The last four months of credit crunch chill have been tough enough for most businesses. At Epicor Software, though, the economic pressures have been accompanied by the company’s own high drama: the integration of its largest-ever acquisition, its biggest product launch in half a decade, a hostile takeover battle, a round of staff lay-offs, the resignation of its CFO, and the “stepping down” of its CEO.
And through all that, the company still even managed to grow revenues and make money.
The mid-range ERP company, which has traditionally focused on software for manufacturing, distribution, supply chain and professional services, started 2008 by completing an aggressive expansion into retail software, with its $322 million cash deal to buy the UK’s NSB Retail Systems (previous acquisitions include Scala, CRS Retail Systems, DataWorks and Clarus.)
At the same time, it was trying to finish a “milestone” overhaul of its core product line. Epicor 9, five years in the making and finally released in December, is the unifying platform for all its previously discrete products – now all converged on a single service-oriented architecture, offering greater applications adaptability and a new collaborative environment for users.
It also delivers consistency across markets for the first time. With Epicor 9, “we can now provide a single product that can be deployed across all major markets and geographies for our target industries,” says CEO George Klaus. And even by early February, Epicor had taken 200 orders for the new product, half from new customers, he adds.
However, in the build up to that launch, Epicor executives found themselves with a major distraction – they were drawn into a fight for control of the company following an unsolicited bid by a hedge fund.
The initial offer from Elliott Associates in October of $9.50 a share, valued the company at around $560 million, but that was rejected outright by Epicor’s board (it was only 1.1 times the revenue figure achieved for 2008 of $448 million). They also refused to discuss the matter.
As the company’s share price continued to fall (it sunk 70% during 2008), Elliott added insult to injury by tabling a reduced offer of $7.50 – an amount that valued the company at only one-times 2008 revenues but still represented a premium of 109% on the share price at that time of around $3.
When that again was rejected, an “astonished and disappointed” Elliott put its cash away. Epicor management argue that demand – and therefore the company’s valuation – was depressed ahead of the shipping of Epicor 9; they also reacted to that situation in November, by taking $18 million out of the expense line through staff redundancies and other cost-cutting.
Interestingly, Elliott was not the first to be snubbed. Its portfolio managers say they are aware of several other potential buyers who had also been rebuffed by the Epicor board.
As the dust settled, though, CEO and president for only 11 months, Tom Kelly, left the company, with George Klaus taking back the CEO’s chair. Klaus ran the company for 13 years, giving up the reigns in February 2008.
Despite the drama, the company’s fourth-quarter results proved that the distraction of the previous three months and imminent debut of a new product line had not terminally affected sales. Revenues for the three months to 31 December rose 2% to $121.9 million, even as software licence sales ahead of the new product launch plunged by 34% to a mere $25.2 million. Only an intense focus on selling maintenance contracts to lapsed customers ensured the company stayed in the black. Quarterly profits of $2.9 million, however, were down from $22.5 million in the year-earlier period.
In returning Klaus to the CEO’s position, Epicor’s board is hoping he can work some of his old magic. “George’s leadership and vision were instrumental in delivering the success and industry-leading growth that the company achieved immediately following the last technology recession in 2002; [he] is the ideal person to lead this time [too],” says board member Robert Smith.
For his part, Klaus is relatively upbeat about the task. “The core fundamentals of Epicor are strong and have not changed much despite the difficult market.” Difficult, he thinks he can deal with. But Klaus – and the company’s 20,000 customers – will be hoping Epicor is in for fewer nasty surprises in 2009.
