Microsoft to Pay $1.3 Billion for Navision, OS/400 Apps in Limbo

by Timothy Prickett Morgan

As we reported last week, the Financial Times of London had reported that Microsoft was getting ready to acquire the European application software vendor for $1.2 billion. At the time, neither Microsoft nor Navision would confirm this rumor, although Navision did say that it was entertaining outside offers for the company.

The Navision acquisition by Microsoft will probably turn out to be a bummer for OS/400 enthusiasts. As we reported in February, Navision was working on porting some of its applications to OS/400. The popularity of its products, particularly in Europe, could be a boon for the iSeries. However, if Microsoft ends up owning Navision, I think the odds are that Microsoft will kill the OS/400 ports. Moreover, the fact that Microsoft will be moving onto European turf in a big way will put further pressure on OS/400 application vendors in an already difficult environment in those geographies. IBM, in a good proactive move, was already talking to The Sage Group, Navision's biggest competitor in Europe, about porting applications to the iSeries via Linux partitions. IBM should talk to other that will be able to compete against Microsoft about porting to the iSeries through OS/400 PASE AIX runtime or hybrid OS/400-Windows setups as well as through Linux partitions.

The Navision acquisition would be Microsoft's biggest one to date, second only to its $1 billion purchase of Great Plains Software at the end of 2000. The acquisition of Navision will give Microsoft a big installed base of customers in Europe, something that it craves. Navision has an installed base of over 130,000 installations and a reseller and implementation partner channel that numbers over 2,250 companies. Sources at Navision say that the company averages over 10,000 installs of its products each year, which makes Navision one of the highest-volume players in the midrange. Navision's chief competitor on the Windows server platform is Microsoft's Great Plains unit.

The Navision acquisition is a tacit admission by Microsoft that its Great Plains unit has no hope in hell of breaking into the European market in a timely fashion. Navision and Sage have a lock on the midrange application market in Europe, and SAP, of Germany, and a number of smaller players, like Intentia International and International Business Systems, both of Sweden, have large installed bases as well.

It will be interesting to see if Microsoft merges the Navision and Great Plains products, something that it needs to do if it were to present a single application portfolio to the world. It seems inconceivable that Microsoft would allow two separate ERP suites to coexist over the long haul in its company. Great Plains was probably lacking in foreign language, currency, and accountancy rules, and the Navision suites had good support in these areas. If the merger progresses, it seems likely that, over time, Microsoft will merge these applications together using its .NET technologies.

The other question a lot of Navision customers must be asking themselves is what happens to support for operating systems and databases other than Microsoft's own Windows and SQL Server? Navision--which is the result of the merger of two Danish software companies, Navision and Damgaard--had distinct solutions before the merger, two years ago. The company has been maintaining those different product lines since then, because they serve different sectors of the midrange market. The three Damgaard product lines--now called Navision Axapta, Navision Financials, and Navision XAL--were supported on Windows and Unix platforms running Microsoft SQL Server and Oracle databases, and were aimed at companies with more than 1,000 employees, with between $100 million and $500 million in annual revenues. The Navision Attain product, which came from the Navision side of the merger, was always aimed at companies with 10 to 50 employees and with revenues in the $10 million to $100 million range. Microsoft will probably continue to support existing Unix and Oracle customers in the near term, but will very likely encourage these customers rather strongly to move to Windows and SQL Server technologies through either aggressive price cuts on the Windows side or aggressive price hikes on the Unix platforms and Oracle databases. Microsoft might even simply sell off the Unix code base in order to help cover the cost of the Navision acquisition, but doing so may prop up a competitor in the midrange, so Microsoft might just sit on the base instead.

The Navision headquarters, in Vedbaek, Denmark, will become Microsoft's applications development center for Europe, the second largest development center outside of the Redmond campus.

Navision has two co-CEOs. Preben Damgaard, from the former company that bears his name, will become director of EMEA operations for Microsoft's Business Solutions unit, which controls Great Plains and Navision. Jesper Balser, from the former Navision conglomerate, will become a director of global strategy at the Business Solutions unit. It is unclear what will happen to Waldemar Schmidt, Navision's chairman of the board.

The Microsoft deal, at $1.3 billion, gives a 36.7 percent premium on the Navision shares compared with their closing price on April 30. While there will be some investors and analysts who will grouse that this is not enough of a premium to pay for a company that is growing at 17 percent in a very tough application software market, and that has about $135 million in the bank, $1.3 billion is a lot to pay for a company that has a sales rate of $200 million a year. The point is basically moot anyway, since over 60 percent of Navision shareholders (owners and big investors) approved the Microsoft deal before it was announced on May 7.

With the Great Plains and Navision applications under its control, Microsoft will now be giving great amounts of grief to Sage, the U.K. midrange application software vendor that is Navision's and Great Plains' main competitors in Europe. Sage has a huge installed base--over 3 million customers--and adds close to a quarter of a million customers a year. It is, however, appealing to small and midsize companies, and therefore does not have the cavernously deep pockets of Microsoft. These are exactly the kinds of customers who should be buying super-low-cost iSeries servers running Sage applications. Next week, we will try to find out exactly what IBM and Sage plan for the midrange as part of their new partnership.