This morning E2open announced the acquisition of Steelwedge for an undisclosed sum of money. Founded in 2000, Steelwedge was an innovator in Sales and Operations Planning (S&OP) and was an early provider of cloud solutions for supply chain. I estimate that the company had annual sales of 30M$. Clients include Canon, Pfizer, HP Inc, Jaguar Land Rover, Lenovo, Nissan and Monsanto.
When E2open called to tell me of the acquisition, they asked, “What do you think?” The company’s press release rhetoric is bullish. More positive than most. However, sitting at my desk, I made a careful list of pros and cons based on history. My answer? I am not sure. It depends. Here is my analysis.
A Look Back. Is Steelwedge a Tragic Hero of Supply Chain Cloud Technology?
I remember my first briefing with Steelwedge in 2001. On a short trip to California I had dinner with the founder. After dinner we walked the Bay and engaged in a deep discussion. I asked him over and over, “Is the market ready for a solution for JUST Sales and Operations Planning?” I struggled to understand how a company focused just on S&OP could be viable. I questioned the size of the market, and if companies needed a standalone S&OP solution. He was bullish and I shrugged my shoulders. I was not sure.
Over the last two decades Steelwedge raised significant capital in three rounds: 4M$ in 2004, 16M$ in 2011 and 22.5M$ in 2015. Each came with significant dilution of the owners with many ups and downs at the board level.
In 2011 I had a similar talk with the founder and asked the same questions. By this time I did believe the market needed a standalone S&OP solution. With globalization, the average company had 5 to 7 Enterprise Resource Planning (ERP) solutions and 3 to 5 Advanced Planning Solutions (APS). S&OP was growing in importance. There was a need for a visualization layer to go across solutions, and it was a natural play for a cloud-based solution. However, the company had issues. The move into process industries went badly and scalability issues plagued many of the deployments.
In 2015, with the new round of capital, the company with a new and more scaleable architecture announced a new management team with a new vision. I wanted to believe; yet, the phone rang with numerous calls from financial investors attempting to understand Steelwedge and the market potential. The company was being shopped, but to no avail. There were no buyers.
The supply chain management software market had soured. The issues that E2open was having in the public market with a recent IPO cast a long, and dark, shadow on the investment market. During this period the supply chain market had a bad image. The markets of Customer Relationship Management (CRM) were more lucrative and easier for the investment market to understand. The companies’ histories–both founded in 2000 and in California– have always been tightly woven.
E2open’s Story. Another Tragic Player?
E2open was founded in 2000 as a consortia exchange by IBM, along with Hitachi, Matsushita, LG Electronics, Nortel Networks, Seagate Technology, Solectron and Toshiba. The original platform technologies were Ariba and i2 Technologies. The company was one of a handful of exchanges to survive the market hype of electronic exchanges in the 2000-2003 period. The original goal of the electronic marketplace was to bring together thousands of computer, electronics and telecom companies around the world to do transactions over the Internet. The focus was on automating procurement.
There were many twists and turns with management teams, but E2open’s initial public offering in July 2012 was 4,687,500 shares of its common stock, including 3,750,000 shares from the company and 937,500 shares from the selling stockholders, at a price to the public of $15 per share. The stock hovered near $30 per share for many months in 2014. On March 26, 2015, Insight Venture Partners (“Insight”) purchased E2open for $8.60 per share. Investors moaned. Taking E2open private put a black mark on the company in the public markets.
Taking the company private, the investment by Insights gives E2open capital to purchase companies. They have recently purchased the undervalued assets of Orchestro, ICON-SCM, Serus, Terra Technology and now Steelwedge. While the public announcement is “E2open’s goal is to be the one place, in the cloud, for companies to operate their supply chains in real-time. Adding S&OP capabilities increases the breadth of solutions we can offer to our customers, and multiplies the value we deliver,” I am not so sure. Within three years the company has acquired five very different assets. The question is will E2open be an aggregator of assets or an innovator?
Aggregator versus Innovator?
This move makes E2open the largest cloud-based provider of supply chain planning solutions with projected revenues 1.5-2X that of Kinaxis. The open question is what will happen next.
After the investment by Insights, E2open cut operating expenses and focused on profitability to improve the balance sheet. They were successful. The company greatly improved the profitability of operations, but the current focus is very sales driven. The architecture to connect the applications is evolving and while I look for the synergies between the applications, they are slow to appear. For all, it is a lot to digest.
Historically, software aggregation reduces the market value for all. Across the decades in the supply chain market, when a company aggregates assets and does not innovate they lose market appeal. For example, Infor and JDA both aggregated supply chain assets with heavy debt burdens, and used maintenance revenue collected from customers to fund the company. Neither company has been able to drive innovation with mounting frustration from business users.
There are few cases where software acquisition leads to innovation. Sitting at my desk, I made a list. I thought long and hard on this one. SAS’s acquisition of MarketMax in 2003 is an exception. i2 Technologies acquisition of Intertrans Logistics Solutions (ITLS) in 1998 or Oracle’s acquisition of GLOG in 2005 are also exceptions. My list was short. In almost all cases, the acquisition of a software company by a larger software company resulted in a slowdown of innovation. Usually with an acquisition there is a turnover of employees and a slowing of support for the product development platform. There is also a period of chaos for employees as people sort through new roles, processes and vision. It is not easy.
- Recommendations for Steelwedge Customers: As Steelwedge customers sort through the changes, my first piece of advice is to not believe the hype of press releases. My advice is to get closer to the company and ask hard questions on the development of the software platform, the release schedule, and employee turnover. Trust but verify.
- Recommendations for Steelwedge Prospects: If you are a prospect considering the Steelwedge solution, go into the deal with your eyes wide-open. Acquisitions drain the strength of a company. Place clauses in the contract for performance and stay close to the company.
- Recommendations for E2open Customers: My recommendation for E2open customers is to push for innovation. It is easy to say that there is synergy between these dissimilar applications, and harder to build them. Push for an enterprise-class architecture, and hold future buying decisions until the company provides test data of software performance at scale.
- My Recommendation for E2open Management: Both companies have a 17-year legacy of ups and downs. There is a market credibility issue. Do this the right way. Hire software product leaders to build true synergies and drive unique value.
To all, I wish you good luck with the venture. My answer when someone calls and asks, “What do you think of the E2open acquisition of Steelwedge?” is “It depends.” I hope that E2open becomes an innovator, but I will wait and see.
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