JDA Ponies Up $346 Million to Buy i2 Technologies

Published: August 11, 2008

by Timothy Prickett Morgan

If there is any rule in the latter stages of development in any market, it is that the big get bigger. So it has been in the market for application software for businesses of all sizes, and this week JDA Software continued to exert its gravity in the software space by acquiring sometime-rival supply chain software specialist i2 Technologies for a net cost of about $346 million. The move not only makes JDA that much more of a player in supply chain software--and for many companies, positions JDA up above SAP and Oracle--but also puts to rest years of speculation about what would happen to i2.

i2 is, of course, one of the key innovators in the supply chain software market, and the Dallas, Texas, vendor broke onto the scene in the late 1990s when companies had automated their company's back office and factory operations with ERP software and started looking at optimizing their partners and part supplier interactions to save money and boost profits. The other name-brand supply chain software innovator was Manugistics, which JDA acquired in July 2006 and which was the biggest (and 11th) acquisition deal that JDA had done in a decade to grow itself and, in the case of Manugistics, to expand beyond its core retail software customer base into supply chain apps mostly for process manufacturers. While i2 has some retail software and also some supply chain code for process manufacturers, the company has been most successful in selling code to discrete manufacturers and is therefore a good fit for the JDA-Manugistics combination. The mystery, of course, is why i2 and Manugistics didn't merge a long time ago. They were such competitors, however, that this was probably difficult to do without a catalyst such as JDA, a weakening global economy, and some intense pressure from Oracle and SAP.

The news is also good for JDA in another potential way: helping it to further diversify and therefore stabilize what has historically been choppy financial results quarter to quarter and year to year. Retailers have been keen on investing in information technology for many decades, but they are on the front line of the world's economies, and when consumers curtail spending, retailers kill or defer IT projects (like application software upgrades) without batting an eyelash. Expanding into supply chain software with the Manugistics buy hasn't been always good news for JDA--the most recent quarter being a good example--but it has significantly smoothed out sales while boosting them and producing more operating and net income, too.

In the second quarter ended June 30, JDA reported product sales of $62.2 million, up 1 percent, with software license sales of $15.5 million, down 16.5 percent, and maintenance sales of $46.6 million, up 8.6 percent. As you might imagine, Wall Street was pretty unhappy about that software licensing drop, but this kind if thing has happened for JDA for many years. The company had services sales of $29.6 million in the quarter, up 1.5 percent, bringing total sales for the quarter to $91.8 million, up 1.2 percent. And you can bet Wall Street analysts and JDA investors were none too happy about the 36.3 percent decline in net earnings in Q2, to $3.1 million.

You can bet that JDA wishes it had already done the i2 deal to balance out its own sales and earnings, but it is going to benefit as if it had already. Last week, i2 reported its second quarter financial results, with $12.6 million in software sales (up 10.1 percent), services sales of $30.5 million (down 3.3 percent), and maintenance of $21.6 million (down 1.7 percent). Total sales at i2 came to $64.7 million, down 4/10ths of a percent. The two companies' ups and downs were out of phase, and could have balanced each other out. But that is not the big reason. i2 also said in reporting its results that in the quarter ended in June it had received $83.3 million as a settlement of a patent lawsuit against SAP, of which $79.9 million dropped to the bottom line after paying off the lawyers. i2 already had with $143.1 million in the bank, and all of that cash (some $223 million) is being used as part of the acquisition to pay off i2's debts.

Hamish Brewer, JDA's chief executive officer, explained the rationale of the i2 acquisition on a call with Wall Street analysts when the deal was announced today, and said that with the i2 acquisition, JDA now had an addressable market of tier one and tier two companies that numbers approximately 38,500 worldwide; that's about 4,500 retailers for the JDA software stack, about 17,000 process manufacturers who are being chased with the Manugistics stack already, and another 17,000 discrete manufacturers who are being pursued by i2 and its supply chain wares.

The combination of the two companies will create a formidable software specialist. JDA, which is based in Scottsdale, Arizona, and which has a significant presence in Manugistics' stomping grounds of Rockville, Maryland, has about 1,711 employees and generated $378 million in sales in the prior 12 months and $105.8 million in operating income; it had a market capitalization of $554 million in the week prior to the announcement of the deal. As it turns out, i2 is nearly as large, with 1,309 employees worldwide and about $237 million in sales in the trailing 12 months, with $44.6 million in operating earnings before all that other stuff called EBITDA. i2 had a market capitalization of $343 million before the deal was announced. When you combine the two companies, you get a JDA with about $635 million in sales annually, with almost $300 million of that coming from recurring revenue such as subscription and maintenance fees; Brewer explained that the combined companies would have an operating income of $150 million.

JDA has about 5,700 customers while i2 has only 400 customers. For the combined companies, the new JDA will get about 60 percent of its sales from manufacturers and distributors, 37 percent from retailers, and 3 percent from services companies in which it has a niche; it will have about 1,500 retail customers and about 4,500 manufacturer and distributor customers. In many ways, JDA will be more heavily focused on manufacturing than on retailing. But the companies, says Brewer, will snap together well despite the fact that this is not your father's JDA.

"The more we looked at i2, the more we realized that these guys are just like us, except they are addressing a slightly different part of the market," explained Brewer on the call. He said that they have already identified more than 130 customers who already use both JDA and i2 applications, and he is obviously very excited about the cross-selling, up-selling, and down-selling opportunities.

With its long history in the midrange application space, JDA was able to standardize on Java in the wake of the Manugistics merger (Manugistics coded in Java, while JDA had chosen Microsoft's .NET environment before the merger for its future applications) and repackage the Manugistics code so it could be sold into smaller midrange accounts as well as into larger enterprises. Without being too specific about future roadmap plans, Brewer said on the call that with a common Java code base (i2's applications are already written in Java), JDA could do the same integration and repackaging for i2's apps, pushing them into a broader range of discrete manufacturers. Brewer said that six weeks after the i2 acquisition closes, the company will give customers a unified product roadmap, explaining how the JDA, Manugistics, and i2 apps will be woven into a single JDA stack of apps.

The i2 acquisition looks like this. First, the cash side. JDA is ponying up its $124.5 million in cash, adding to it the SAP settlement and i2's cash on hand as well as a loan commitment of $425 million from Credit Suisse and Wachovia; the two banks are also kicking in a $25 million revolving line of credit. Then, having got all this cash together, JDA is going to pay $342.9 million to buy i2's stock, and pay $225.5 million to retire i2's debt, pay another $80.9 to retire JDA's existing debt (which has to be accomplished under the terms of its loans), plus another $45 million for closing costs. That will leave JDA with $77.3 million left in the bank as cash, and the company expects to use $27 million of that to do restructurings relating to the i2 acquisition. The Manugistics deal two years ago was facilitated in part by an investment by private equity form Thoma Cressy Bravo, and JDA will still have $50 million in convertible preferred stock on the books after this i2 deal is done. JDA is using debt to do the deal instead of issuing stock because that will keep its stock from being diluted and that it has already paid off the debt it incurred in the Manugistics acquisition and believes it can do it again in relatively short order on the i2 deal, too.

As you can see, JDA is not paying a very big premium for i2. How big depends on how you want to calculate it. If you look at the 30-day average of the company's market capitalization and compare it to the value JDA is paying for the stock, it is a 12.2 percent premium. If you compare the price to the trailing sales for the past 12 months, it is a 30 percent premium.

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