Lawson Acquires Intentia to Rule the Midrange

by Timothy Prickett Morgan

There are two meanings of the word gravity: one is seriousness, and the other is a force of attraction that causes all matter in the universe to clump together. If you were describing the market for enterprise resource planning (ERP) software since growth more or less stopped in 2000, gravity would be a good word. It is a very serious business, and vendors are clumping together in some hope that size and scope matter. This is why Lawson Software acquired Intentia International for $480 million last week.

The move was something of a surprise, since both Lawson and Intentia have undergone major restructurings, put their product roadmaps on similar courses, and resisted any attempts to merge with other software companies. And, ironically, this is exactly why Richard Lawson, the chairman and founder of Lawson and its largest shareholder, and Romesh Wadhwani, the chairman of Intentia and its largest shareholder (after his company, Symphony Technology Group, bought a $35.2 million stake in Intentia in December 2003), spent nearly two hours explaining to Wall Street analysts last Thursday morning when the acquisition of Intentia by Lawson was announced.

At first glance, Lawson's acquisition of Intentia seems like something of a strange move, but might makes right in the ERP business (or, at least that is the current thinking based on the number of mergers), and both Lawson and Intentia see the combination as giving them greater breadth of products in the midrange market and greater coverage on a global basis than the two companies can do alone. Having both reorganized their operations in the past 18 months and for the most part paid for those reorganizations already, and having set their products on similar paths, the fact that Lawson and Intentia do not compete very much in terms of their core markets--Lawson focuses on healthcare, financial services, retail, and government in the United States while Intentia is focused on manufacturing and distribution in Europe and Asia/Pacific--means that they can merge relatively easily and become a much stronger force in the midrange market that both have chosen independently to focus on.

Lawson, the man not the company, said in a conference call with Wall Street analysts that the new Lawson Software that will result from the merger of Lawson and Intentia will be the largest application software provider dedicated to the midrange market. "This market is underserved," he said. "This market is growing. This market is global. And this market is waiting for the right company to come forward to present a compelling offering. The big ERP players are not doing it. Small ERP players cannot do it."

Both large and small ERP players would probably differ with the opinion that their wares cannot serve the midrange market, which Wadhwani characterized as companies with between $250 million and $1 billion in annual sales. He said 71 percent of Oracle's and SAP's sales were to companies with more than $1 billion in annual revenues, and 72 percent of Microsoft's and Sage's sales were to companies with less than $250 million in revenues; Lawson and Intentia combined, by contrast, get 75 percent of their sales from companies in that middle ground SAP and Oracle are trying to reach down into, Microsoft and Sage are trying to grow up into, and companies like SSA Global, International Business Systems, Infor Global Solutions, Geac and others are trying to get a slice of. Wadhwani said each company alone had an addressable market (based on their market segments and geographies) of about $1 billion each and that by combining, the two companies now had an addressable market of $5.8 billion, or nearly three times larger.

You might wonder how this can be the case. It seems clear from Intentia's difficulties in getting a stronghold in the American market that relatively few American companies buy Intentia's software, and conversely few European companies have bought Lawson's software. Will the odds for success be better now that the two have become one global company? Only if there are thousands of midrange shops that span many languages and business operations who don't want to pay big bucks for Oracle and SAP applications and who cannot get by with something from Microsoft or Sage. Executives from Lawson and Intentia didn't explain the addressable market numbers, but this makes sense. It also makes sense that companies in a geography now served by one company that is not in a certain vertical market will give the new Lawson a chance to bid because it will serve most industry sectors.

After the acquisition, which the two companies hope to close well before the end of the year, the new Lawson will have 45 percent of its sales in the Americas, 45 percent of its sales in Europe, and 10 percent in Asia/Pacific. Its applications will be running at about 4,000 customer locations and will be available in 40 countries and more than 40 languages. The combined company will have just under 4,000 employees and it will be headquartered in St. Paul, Minn., with its European headquarters in Stockholm. There is no indication that there will be any layoffs, but Intentia just outsourced more than 700 jobs to IBM and to a subsidiary of Symphony's called Symphony Services, which does programming and support from India. There could be more of this in Lawson's future as it tries to cut back on headcount in development and support costs to boost profits.

It is hard to reconcile the aggregated sales and profits for the two companies, since they are on very different quarterly schedules, report in different currencies, and use different accounting rules. (They are both public companies, so there is lots of data.) Lawson's license sales have been trending down in the past three years and it has been able to hold services sales more or less steady. The company booked $363.6 million in sales and just under $8 million in profits in its fiscal 2005 ended May 31. Intentia ended its fiscal 2004 in December 2004, and had sales of $405.8 million, but booked a loss of $48.2 million. Intentia had $75.6 million in cash and $44.8 million in debts, while Lawson had $200.5 million in cash and $2.6 million in debt. A good estimate is that the new Lawson will have about $800 million in sales and will eventually have about 15 percent gross profits--the latter being the goals set by Lawson and Wadhwani. As for net profits, that will depend on the cost of the merger and how well the plans they have set forth pan out.

The one thing that no one seemed to notice is that what Lawson is probably paying for is expertise in Java. Only three weeks ago at its user group meeting in San Diego, Lawson announced that it was moving its eponymous ERP suite to Java across all platforms (and away from RPG on the iSeries) and that it had created a code generation tool and a related language called the Lawson Pattern Language (LPL) that can be run through the generator to create Enterprise JavaBeans. After six years of development and $100 million in investments, Intentia has ported its RPG suite to Java and created a Movex product suite that spans many operating system platforms and is not bound tightly to the iSeries. While Lawson has in the past few years renewed its commitment to the iSeries, it is moving in a direction that Intentia has already moved through. The expertise that Intentia has gained in moving the Movex suite to Java is, in a sense, saving Lawson money that it would spend learning what Intentia already knows. It is unclear how the Landmark project and the LPL language will be affected by the merger.

Lawson and Intentia plan to continue to develop and support the current Lawson and Movex suites for at least five more years, and are now examining ways to integrate their product lines. There will be some overlap in core financial functions, of course, but the industry-specific modules will be largely different since Lawson and Intentia have been selling to different customers, and hence will probably be preserved.

To pay for the acquisition, Lawson will issue 81 million new shares of stock and offer them to shareholders in Intentia. Lawson and Wadhwani will be co-chairmen of the board of the merged company and have agreed to sit on their shares after the deal closes. Jay Cochlan, who was Lawson's president since March 2000 and CEO since February 2001 and who joined Lawson 18 years ago, has decided to retire from the company, allowing the new Lawson to bring in Harry Debes, a former executive in charge of J.D. Edwards's American sales and a managing director at Geac before that, to be the combined Lawson-Intentia's new CEO. Betrand Sciard, who was appointed CEO of Intentia in May 2004, will become Lawson's chief operating officer, and Bob Barbieri, Lawson's current chief financial officer, will retain that role. The company will continue to trade its stock on the NASDAQ and Stockholm exchanges.

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