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Supply Chain Management Exits

In the past few weeks there have been several exits for private equity investors in the supply chain management space.  Using some baseball analogies, one could be categorized as a single, two would be considered doubles, and three are potential home runs, but no grand slams.  The companies that have achieved some type of exit in the past few weeks include Advant-e Corporation, GXS & Inovis, JDA & i2, Descartes, SPS Commerce, and RedPrairie. 

While most people consider supply chain management to be a mature and somewhat boring marketplace, the diversity of the types of exits that have occurred recently show how investors can obtain significant returns even in these tough times.  Generally, supply chain management companies are not considered to be too valuable in comparison to other software markets.  Take a look at the following table from the Software Equity Group’s 3Q 2009 Software Industry Equity Report.  Out of the 24 markets that SEG tracks, supply chain management is the 19th most valuable market in terms of Enterprise Value/Revenue and EV/EBITDA multiples:

 SCMExit 1

Advant-e $2 Million Dividend

Advant-e (Nasdaq:ADVC) is a $9 million revenue provider of internet-based hosted Electronic Data Interchange (EDI) and electronic document management software and services. The Company helps businesses automate manual, paper-intensive processes via expanded use of EDI or by integrating directly with ERP/MRP systems.  This profitable business has had steady growth in revenues and earnings over the past five years.  Recently, Advant-e announced a $2 million dividend to its shareholders.  Advant-e has been steadily building their cash balances.  A $2 million dividend for a $9 million revenue company is a pretty significant and positive event.

GXS / Inovis Merger

On December 8th, B2B integration heavy weights GXS and Inovis announced their plans to merge.  GXS is owned by Francisco Partners and Inovis by Golden Gate Capital & Cerberus Capital Management.  (Disclosure: I am a former senior executive of Inovis)  While details about the transaction have not been released one can reasonably infer a few things.  First, this is a stock deal.  The companies will be combined and the current owners will continue to own the equity.  It also appears that the owners will get a dividend out of the planned refinancing of Inovis & GXS’s debt but it is nowhere near walk away money.  This deal is significant because the investors realized that neither company had excellent prospects for a near term high value exits on a standalone basis.  On a combined basis, however, the new company will dominate their industry and be much better positioned for either an IPO or strategic exit down the road. 

The new company will be the undisputed #1 player in the EDI Value Added Network market place.  Their EDI VAN business will be almost three times the size of the nearest competitor and ten to twenty times the size of the remaining players in the marketplace.  They will be the undisputed leader in EDI Managed Services – basically the outsourcing of EDI activities which happens to be the fastest growing part of the market right now.  Additionally each company will contribute something to the NewCo that offsets one of the other side’s weaknesses.  For example, Inovis will be contributing a significant licensed software business that GXS currently does not have any presence in as well as significantly expanding the hosted master data management business.  GXS, with their significant global presence, will offset Inovis’ relative historic weakness in Asia, Central & Eastern Europe.  The combined companies will be able to significantly increase profitability through the consolidation of operations, facilities, G&A, and the elimination of redundant management and headcount.  These new found profits in turn can be reinvested into the growth of each company’s existing as well as emerging growth opportunities.

JDA & i2 Debt Financing

On December 7th, JDA announced that they had successfully priced $275 million in senior secured notes to finance their acquisition of i2, which closed on December 10th.  As you may recall, this is the second time JDA has attempted to acquire i2.  The first attempt at the end of 2008 blew up when JDA was unable to close on the financing for the deal due to the meltdown of the credit markets.  This time around JDA structured the deal as a combination of cash, stock, and limited new debt.  The deal value is in line with the current general supply chain management valuation metrics – 1.7x ttm EV/Revenue and 6.3x ttm EV/EBITDA.  As in the case of GXS/Inovis the combination of JDA & i2 will create a significant powerhouse in the supply chain management licensed software marketplace.  It was also interesting to note that JDA’s debt sale was extremely successful.  According to a few hedge funds I spoke to last week there was significant interest in the debt and many funds could only get a portion of what they wanted to buy.  Most of this was due to the excellent leverage metrics and the very high confidence the funds had in JDA’s ability to execute.

Descartes Raises $38 Million via Secondary Offer

Descartes Systems Group (DSGX) launched and closed a successful secondary stock offering that grossed about $38 Million in late October.  Descartes is a $ 65 million/year provider of SaaS-based logistics and global trade management solutions.  While this is not an exit per se, being able to raise a substantial amount of cash in today’s market is quite a feat.  In the past three years Descartes has done a number of small, highly accretive acquisitions to help expand their customer base and logistics/global trade management services.  They put some of that newly raised cash to work right away with their announced acquisition of Belgian-based Porthus on December 14th.

