Enterprise applications vendor Made2Manage Systems Inc. today disclosed that it has raised $50 million in equity and debt financing to help fund its growth-through-acquisition strategy.
As part of the transaction, Thoma Cressey Equity Partners, an investment firm that specializes in M&A roll-ups, has taken a minority stake in the niche-oriented ERP vendor that targets small to medium-size manufacturing companies. Through its relationship with Thoma Cressey, the Indianapolis-based ERP vendor said it now has access to additional capital from Harris Nesbitt, a banking unit of North American giant Bank of Montreal (BMO) Financial Group.
Made2Manage CEO Jeff Tognoni characterized Thoma Cressey's equity stake as a "large minority position." He added: "It's less than 50% but greater than 25%" of the equity in the company.
After operating for years as a publicly traded NASDAQ company, Made2Manage was acquired in August 2003 by Boston-based equity financier Battery Ventures in a deal valued at about $16 million. Founded in 1986, Made2Manage had reached $30 million in annual revenue, and was operating at "a slight loss to break-even" before being acquired, Tognoni said.
As a private company, Made2Manage has consistently operated in the black, and has grown organically and through three acquisitions: DTR Software International, a provider of ERP software for the plastics processing industry (August 2004); the professional services and support assets of ADS Information Systems (September 2004); and Capri Corp., a developer of ERP software for printed circuit board manufacturers (December 2005).
The company, in fact, claims to have operated profitably for nine consecutive quarters since going private and has a customer base which now numbers 2,100 across 30 manufacturing segments. Through September of 2005, the company said, revenue had risen 25%, compared with the like nine-month period of 2004. Moreover, sales to new customers increased 64% when compared to the same period of 2004.
Made2Manage chose Thoma Cressey from an elite group of private equity investment houses focused on the software space because of its deep pockets and experience in industry consolidation plays, Tognoni said. (The financier, for instance, recently rolled portfolio company WRQ into Attachmate, forming a powerhouse player in the legacy application access and integration sector.)
With more cash in its corporate coffers, Made2Manage wants to capitalize on what it sees as a trend among smaller to medium-size manufacturers in some vertical markets towards enterprise applications that are built from the ground up with more modest technical and business requirements in mind. "Our belief is that ERP is changing," Tognoni said, noting that Made2Manage is challenging the notion that one flat suite of enterprise applications can be tailored to manufacturers of every size and scope. "It always comes down to the fact that they are sub-optimal for everyone -- that's why it takes 10 times the systems cost to implement them," he noted.
Made2Manage's move-forward strategy is reminiscent of the consolidation initiatives aggressively pushed by its larger brethren, vendors such as SSA Global and Infor: Acquire undervalued assets in the form of full suites of enterprise applications and extend their capabilities through new development and code integration (click here for SSA's strategy; here for Infor's approach).
Where the strategy differs is that Made2Manage is focused on micro vertical market sub-segments, such as semiconductor manufacturing, and isn't intent on acquiring large customer bases and maintenance revenue to generate cash flow that is critical to driving market capitalization.
"We believe [the industry] will slide back over time towards more of a best-fit approach," Tognoni said. "Manufacturers will be buying ERP software because it fits their business, not because the vendor is number one or two in the world."
That perception is making its way across the manufacturing industry spectrum, whether it's SAP AG pushing industry-specific solutions; Infor's similar efforts in the mid-market; or Microsoft's partnerships with ISVs to create vertically oriented applications, noted Jim Shepherd, an ERP analyst with AMR Research Inc. in Boston. "This is happening at all levels -- software vendors are trying to come up with industry-specific products," he said. "No question, that's what buyers want."
Made2Manage's approach makes even more sense in micro-markets where smaller companies may not have the internal resources, nor the capital or technical wherewithal, to consider purchasing and installing more complex software pitched by larger and better capitalized vendors, Shepherd noted. A smaller manufacturer can most likely get more functionality than it will ever need from a vendor such as SAP. The downside is that they will have to spend months sorting through the technical complexity of which pieces to deploy and at what cost.
"If [there's] a system that is purpose built for smaller companies, which doesn't have all the overhead requirements of software developed for multi-billion, multi-national companies ... that can be installed in a fraction of [the] time and cost, then that is an argument that resonates," Shepherd said.
Made2Manage's niche concept, aimed at companies in the $5 million to $25 million range, provides it with a great demographic and market opportunity, he continued. "It will never run out of market -- no one will consolidate [the space] completely," Shepherd noted. "No matter how dominant SAP, Sage, Microsoft, and others get, the sheer size of the market and varied demographics always leaves room for a niche player."
And rolling up smaller software assets into one company with shared administrative, sales, and development resources -- with the backing of marquee financiers -- should enable Made2Manage to stand out from the crowd. While it may never be a major player, the company's aspirations are more modest and its reputation of delivering "nice," well-supported products to "happy customers" hasn't suffered as its growth-by-acquisition strategy has taken form, Shepherd noted.
"Each acquisition is small and doesn't cost much, but [provides] synergy in areas such as sales support, accounting, and product development," he said. "It's a viable business model."
That's because Made2Manage has focused on providing horizontal services -- such as web-based customer support knowledgebases that can be easily tailored to recently acquired technologies -- to drive operational efficiencies and improve customer satisfaction. "We have an execution-oriented culture and can buy a company and quickly bring them into our way of doing things," Made2Manage's Tognoni explained. "We are providing things that [acquired] companies did not have the resources to do while retaining the specialness of their approach."
So how will Made2Manage apply its new capital? Tognoni declined to reveal his hand, other than noting that the company will remain laser focused on manufacturing ERP software aimed at micro verticals. "You can get an idea by looking at the kind of companies we have already bought," he said.
AMR's Shepherd said any acquisitions made by Made2Manage will likely be companies that are off the radar. "It will likely be five guys in a basement that have a product for companies that make wire and cable or serve tool and die shops; very specialized areas," he noted.
Made2Manage could become a target for another ERP vendor interested in going down market with its market consolidation efforts. Despite its aggressive takeover behavior, Infor is an unlikely candidate, Shepherd said, noting that Made2Manage's applications don't easily scale up. "It would have to be someone who wanted complementary small business solutions -- maybe."