Assessment

Lawson Software has launched a tender offer for Intentia, a Swedish ERP software vendor that sells into roughly the same customer stratum: namely, the mid- to lower end of where SAP plays, in the same neighborhood as Oracle Applications, and at the mid- to high end of where Epicor and QAD compete. The company has pointed to the focus on the mid-market that the two organizations share as well as to their complementary products and geographic portfolio as reasons for the merger. Ventana Research sees this as the latest in a series of combinations in a stagnant, consolidating ERP market where the initial -- but perhaps not ulitmate -- aim is simply to get bigger. While insisting the combined entity will be an organic whole, management of both companies has made it clear there will be no changes in product direction, no attempts to combine the products or merge operations in any meaningful way in the immediate future. Intentia has been undergoing a restructuring for the past year, so the "streamlining" of its operations and its shift away from unprofitable consulting/implementation engagements is likely to continue, along with a focus on increasing its maintenance revenues.

Ventana Research believes the combination is unlikely to have any impact - positive or negative - for Lawson North American users within the next 12-18 months. We believe there is some upside to Lawson's North American sales if the change in management (there will be a new CEO and Board of Directors) increases the focus on selling Performance Management software into the existing Lawson customer base. Longer term, the impact on both Lawson's and Intentia's customers may be positive but there is scant evidence to make this assertion with assurance, since the undeniable theoretical potential must be judged against the difficulty of ultimately combining the two organizations and product lines. For the moment, other than in Performance Management and analytics we see little potential for significant top line growth as a result of combination, since sales and marketing for the two companies are aimed at very different verticals and there is no stated plan for cross training or changes in compensation. Moreover, we do not see how a Lawson account executive with gaming and lodging expertise is ever likely to be very successful selling an entirely different application to any North American customer outside Lawson's core markets.

In conference calls with investment and industry analysts, the company cited revenue growth potential. Certainly because of US accounting rules Lawson will report revenue growth in the first four quarters of the combination. Intentia's revenues will be added and compared only to Lawson's prior periods. Under pooling-of-interest accounting (once the norm for this type of combination), historic data would be revised to show the combined results going back several years, so there would be no growth beyond what the two companies actually could produce. Given the tepid demand for ERP software, this will be difficult to achieve. On the other hand, Ventana Research believes Intentia's restructuring efforts are likely to product improving margins on its side of the business -- providing revenues from this part of the business at least remain flat.

Market Impact

From a defensive standpoint, we think this is a relatively good time for both companies to be making this move as Oracle also has to contend with confusion around its future after the PeopleSoft acquisition and since JD Edwards' software is essentially off the market. Nonetheless, it is not clear that Lawson will be in a position to benefit from Oracle's difficulties. The rest of the companies that sell financial and manufacturing/supply chain software in Lawson's segment of the market are smaller and are in no position to mount major offensives. The main threat to Lawson/Intentia, to our mind, is SAP's drive to sell into smaller (not small) businesses.

Recommendation

As consolidation continues in the ERP sector, companies face a standard set of issues. When two vendors merge, change is almost inevitable. Its impact on users may be limited if "their" part of the business is the dominant surviving entity. The impact may be positive if despite the cost and inconvenience of a migration from existing software, the result is an equal or better product supported by a more viable company. Yet, ultimately companies are likely to face the need to make significant changes to their ERP environment sooner than they wish. In looking for a "safe" choice of vendors, companies should recognize that safety may be an illusion (e.g., PeopleSoft was once thought to be a probable survivor) and that the "safe" choice may be the wrong choice for their business requirements. Given the difficulty of accurately forecasting the twists and turns of the consolidation process, Ventana Research thinks organizations must balance their need to minimize the cost and effort of maintaining their ERP investments while ensuring they meet their requirements in efficiently executing financial processes, effectively providing decisions support, achieving regulatory compliance, etc.

Ventana Research recommends Lawson users stand pat with their current plans. In our judgment, there are unlikely to be any changes to products or to the organization anytime over the next 12-18 months that would have a negative impact on the outcomes of decisions already reached.