Services a Priority at ASNA after Merger with BluePhoenix

September 4, 2007 Dan Burger

When mainframe application modernization/migration software vendor BluePhoenix Solutions decided to expand to the IBM OS/400 and i5/OS market, it found a willing partner in ASNA, a company with more than 25 years in the midrange. For BluePhoenix, which announced the completion of the ASNA merger August 17, it gains RPG-to.NET technology, a trusted brand, an experienced workforce, and a base of customers from which it can work. The upside for ASNA is much deeper pockets with which to build the services side of its business.

Anne Ferguson, the owner and president of ASNA, explained the BluePhoenix merger with her company in terms of allowing ASNA to move in a direction that its customers needed. “ASNA has been a products company and not a services company,” Ferguson said. “Our customer base and our product line demands that we provide services. BluePhoenix brings that ability immediately. That’s very important to us. We wanted to be part of a bigger entity and we needed to provide migration services and extension services.

“We have technology experts as ASNA that can interface with the customers and that know the customer base. But we don’t have the people resources to fill the demands of the customer base for services. We will be working closely with BluePhoenix to train our people to provide a wider range of resources to our customer base.”

In order for ASNA to reach beyond its current level, Ferguson said the company needed a partner that could provide the services and financial backing as well as the synergy for our products. ASNA had been looking for partner for about a year, Ferguson said, before the first meeting with BluePhoenix took place in June.

BluePhoenix had already begun a search for new strategic directions, and the iSeries market was on the radar. Part of the reason for that can be attributed to David Leichner, vice president of marketing at BluePhoenix. Leichner was formerly the marketing director at Magic Software, a software tool vendor that derives about 25 percent of its business from the iSeries installed base. “I know this market pretty well,” Leichner said. “It’s an area I believe in.”

When the agreement between the two firms was finalized, BluePhoenix paid ASNA $8.7 million (a $7 million cash payment from BluePhoenix and a $1.7 million dividend) with an additional consideration to ASNA’s shareholders if certain profit and revenue targets are achieved by ASNA, in 2007, 2008, and 2009.

While BluePhoenix and ASNA were negotiating a deal, BluePhoenix, which has its world headquarters in Herzlia, Israel, and its U.S. headquarters in Cary, North Carolina, was also undergoing some internal changes. Until two months ago, it was owned and controlled by a majority shareholder called The Formula Group, an Israel-based IT holding company. Formula sold its holdings in BluePhoenix–8 million shares–to a group of 13 institutional investors in the U.S. The Formula Group held slightly less than 50 percent of BluePhoenix stock at the time of the sale. The company is now controlled by Arik Kilman, the CEO and principal shareholder, along with the institutional investors. Kilman has served as president and CEO of BluePhoenix Solutions since its inception in October 2001.

BluePhoenix is expected to be a $100 million company next year, Leichner said. In becoming a wholly owned subsidiary, ASNA gets the financial backing it needs and the services arm of the modernization puzzle. “ASNA brings the product suite and the iSeries market experience and the excellent references in the 400 world,” Leichner said.

ASNA is the only BluePhoenix subsidiary with a place in the System i market, but it is not the only company BluePhoenix has merged with or purchased to gain complementary technologies and new footholds into market niches. The ASNA merger, Leichner said, provides BluePhoenix with the tools to cross-sell into sites. “There are a lot of mainframe customers with iSeries boxes in their environments,” he said.

Naturally BluePhoenix will be searching its customer base for companies interested in migrating RPG applications.

“We’ve heard from analysts that companies that have mainframes tend to have System i boxes rather than the other way around.” Leichner said. “We are talking about a market with hundreds of thousands of iSeries and old AS/400 boxes versus 15,000 to 20,000 mainframes.”

Clearly there are opportunities to cover two bases in shops that have these legacy platforms, but modernization and migration projects are not the end of the sales opportunity rainbow. “This is not just about migration,” Leichner says. “It also involves upgrading architectures and application and database environments.”

To a much lesser degree, ASNA’s customers might provide opportunities for BluePhoenix to sell products on the mainframe side.

“The ASNA customer base is completely iSeries,” Ferguson said. “And most customers are not really migrating. They are modernizing their user interface to extend applications to the rest of the enterprise.

“The iSeries is a very closed machine,” she continued. “It is difficult to extend it. And it is expensive. Eighty percent of our non-ISV customers stay with the database on the iSeries. Even though they now have .NET applications, they maintain their backend processes on the iSeries. The iSeries does a very good job with its database and running the back processes. It doesn’t do a good job extending the applications to incorporate new technology.”

Ferguson’s insight into the ISV side of the ASNA customer list reveals something different–the ISVs want to become multi-platform. “When they work with us, they are taking their applications to .NET and their databases to SQL [Server],” she says. “It keeps getting harder and harder for vendors to sell a green-screen application. To rewrite apps with millions of lines of code is pretty daunting. The ISVs that are migrating their software packages are not doing that because they want to move their existing customers off the iSeries, but to extend their markets and allow them to sell to a new customer base.”

At this early stage of the deal, there is no reason to believe the ASNA product lineup will change. Products in the pipeline for delivery in the next six to nine months will certainly not be affected, and Ferguson said it will take that same amount of time to make good decisions about the direction concerning the advantages or disadvantages of combining development teams.

“Right now we are on a path for Visual Studio 2008 to be our next delivery,” Ferguson said. “We are working on the next Microsoft-related releases so they can be released at the same time as Visual Studio 2008, which is due in February. Our team is working with Microsoft to ensure compatibility with the finalized release. ASNA has a close affiliation with Microsoft through various partnerships, and is a founding member of Microsoft’s Midrange Alliance Program.

“We have just released a suite of upgrades to our products,” she continued. “We are improving our migration ability every month by adding more functionality, more features. We are learning to work together with BluePhoenix, building sales, building marketing.”

Michael Killian, vice president of operations at ASNA, said the acquisition has received nods of approval from customers. “The response we’ve received from customers shows excitement because of the financial stability that it brings,” he said. “It solidifies their decision to move forward with ASNA solutions.”

On the sales and distribution side, Ferguson expects growth due to the advantages that BluePhoenix’s large sales force brings. Part of this is an increased awareness in countries where ASNA has never been introduced. Sales will stay within the company. At BluePhoenix, 60 to 65 percent of the business gets done through direct sales. The remainder is done through partners on the services side.

ASNA’s San Antonio, Texas, office, the executive and the entire staff, remains in place according to Ferguson. She says, “There aren’t going to be any employee changes in the foreseeable future, and in terms of running ASNA, that is still my job.”