THE SINGLES SCENE - Erstwhile Acquirer i2 May Need a Buyer Soon.
By Justin Hibbard
December 6, 2001
herring.com
Of all the B2B companies that emerged in the last few years, i2 Technologies seemed the most likely to muscle in on old-guard competitors like Oracle and SAP. In 2000, the 13-year-old firm, which makes software for connecting buyers and suppliers over the Net, saw its revenue reach $1.1 billion, almost double what it was in 1999.
As revenue ballooned, i2's stock price soared to an all-time high of $110 in March 2000, and the company used its red-hot shares to bulk up through acquisition. In the first six months of last year, i2 bought two software companies, Aspect Development and SupplyBase, as well as a bundle of IBM's software assets, for a total of $9.4 billion in stock. Valued at $8.8 billion, the Aspect deal was the largest software-company acquisition in history.
Then in April of this year, the Dallas-based company surprised investors with news that sales in 2001 would fall below forecasts, resulting in losses for the second and third quarters and possibly the year. And the old guard? SAP and Oracle beat second-quarter earnings estimates. In September, the former said that its forecast of 20 percent sales growth in 2001 would hold up just fine, thank you. And Oracle announced fiscal first-quarter earnings that beat analysts' estimates by one cent a share.
Meanwhile, i2's stock price has been hovering around $4. After acquiring five companies in the last 18 months, i2 suddenly looks like an acquisition target itself. In mid-September, rumors circulated that the company was in merger talks with Siebel Systems, a maker of customer relationship management (CRM) software. In theory, the combination would help both firms fend off their larger rivals. (In practice, neither company would comment on the rumors.)
Two weeks before the gossip started, we spoke with Romesh Wadhwani, i2's vice chairman. "As things stand, i2's plan is to continue as an independent company," he said. Independence is not out of the question. At the end of June, i2 had $819 million in cash and short-term investments, roughly the same as last December. Though software license revenue for first quarter 2001 decreased 30 percent year-over-year, i2 has responded by shedding one-fifth of its workforce since April. It has also cut expenses to less than $300 million per quarter.
The company still commands the largest share of its market. Last year, i2 owned about 10 percent of worldwide sales of supply-chain management software, which totaled $7 billion in 2000, according to the research firm IDC. With 1,000 accounts and 9,000 installations of its products around the globe, i2 has a broad constituency to which it can sell upgrades and add-ons.
But the gargantuan deals that fueled i2's growth in 1999 and 2000 are mostly gone. During those years, the company could rely on a few big contracts each quarter to boost revenue. In first quarter 2001, though, its average deal size fell to $1 million in license fees, down from $1.8 million a year earlier. That drop has forced i2 to alter its sales strategy.
In the past two years, the company focused on winning mammoth contracts, like the two-year overhaul of Kmart's supply-chain systems, which was announced last fall. Estimated in the tens of millions of dollars, the Kmart deal was one of i2's largest sales ever. But such projects required the software maker to hire an army of salespeople and service technicians to nurse customers through complex installations.
"What really hurt i2 is that they overhired," says Eric Upin, an analyst at Robertson Stephens. As the company scrambled to support customers in first quarter 2001, sales and marketing expenses rose 112 percent year-over-year, while the cost of services and maintenance rose 102 percent. Even so, a sign of strain appeared in February, when Nike blamed weak quarterly sales on a faulty software installation by i2, driving the vendor's stock price down 22 percent.
As i2's average deal size continued to shrink during the second and third quarters, the company fired about 1,280 employees, most of them in sales and marketing. Since then i2 has reorganized its sales force to pursue smaller deals--a mission that shifts the company's position among its competitors.
In small deals, customers install one or two of i2's applications, rather than its entire product line. Usually they must integrate those applications with software from other vendors--a costly task. Companies like Oracle offer suites of applications that come designed to work together. Their pitch: buy all your software from us and save on integration.
I2, on the other hand, makes the "best of breed" argument: its flagship supply-chain application provides the most value even when it requires integration. Oracle and SAP sell supply-chain applications in their suites, though the products aren't as developed as i2's. But they are selling. In second quarter 2001, the revenue from SAP's supply- chain application reached e150 million ($127.4 million).
Even with larger rivals encroaching, i2 could continue to go it alone. But expanding beyond supply-chain software will be tough. And with its limp stock price of $4, i2's days of buying its way into new markets are over. Clearly, i2 could benefit from selling out to a company with complementary products and a long list of customers. In what's shaping up to be a long, dark winter for the software industry, the old guard suddenly looks young again.
Write to Justin Hibbard. |
