Onyx and Change in CRM
Onyx got bought last week, in an all cash deal valued at $92 million, subject to the usual regulatory rubber stamping. This was a semi-significant move in the continuing consolidation of the CRM industry but let’s not get maudlin about the roll up of another CRM pioneer. The world is not ending simply because one of the early market makers is being acquired and ninety-two megabucks is a tidy sum that could fuel more than a couple of long weekends in Vegas.
M2M Holdings, Inc. a holding company jointly owned by Battery Ventures VI, LP and Thoma Cressey Equity Partners decided to buy the CRM pioneer for about $4.80 per share, a tidy markup to the recent market price according to CEO Janice P. Anderson. M2M Holdings also owns Made2Manage Systems, Inc and is probably strategizing a synergistic pairing of the two application suites to deliver integrated front and back office applications to the market.
That’s about as far as I can take this. I am not a finance guy and truth be told I don’t have a lot of use for the machinations of finance. Nevertheless, from an economic perspective I find this move potentially fascinating. A public company agreed to be acquired — that happens all the time, but the opportunity the acquisition gives to Onyx is bigger than the news suggests.
Like every other public company Onyx was locked onto a treadmill marching to a quarterly number that is becoming harder and harder to make given the age of the market and the level of competition. Onyx was not the largest competitor and they tried to compensate by carefully selecting niches where they could exploit innate strengths even to the point of down playing their CRM roots. As part of a private company — owned by an investment partnership, the company, or more correctly, the new owners, have an opportunity to change the company’s business model and perhaps launch a new IPO on another day.
To be sure, the private investors will be as results driven as the public market, but the thing that privacy provides is a longer time horizon in which to affect some necessary changes. Privacy provides patience.
So, what changes are we talking about? The business model. Changing the business model is something that an increasing number of companies will need to contemplate over the next few years and acquisitions of the Onyx variety might become commonplace for a while as droves of software companies attempt to change their business models.
Specifically, if I had ninety-two megabucks and therefore a say in what happens next at Onyx (which I don’t or I would be in Vagas) it would go something like this. Onyx was a competent provider of front office software via a complex solutions model. Say what you want about streamlining, configuration, and powerful new tools, if you delivered software on a CD or a DVD and sent in a small army of people to make it work for the customer, you were living in a complex systems world. There’s nothing wrong with that, but the era of complex systems in the software industry is over.
What’s interesting about Onyx is that they were also one of the earliest companies to dive into what was then called the ASP market, so the company has a good deal of relevant experience in the new fangled world of software as a service (SaaS) and that is where the future lies. SaaS is not simply an alternative way of delivering software. Those who think otherwise probably still believe the automobile is simply an unreliable alternative to a horse.
SaaS is really the manifestation of the change from complex systems to volume operations and that is what the business model change is all about. According to Geoffrey Moore’s new book, “Dealing with Darwin,” volume operations is what happens when everybody sort of “gets it”. In the CRM case, the core business processes have been figured out and rather than demanding customization, may users are opting for standardization which facilitates things like fast implementation, easier maintenance, and, most importantly, ROI.
As you know, in a SaaS model you make money via the monthly subscription drip as opposed to the tsunami of a license agreement. If you try to make that transition as a public company you get clobbered: Wall Street will not let you bring in drips when it has been conditioned to tsunamis, however erratic their arrivals may be. So the option is to go private, to go through an exercise that in some regards looks like the reorganization of a bankruptcy. However, instead of restructuring the debt, the company gets to tune up the recipe for the secret sauce, how they make money.
A couple of years ago I floated the idea that in this column that Siebel should buy itself back from the public market. To me the idea made a lot of sense. The company was sitting on about two billion dollars in cash, the investors were screaming about returns and dilution, and the founders were sitting on even more cash. If the will had been there the deal could have been done. Instead, Oracle bought Siebel and the companies are working to rationalize a warehouse full of software that includes redundant systems from Peoplesoft (and its several acquisitions) and Oracle’s home made CRM as well as other products.
Will that acquisition be valuable? Perhaps. Oracle has lots of money and smart people to braid everything together, but the jewel in the crown is Siebel On-Demand and Oracle does not look like a company transitioning to SaaS in any meaningful way. There are some who tell a story about hybrid solutions, and alternative delivery models. If you want to know what I think of that idea, go back four paragraphs.
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The notion of not hiring that extra sales rep in the Northeast region is a tough pill to swallow when you’ve been conditioned to think that growing the top line will make everything else fall into place.
By all rights, Onyx should have been in the cat-bird seat after Siebel went the way of Oracle and left the tier 1 client/server buyers in a state of confusion, which continues today. However, the company’s inability to execute has been evident. Onyx was the only CRM manufacturer with a valuation multiple of less than 1 times sales, the company seems unable to grow and the company demonstrates no direction toward a SaaS model. The company’s flagship product appears to be getting old and tired – and has no technology foundation to be transitioned to a SaaS solution. I don’t see any reason to believe that Onyx will better execute as a private organization.
Hi Denis, Great take on this. Deep down, I’m breathing a sigh of relief — finally, Onyx has been “put out of it’s (financial) misery.” I think it’s interesting to look to Pivotal’s acquisition by CDC (formerly chinadotcom) for insight as to what Onyx might be headed for. And as an aside, Onyx had last December received an unsolicited bid by CDC to buy parts of the company. Onyx rejected the bid saying it was not seeking a sale….
Unlike M2M, CDC is a public company (also owning Ross Systems among others) so I suppose “private” thinking is toned down, but certainly not erased as the more diversified CDC portfolio likely provides some leeway for longer-term thinking. If we look at growth as the bottom line, then I’d expect to see enough investment to have garnered lots more customers. In 2004, Pivotal had about 1600 customers. I wonder what that number looks like now?
Great work on this post!
Really excellent take. I personally think we’ll see more and more of this (Garnett & Helfrich are doing this too via Ingres, Wyse, etc…) and I know of several large private equity firms, VCs and hedge funds that have excess capital and are looking at the tech buyout opportunities.
One of the things technology companies, publicly traded ones that is, have struggled with as the market matured is transitioning from growth at any cost to a more responsible, shareholder friendly model. The notion of not hiring that extra sales rep in the Northeast region is a tough pill to swallow when you’ve been conditioned to think that growing the top line will make everything else fall into place.