Economies of Sale

After a year of relative stagnation, merger and acquisition activity in the logistics sector may be about to pick up. One sign: JDA Software Group this month finalized long-delayed plans to acquire supply chain management competitor i2 Technologies for about $396 million.

Last December, a deal between the two companies, then valued at $346 million, fell apart because of its complexities.

Together, the two suppliers of specialized supply chain software may have a better chance of competing against giants SAP and Oracle in an era of slower economic growth. Cost-cutting would be a key first step in the acquisition, and JDA plans to cut $20 million in costs after the deal is completed in next year’s first quarter. JDA has plenty of experience at acquisitions, having already completed several major deals, including takeovers of Arthur (1998), Intactix (2000), E3 (2001) and Manugistics (2006). The new JDA will have about 3,000 employees, including about 1,200 from i2 Technologies, and combined annual revenue of about $617 million.

That may be small compared to SAP (51,530 employees, $16.8 billion in 2008 revenue) and Oracle (86,000 employees, $22.4 billion in revenue), but a larger JDA would offer a more complete portfolio of products and services for a wider range of sectors, including manufacturing, wholesale distribution, retail and services industries.

Noha Tohamy, vice president of supply chain research at AMR Research, said she expects SAP and Oracle will continue to argue that they offer better integration and a lower total cost of ownership, while “JDA will argue that they are all focused wholly on the supply chain and nothing else — and that they now have the entire supply chain covered.”

JDA and i2 have managed to remain profitable despite the recession. For the third quarter of 2009, JDA reported total revenue of $95.9 million, down 2.5 percent year-on-year but higher than the Wall Street consensus of $92 million.

Kevin Sterneckert, research director for retail at AMR Research, said that in its software service business, in particular, JDA recorded stronger margins during the third quarter of 2009, and increased its cash and cash equivalents, while recording no debt.

Although i2’s revenue declined 16 percent year-on-year in the third quarter to $54.6 million, its earnings were $10.8 million compared with $2.2 million a year earlier.

At their recent European customer conference in London, JDA executives said the company’s fourth-quarter pipeline was the strongest in its history despite only one deal worth more than $1 million closing during the third quarter.

In part, JDA will be looking to expand its customer base by targeting SAP accounts. The company recently hired several former SAP executives, including Jason Zintak, vice president of global sales and marketing, apparently to leverage their personal contacts with customers.

JDA executives said they launched a new partner program in the third quarter, and they intend to use their Center of Excellence in India to promote expansion into global growth markets in retailing, food and tobacco, and consumer products. To enhance its presence in Central and eastern Europe, JDA acquired 49 percent equity stakes in Germany-based Strategix Enterprise Technology and Poland-based Strategix Enterprise Technology last July.

While all these initiatives could benefit from the larger scale provided by the i2 acquisition, the newly expanded JDA would have to overcome some challenges. Tohamy said the main challenge from a functional standpoint is that there is a lot of overlap between i2’s products and those developed by Manugistics, the former i2 rival that JDA took over in 2006. While Manugistics’ market is particularly strong among consumer products companies and retailers, i2 is especially strong among high-tech and other manufacturing sectors.

Tohamy said the company would have to determine whether it is possible to offer customers a single product that meets the supply chain planning needs of consumer goods companies and high-tech
manufacturers.

Contact Alan M. Field at afield@joc.com.