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M&A Impact: No Let Up in Acquisitions For Neon.

A week is a long time in the software industry. When it's a week in the corporate life of New Era of Networks' (Neon) senior VP of corporate development, Rob Theis, it could seem even longer. Theis is on the receiving end of the multiple acquisition proposals coming Neon's way. Having made six acquisitions in the last four months, Neon is fast assuming the mantle of the Cisco of the enterprise application integration (EAI) space. And in a high competitive market where the chance of reaching the top of the pile is slim, the prospect of being acquired by market leader Neon looks ever more appealing. And so the proposals keep on coming.

The comparison with Cisco is not incidental either. "We've worked closely with Cisco to examine its acquisition strategy to make sure our model is similar. We are following Cisco's approach in buying as much technology as possible and housing it under one roof so customers can buy all products from one vendor," says Theis. Acquisitions remain a top priority as a means to broaden the software portfolio, attract new customers and nurture growth.

With the ink barely drying on an agreement to purchase ERP application integration company, Convoy, Neon has announced plans to takeover $8 million MicroScript, an NT-based EAI vendor, for $34 million in a mixture of $22 million in stock and $12 million in cash.

"We don't want to experience death from below where we are up against competitors that can offer 80% of the functionality at 20% of the price," says Theis. The MicroScript transaction was instigated to ward off this threat. The company has a suite of integration products that provide enterprise level routing and high-speed integration connection for legacy to NT applications.

Typically, these products are used by SMEs (small and mid cap enterprises) in the hospitality, retail and healthcare sectors and cost between $30,000 and $75,000. The suite is comparable to TSI's Mercator in terms of functionality but far cheaper, according to Theis, who is confident that MicroScript will see Neon eat TSI's lunch at the low end of the market.

Neon will also look to extend MicroScript's NT product beyond the three vertical niches it currently occupies into ERP and, in particular, the SAP R/3 market place. "Roughly 50% of new R/3 sales are on NT and we needed a strategy to attack this segment otherwise we would have been left out in the cold," says Theis. It is a strategy that is firmly backed by the analyst community. "The potential integration of MicroScript products with Neon's content-based routing technology should create pull-through demand for its current product base," says Wendell Laidley at Credit Suisse First Boston.

MicroScript would appear to be the only company that focuses solely on EAI on NT and can therefore lay just claim to lead the field. Its technology has been well received. "MicroScript is particularly strong in the healthcare industry, which is littered with legacy systems. With MicroScript you can integrate a legacy app with no changes whatsoever. Part of that is to do with the scripting language the product uses, which is very efficient and requires few modifications to the original script if a subsequent change to the system is required," says Barry Hieb at the Gartner Group.

But while MicroScript brings yet more products to Neon's never- ending quest to offer a bigger EAI tool set than any its competitors, MicroScript's channel infrastructure played an equally, if not more crucial role, in Neon's decision to buy the 62-employee company.

MicroScript has a well-developed telesales department through which it has managed to attract 1,400 customers since its inception in 1994. Currently, Neon's indirect channel is virtually non-existent. "Around 90% of our customers have maintenance contracts. MicroScript had been able to consistently achieve a 15% operating profit by renewing maintenance contracts over the phone. So its easy to see what kind of cost savings we could achieve," says Theis.

The sales of additional MQ Series Integrator modules will also be funneled through telesales, which also brings with it software that allows staff to demonstrate the product over the internet. The acquisition also provides Neon with an opportunity to work more closely with Microsoft, which was highly instrumental in developing MicroScript's EAI products - Microsoft still provides MicroScript with a $0.5 million marketing and advertising budget that Neon will now inherit.

With Microsoft's backing in the NT marketplace and IBM's support in the Unix and mainframe space, "no one in the EAI space will come close to us now," says Theis.

That said, Neon still plans to continue creating distance between itself and its competitors - by acquisition. "We restructured the company at the beginning of last quarter to accommodate 300% to 400% growth, the majority of which will come through takeover activity," says Theis. The restructuring involved the appointment of a president to each of Neon's verticals - such as telcos, healthcare and financials - so acquisitions "don't get pushed into a monolithic infrastructure and risk not being absorbed" according to Theis.

The other tenet of Neon's acquisition philosophy is never to make a dilutive acquisition. With a high flying stock price and a further $162 million in cash to back it up, Neon can afford to take advantage of the uncertainty in the nascent EAI market space to make non-dilutive transactions. Consequently, Neon has become the acquisition darling of Wall Street by making eight acquisitions that have all been accretive to earnings. "Management is capable of executing merger-related integration without any disruption," confirms Laidley.

There is no real secret behind such an acquisition strategy, says Theis, who argues that Neon has learned to play to the advantages of a fledging market. "When we buy a company its sales tend to automatically rise because that company no longer has to justify that it will be around in two or three years to make a sale. We also do enough due diligence to ensure that any potential target can operate at our margins [10-15%] in a stand alone capacity because you can't slam two companies together within six months and expect them to continue operating at pre-merger levels," says Theis.

Analysts are suggesting that there may be some let up in Neon's frantic acquisition pace. Or, if it does not abate, it will at least head in a different direction, perhaps towards European expansion. "The company will continue to make acquisitions but they're probably not going to be as product-oriented as recent deals," says David Breiner at Volpe, Brown & Whelan.

Aside from managing acquisitions another pressing task is of managing its relationship with IBM which co-develops and sells MQSI. If there is going to be any stumbling block to Neon's future success it will be in a failure to manage this relationship. "Neon needs to get the IBM sales force to help themselves. They need to teach them to fish rather than providing the fish for them," says one analyst, who argues that Neon's inability to extricate itself from IBM deals could be the one blot in an another wise clean book.
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Title Annotation:MicroScript, Convoy acquired by New Era of Networks
Publication:Computergram International
Geographic Code:1USA
Date:Jun 28, 1999
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