SPS Commerce IPO

Also on December 7th, SPS Commerce, a $40 million provider of EDI-centric SaaS services, filed an S-1 to sell $46 million in shares.  SPS is a specialist that serves mid-market and small to medium enterprises that need to use Electronic Data Interchange (EDI) to do business with their customers and suppliers.  They have consistently grown revenues in the past few years and are track to hit $40 million this year and make money at the same time.  While GXS/Inovis may be the king of large scale EDI, SPS is undoubtedly recognized as the leader in the small to medium enterprise EDI space.  SPS has raised more than $50 million in venture capital and the IPO will provide a decent, but not oversized exit for the investors.  This deal represents the first EDI company of any size to go public in the past five years. 

RedPrairie IPO

RedPrairie, the Wisconsin-based provider of licensed software and SaaS solutions to enable manufacturers, distributors and retailers to synchronize and optimize the management of workforce, inventory and transportation, filed for a $172 million IPO in late November.  Red Prairie is a portfolio company of Francisco Partners, who acquired the firm in May 2005 for $236 million, $120 million of which was financed by new debt.  Since the Francisco investment the company has grown revenues from $125 million to almost $260 million this year and they have closed two small and one large acquisition as well.  This IPO will represent the second supply chain management investment that Francisco has been able to monetize recently, with the other being the GXS/Inovis merger described earlier.

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2 Responses to “Supply Chain Management Exits”

  1. Alan Wilensky Says:

    The FTC handed off the GXS Inovis anti-trust investigation to DOJ for a compelling reason, i.e. GXS’ bad behavior in exploiting its market footprint by refusing to provide non-settlement peering to otherwise bona-fide electronic commerce networks. This long and shameful track record of market distortion dates back to the IBM VAN acquisition, and further led to a Michigan HR 5122 being tabled for, (in terms of anti-trust art), “failure to deal”.

    Perhaps a dozen or more august technical agencies and private operators have been disadvantaged by this distortion of market via refusal to carry bi-directional traffic. And in the last analysis, if you consider carefully, it is not the actual ecommerce network or competitive VAN that is merely overcharged, squeezed out, shmooshed down, what have you, it is the customers they serve that are disadvantaged. And the DOJ has come to understand this problem quite well after hours of collecting industry opinion from a very diverse corpus of competitive VAN operators.

    If a customer selects a certain competitive ecommerce communications provider due to whatever technical advantages this network may hold for them, and said network is either a) cut out of the possibility of delivering traffic to GXS QIDs, or b) charged outrageous rates for interconnection carriage, or c) made to act as retail customer, then the client and the network are disadvantaged. These acts not only harm the obvious party, but it causes a sinister forced migration of clients from the innovators to the technically laggard but numerically and economically larger operator. Such wars have been fought and settled long ago in the internet peering jungle and telecom termination business.

    Not one of the disadvantaged networks that make up a part of the collected case against GXS – as private complainants, as a class, and as contributors to the DOJ’s regulatory case, care about GXS and Inovis sallying forth and making hay with B2B integration software and VAN services. None of these fine companies has any illusion that the merger will be stayed. However, as a group, we have asked that limitations of behavior be placed on the merged parties viz. Interconnection policies, settlements, and participation in standards that will assist the VAN industry’s healthy evolution.

    For in the present case, it is a sign of a very unhealthy and most likely ailing industry where the leaders feel they have to distort the playing field by such practices. Had this been the case in the formative years of the post ARPANET days, we would have a very stunted internet industry.

    As we speak here, in the very real present, many of the enterprise 2.0 leaders, some with millions of subscribers, are seeking to establish alternative ways of sending commerce data. Some still like the lightweight services some x12 centric VANs offer, but it is safe to say that if these issues of cooperation between ALL VANs do not get ironed out and brought into the light, we are in for a clash.

    For those wishing to see a draft of the proposed remedies offered as limiting conditions of the GSX Inovis merger, drop me line. Cooperate dear colleagues, exchange data in an open and professional manner, evolve your interoperation standards, culture directory services and automated routing, canonical document standards, and better APIs – then the VAN industry will grow and proper up and down the value curve. In such a world, the GXS giants and the specialized smaller operators all win.

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