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M&A Impact: The Neon Juggernaut Buys a Convoy.

In a bid to maintain its lead in the enterprise application integration space, New Era of Networks (Neon), has bought market share and PeopleSoft expertise with the $42m stock acquisition of Convoy. The privately-held EAI company was a fast growing start- up which saw revenues more than double to $10.4m for fiscal 1999. It was believed to have been just breaking through to profitability but evidently found the prospect of being taken over a more appealing exit strategy than a future as an independent entity struggling in a highly crowded, albeit fast growing market. The EAI arena was estimated to be worth $306m in 1998 and will grow 45% to reach $443.7m by the end of the year, according to WinterGreen Research, and there are estimated to be more than 30 vendors trying to jostle for market share.

Although still the confirmed leader in the field, with a massive $1.5bn market cap, Neon has not managed to make itself exempt from competitive pressure either, say analysts. "The company has no choice but to take on an aggressive acquisition stance if it wants to be the gorilla in this space," says David Breiner at Volpe, Brown Whelan & Co.

Where financial services was once the primary vertical for EAI vendors, ERP, customer relationship management and e-business integration are fast becoming new areas for diversification. By offering a broad range of integration applications, these vendors can achieve competitive differentiation and new revenues streams. There has been some suggestion that Neon is using the Convoy acquisition to play ERP catch-up to primary competitor, TSI, which has been steadily building a healthy business in SAP integration projections for the past two years. However, this is a theory that Neon hotly contests. "TSI may have a two-year lead in SAP integration but our business is larger," says Rob Theis, senior VP of corporate development at Neon.

With Convoy on board, Neon has bought itself products to automate data migration, extract metadata and generate SQR data conversion programs that automatically enable data from third party and legacy applications to flow into and out of PeopleSoft applications. These products fit together with the SAP integration products it picked up in the earlier acquisition of S1, a $20m Swiss company with a SAP consulting practice. Convoy also had some SAP integration adapters that Neon plans to bring together with those developed in house. Convoy also brings 150 customers in manufacturing, retail, financial services, higher education and government.

And Neon is planning no let up in its buying activities. "We will build on our move into the healthcare market initiated with the purchase of CAI [Century Analysis Inc], continue making acquisition in e-commerce application integration and grow our telecoms business unit into a $50m to $100m operation within the next 12 months mainly through acquisition," says Theis. The object of this strategy is to achieve the 75 pieces of technology that it claims are required to offer a full EAI suite. With the Convoy purchase, Neon now claims to have passed the three quarters mark, although by is own admission it claims to be missing some adapters for the packaged application market.

The deal was greeted with widespread nods of approvals from security analysts. "At roughly four times trailing 12 months revenues, the price paid appears quite reasonable," says Wendell Laidley at Credit Suisse First Boston. Laidley has high hopes for Neon this year and is expecting the company to close 1999 with an earnings per share of $0.51, Breiner at Volpe Brown Whelan expects an EPS of $0.50. This year is therefore going to be the one in which Neon finally makes a profit. The company is also likely to continue its growth spurt with revenues more than doubling to approach $143m in 1999, according to Breiner.
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Publication:Computergram International
Geographic Code:1USA
Date:Jun 14, 1999
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