Blackbaud's acquisition of eTapestry: questions are being asked by users and tech community.

When a company spends $90 million in two years, it tends to get tongues wagging. And there has been no shortage of opinions in the nonprofit technology community regarding the impact of the $24.8 million acquisition of online donor management and advocacy tool eTapestry by software giant Blackbaud.

The purchase was Blackbaud's second acquisition this year. The earlier purchase was Target Analysis Group for $60 million. The Cambridge, Mass.-based Target Analysis has donor management software but also has a donor research, database operation and fundraising consultancy. Last year Blackbaud paid $6 million to purchase Campagne Associates, a donor management software firm.

[ILLUSTRATION OMITTED]

The largest purchase prior to that was in 1997 when it acquired Master Software Corp. from Epsilon for $11.5 million. Coincidentally, Master Software was managed by the same people who founded eTapestry a few years later, when their non-compete agreements expired.

Blackbaud might not be finished. In public announcements and filings, the firm disclosed it had established a credit line of $75 million. The acquisition of eTapestry leaves another $50 million.

[ILLUSTRATION OMITTED]

THE DEAL

Blackbaud will pay $24.8 million for eTapestry and up to another $1.5 million under a two-year, stock-based performance incentive arrangement. Separately, Blackbaud reported net income of $8.2 million, or 19 cents a share, in the second quarter ended June 30, up from $7.6 million, or 17 cents a share, for the same period a year ago. Revenue for the second quarter totaled $64 million, up from $48.6 million a year ago. Its board of directors declared a third-quarter dividend of 8.5 cents a share.

eTapestry had unaudited revenue of approximately $7 million for 2006, according to a Blackbaud spokesperson.

Blackbaud financed the deal through a combination of cash and borrowing from its credit facility, the company announced, eTapestry, based just outside Indianapolis, Ind., developed one of the first Software-as-a-Service (SaaS) offerings built specifically for nonprofits. SaaS means that the software resides at the vendor and transactions are done online.

eTapestry's flagship offering is its on-demand fundraising solution, eTapestry reportedly has more than 3,000 customers for its on-demand services, with donor records ranging from several hundred per organization to more than 300,000. The firm has another 3,000 organizations using the service under a plan that allows groups free access for 500 or fewer records, according to Jay Love, eTapestry's co-founder and chief executive officer. He declined to provide statistics for the number that migrate to the paid service.

The acquisition moved Charleston, S.C.-based Blackbaud more completely into the fundraising arena. Its software products were steeped in accounting and donor management.

Tim Williams, Blackbaud's chief financial officer, said in a prepared statement that in addition to the strategic reasons supporting the acquisition of eTapestry, the deal is attractive from a financial perspective. "Specifically, Blackbaud will be adding another high-growth, subscription-based revenue stream from an on-demand service offering. The combination of eTapestry, Target Software and Blackbaud's previously existing subscription revenue sources represent the highest growth revenue line in our business. The growing portion of Blackbaud's revenue that is coming from recurring sources, combined with its very strong cash flow, provides the company with a very attractive business model."

Not only do the purchases solidify Blackbaud's position in the software and technology space, but the acquisitions make them competitors of firms such as Epsilon in Wakefield, Mass., and Merkle: Domain in Lanham, Md., which have large nonprofit database operations.

eTapestry will continue operations as a wholly-owned subsidiary in Indianapolis. The 85-person company will continue to be led by Love. He previously served as a sales and marketing consultant at Target Software, as well as president and CEO of Master Software Corp. John Moore, eTapestry's co-founder and vice president of development, and Steve Rusche, eTapestry's co-founder and chief operating officer, both plan on continuing in their roles with eTapestry at Blackbaud.

Love said there is a plan in place for continuing the product. "Rest assured the eTapestry product is a vital one for the combined company. Just looking at the purchase price and one can surmise as much. We have nearly three years of product road map enhancements that we are moving ahead full speed on."

He said that this deal might not have been possible a few years ago. During just the first week, "The interactions have been numerous, productive and more than friendly. Blackbaud CEO Marc Chardon's visit and very open discussions with all of our team were far beyond expectations. It is truly a different Blackbaud now, compared to a few years ago," said Love.

In a statement, Chardon said the acquisition, "provides Blackbaud with a best-of-breed, on-demand fundraising solution that is ideally suited for smaller organizations interested in an easy-to-deploy and relatively low cost offering, as well as mid-sized nonprofits interested in a stand-alone fundraising solution deployed in an on-demand model."

eTapestry will probably be Blackbaud's lowest entry point, starting at $200 per month. That's compared to Blackbaud's The Raiser's Edge which starts at approximately $6,500.

THE MARKET

There has been quite a bit of buzz about the acquisition on various technology blogs. For example, on Don't Tell The Donor, one participant commented that "Although Blackbaud was No. 1, eTapestry had emerged as a strong competitor because of its focus on smaller charities, as well as its pipeline into college-based fundraising."

On the Nonprofit Tech Blog, one posting read: "Obviously, Blackbaud is taking a page out of Oracle's playbook and applying it to themselves. Rapid-fire acquisition of smaller players so that you can wrap it up into a system of systems seems to be their strategy for now. They now control the vertical fundraising environment for nonprofits from the base of the nonprofit market (eTapestry) to its apex (Target Software). This should put them in good position to compete against the Sages, Microsofts and salesforces of the world. It's an impressive move and a smart one."

Tim Mills-Groninger, associate executive director at the technology support organization Lumity in Chicago, likes the move. "Previously when Blackbaud bought a software company, they wanted the customer base and experience of the staff but they stopped selling the software--FundMaster and Campagne Associates are classic examples. The Target and eTapestry acquisitions show a different approach of creating wholly-owned subsidiaries that expand market share overall and keep the products going."

Said Mills-Groninger, "Buying an ASP/SaaS provider like eTapestry is a smart move. There's good cash flow because once a user stops paying for the service they lose access to the software. Premises solutions, software installed locally, can run for years after the user stops paying the support fees. Using unsupported software is very high risk because one hardware upgrade or an operating system patch could crash the program and you'd lose access to the data, but many shops are willing to take that risk. With SaaS you don't have a choice--the license and support are a single bundle."

Choice is one thing, price is another. According to Douglas Schoenberg, CEO at software vendor and Blackbaud competitor SofterWare, "I suspect that many of them (users) are concerned about possible price increases. After all, to get a return on that $25 million purchase for a company with only $7 million in annual sales, eTapestry clients are likely to see dramatically increasing subscription and service fees."

Love said there is no plan to increase prices. "We talked openly about that. There's nothing on the near horizon. We operate with appropriate margins," he said.

Daniel Ben-Horin, co-founder of CompuMentor and TechSoup in San Francisco, is somewhat less enthusiastic. "eTapestry was a presence in the broader nonprofit sector in the way that the much larger Blackbaud never has been. It will be interesting to see if Blackbaud acquired any of eTapestry's enthusiasm for engaging with smaller customers or is just trying to bite off a segment of low-end market share. If it's the latter, and most people think it is, it will be interesting to see if that segment of the market obediently gets bought or whether it opts for providers who speak its value-based language and offer alternative solutions."