The Four Hundred

Times are tough out there in the ERP software market and in the manufacturing sector in particular. Midrange ERP vendors are consolidating or wondering how they are going to compete against one another as big name companies like SAP, Microsoft, Oracle, and PeopleSoft move in on their turf. One strategy is to merge to create a bigger company, which is what MAPICS and Frontstep, two venerable midrange ERP vendors, decided to do last week.

Under terms of the acquisition, MAPICS will exchange 4.2 million shares of its stock for all outstanding shares of Frontstep, which had a market capitalization of $15 million when the story broke, and, given the current trading levels of the stock, that makes the company worth about $25 million to $30 million. MAPICS is also assuming $21.5 million in debt off the Frontstep books as part of the deal, and says that it will book pre-tax charges of between $9 million and $11 million in association with the deal, which it expects to close sometime in the first quarter of 2003. The management and boards of directors at both companies have signed on to the acquisition, but it now has to get through the regulatory process and gain approval of both companies' shareholders. The combined company will have 4,800 customers in 10,400 sites worldwide and total annual revenues approaching $200 million. Both companies are publicly traded on the Nasdaq. The combined company will have about 1,100 employees, and it is unclear if the company will pare down its payroll after the merger. At least some layoffs are typical in such mergers.

MAPICS is the venerable OS/400 ERP software vendor that used to be part of IBM's Atlanta midrange application software organization until the company spun it out in the early 1990s. MAPICS has been in business for 25 years (including the years that it was part of IBM) and has over 3,000 customers at about 6,600 sites worldwide. Most of those customers are using the flagship MAPICS ERP applications that were initially created by IBM for the System/3X and have been subsequently upgraded for AS/400 and iSeries servers. MAPICS spent $48 million in cash to acquire PivotPoint--an ERP software vendor that has a set of Oracle applications that run on Windows, Unix, and Linux servers--which is based in Woburn, Massachusetts. But almost three years later, the bulk of the revenues generated at MAPICS still come from the OS/400 platform. MAPICS wants to ride the Windows adoption curve, and that is why it has acquired Frontstep, an established ERP vendor that is an ardent supporter of the Windows platform and that has already created a set of applications that support Microsoft's .NET Web services model and its underlying Microsoft technologies. With Microsoft having eaten Great Plains and Navision in the past year, Frontstep can count on Microsoft as a partner as well as a rival, and the company undoubtedly felt it needed to gird its loins for battle against Microsoft and other players. MAPICS is in better financial shape than Frontstep, and the combination will probably create a better competitor in the midrange so long as they can merge the companies effectively and strip out costs by eliminating redundancies.

Frontstep is probably unfamiliar to most OS/400 shops. Several years ago, the company, based in Columbus, Ohio, was known as Symix. It has been in business for more than 20 years, and its products run on the Windows platform and are positioned to be players in the future .NET world that Microsoft is trying to build. Frontstep has 1,800 customers in 4,400 sites worldwide, which puts it in the same league as MAPICS. However, while MAPICS has been able to generate cash (excluding special charges) and keep revenues fairly steady in the past six quarters--not a great time in the economy, to be sure, so this is something of a feat--Frontstep has watched as its sales peaked at $129 million in fiscal 1999 and 2000 and declined to $117 million and then $93 million in fiscal 2001 and 2002, respectively. In fiscal 2002, Frontstep booked losses of $3.4 million, which is not a huge loss, but it did book a loss of nearly $2 million in the first fiscal quarter of 2003 (which ended September 30, 2002). This is a concern in and of itself, but it is also a problem because revenues contracted by 18 percent compared with the same quarter of last year. But compared to other ERP vendors, these financial results are not really alarming. Other companies are doing far worse.

MAPICS is not one of them. In its fiscal 1999, MAPICS brought in $135 million in sales and booked $13 million in profits after taxes. In other words, MAPICS and Frontstep were about the same size, but MAPICS was making more money (Frontstep had profits of $4 million on sales of $129 million in its fiscal 1999). In fiscal 2000 and 2001, Frontstep had losses of $10 million and $26 million on sales of $128 million and $117 million, and it was clearly trying to wait out a recovery in IT spending that has not materialized. Those losses are one of the factors that has pushed Frontstep's stock from a high of about $33 a share in early 2000 (giving it a market cap of about $240 million) to a low of about $2 a share and a market cap of about $15 million on the day before the deal was announced last week. Obviously, the company's market cap is woefully low compared to its revenue stream, and that has to do with the expectation on Wall Street that Frontstep would have taken time to turn itself around, cut costs, and start generating profits. MAPICS has booked losses of $12 million and $27 million in fiscal 2000 and 2001--some of this retaining to the writedown of acquisitions and their assets--but has been able to keep sales more or less steady, with sales of $135 million in fiscal 1999, $140 million in fiscal 2000, and $138 million in fiscal 2001. Perhaps more significant, in the first three quarters of fiscal 2003, MAPICS has booked $98 million in sales and generated $9.7 million in actual profits. This is one reason why MAPICS stock was trading near $7.50 a share and the company had a market capitalization of $125 million; the Frontstep deal added about $1 a share to MAPICS stock last week. What is clear to Wall Street at least is that MAPICS has turned the corner despite the bad economy and it has $23 million in the bank. That is why MAPICS is buying Frontstep instead of the other way around. That said, MAPICS has seen its market cap cut by a third from its high of around $340 million, which it set in early 2000.

Dick Cook, president and CEO of MAPICS, said that the company absolutely would be investing in the SyteLine 7 Windows-based ERP suite going forward, and then, just to make sure SyteLine customers understood, he said it again. What he didn't say is what MAPICS would do with the customers it has for its PivotPoint applications, and we probably won't find that out until after the deal closes, the management team is organized, and product roadmaps and development budgets are set. MAPICS will say that it is committed to being a provider of ERP applications on both the OS/400 and the Windows platforms.

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