Software AG extends scale and reach with IDS Scheer buy

(By Philip Carnelley, Wed 15 Jul 2009 9:10) Germany’s second largest software company, the venerable database and tools company Software AG, has offered to buy compatriot software and services company IDS Scheer. SAG’s cash offer of €15 per share values the provider of business process modelling and management tools and services at around €480m (£411m – circa 1.2x revenues), 39% over the closing price earlier this week. SAG already has agreement to buy 48% of the stock from two major shareholders, including founder Dr August-Wilhelm Scheer.

Software AG isn’t the company that would first spring to mind as a new home for IDS Scheer – that would be SAP. Not just because SAP is also German, and big (€11.6b in revenues): the most common use for Scheer’s ARIS toolset is as a modelling front-end to SAP ERP. Oracle would also have been in the frame, as it OEMs ARIS into its own BPA Suite. Scheer also has technology partnerships with HP, Microsoft (linking to Biztalk), IBM (WebSphere) and others.

Buying ARIS (which what this deal is really all about) represents a move ‘up the stack’ for SAG towards business process modelling. However, it will not be all plain sailing. One of IDS Scheer’s strengths was its independence with multiple alliances. The webMethods middleware suite, now 44% of SAG’s revenues, competes directly with products from IDS Scheer’s technology partners – products that link to ARIS. How SAG will manage that delicate balance – especially with industry behemoths like Oracle and Microsoft – will surely present some interesting challenges.

The acquisition (to be funded from cash and debt) will increase SAG’s revenues by over 50%, to around €1.1bn (£943m). Therein lies the first challenge – potential ‘acquisition indigestion’. We always get nervous when companies acquire anything much larger than 10% their own size. This becomes a bigger issue considering margin dilution: IDS Scheer’s operating margins were just 3% last year (versus 25% for SAG). That said, SAG absorbed webMethods rather well. That deal, two years ago, was for $546m, about 2.5x revenues.

The other issue is what SAG will do with the rest of IDS Scheer – some 70% of IDS Scheer’s revenues derive from its consulting services (one reason why its margins are low). Will SAG try to build up a wider consulting group? Preserve it as it is? Or run it down and sacrifice the revenues? This, as well as the margin question, may be the reason why markets responded negatively to the deal: SAG’s shares fell 6% on the news. So while this move gives it increased scale and reach, the payoff is not by any means a ‘given’.

Fun fact: IDS Scheer’s original company name was “IDS Prof. Scheer Gesellschaft für integrierte Datenverarbeitungssysteme mbH”. Glad we don’t still have to use that in full.