The coming together of ERP firms Acumatica and IFS - an early analysis

June 19, 2019

Dyslexia mode

Summary:: In an interesting private equity deal, EQT Partners, the owner of IFS is also buying Acumatica. However, this deal is not intended to be a rollup deal, a tuck-in deal, or some other typical play. Here’s Brian and Jon's assessment.

Today, Swedish-based ERP vendor IFS and U.S. based ERP vendor Acumatica are coming together. This transaction is actually one that involves IFS’ private equity owner: EQT. EQT Partners acquired IFS AB in 2016 and has now acquired Acumatica via the same funding pool.

The end result will be that the two firms will retain much of their autonomy; however, synergies from go-to-market activities, R&D efforts, etc. will be maximized between the two companies (more on this below). As such, this is not an acquisition by IFS, per se, but rather a tight affiliation between the two companies.

This is a very important distinction given the "acquisition fatigue" that customers are feeling of late, particularly in the cloud ERP market. The first assumption many might have is that this constitutes yet another merger, and the loss of two independent players for customer choice, but that is not the case.

As part of the deal, IFS CEO Darren Roos will have a seat on the Acumatica board. Financial terms of this deal were not disclosed. The official announcement stated:

EQT Partners, a private equity fund with $45B (€40B) of assets under management, has acquired cloud-native enterprise software provider Acumatica through the same investment vehicle that holds IFS AB (Industrial and Financial Systems). The structure of the investment ensures that both companies have a stake in each other's success, and to further reinforce this coalition, Jonas Persson will serve as chairman for both companies. IFS, the global enterprise applications company, and Acumatica, the world's fastest-growing Cloud ERP provider, will serve growth industries such as manufacturing, distribution, construction, service, energy and A&D, while competing directly with SAP, Oracle, Microsoft, Infor, and Sage among others.

Who are IFS and Acumatica?

Neither ERP vendor will be a stranger to diginomica readers. IFS is very big in asset-intensive industries and has, not surprisingly, a large following of customers in Europe. It also has offices in many parts of the world (a large one is in Itasca, Illinois). The company has been around many years and has a number of large aviation, capital equipment and other customers.

IFS has been pivoting heavily in recent years around greater support for IIoT technologies and the cloud. It has been working with many of its legacy, on-premises customers to make these moves impactful and economically viable.

IFS' customer base spans a range of company sizes, but it nudges well into the large enterprise space where Acumatica does not historically play. For more background on IFS, diginomica readers should check:

Acumatica is a Seattle-based ERP vendor. They are essentially an all-cloud player that drives almost all of its sales via its channel partners. The company is relatively new and has grow significantly. Where IFS targets larger enterprises, Acumatica has served many of the same customers/prospects that also consider Microsoft Business Solutions products (e.g., Navision, Dynamics, Axapta, Great Plains). Acumatica views its main competitor as (Oracle) NetSuite, and also competes against Sage Intacct.

Diginomica coverage the last few years re: Acumatica has also been in-depth. For starters, readers may want to see the following pieces for more information:

Overall, this deal covers two different firms. IFS is a long-time, European ERP firm that targets large firms, in complex industries all over the globe. Acumatica is a newer, US-based ERP firm with strong accounting functionality and lots of channel partners working well for them.

Though Acumatica has smaller customers and is able to scale with their bigger ones, Acumatica is primarily focused on the vertical midmarket, which it says many ERP companies have "abandoned" in the push upmarket.

The NetSuite/Oracle parallels

Prior to NetSuite's acquisition by Oracle, NetSuite was quite well-known in North America and some other pockets of sales successes globally. However, once Oracle acquired NetSuite, the global growth capabilities of the NetSuite solutions were able to grow demonstrably. Oracle was able to apply its massive global sales engine and marketing capabilities to propel NetSuite sales in other parts of the world.

Acumatica should be able to leverage IFS' sales and geographic strengths to aid in its global expansion and to enhance its customer support. However, Acumatica will still need to acquire local/in-country channel partners to help sell and implement these solutions in newer geographies. Going forward, Acumatica will focus on firms of approx. $200 million revenue or less. IFS will focus on larger entities.

Top assets each firm brings into the deal

IFS will bring a more global infrastructure to the mix. It will also bring a significant amount of R& ;D/innovation re: Industrial Internet of Things (IIoT) asset maintenance. IFS' skunkworks efforts are fairly rich. They have demonstrated capabilities re: drones and other advanced tech years before competitors did. IFS also has significant vertical depth in aviation, oil & gas and other asset-intensive verticals. IFS CEO Darren Roos, who has now been on board more than a year, has brought a determination to double down on the modernization of IFS' technology platform, cloud offerings, and channel partner relationships.

Acumatica has a very modern technology stack and deep cloud capabilities. It also has a long-term relationship with Amazon and their AWS cloud service. Acumatica has functionality in financials, warehouse distribution and e-commerce. They have several interesting vertical niches. But, above all, Acumatica has a channel program that rivals Intacct's (now part of Sage Group) in its ability to recruit and enable its partners.

Though both firms offer a range of deployment options, the vast majority of Acumatica's new customers sign up to their multi-tenant SaaS offering. Acumatica also has a pricing model that is fairly close to a consumption-based model, providing a flexibility in user licensing that is rare in the cloud ERP market.

The other opportunities

The two firms should see opportunities to leverage each other's R&D efforts, innovations, IoT and IIoT capabilities, channel partners, and vertical knowledge. Moreover, IFS should be able to exploit the cloud experience and AWS knowledge of Acumatica.

IFS acquired a company, WorkWave recently. It's an all-cloud firm with over 8,000 customers. WorkWave is a big field service solution that could be a great first step in joint development/integration between the two firms. Given the importance of servitization is to IFS' customers and the potential for this as a cross-sell or new vertical for Acumatica, WorkWave could deliver quick hits for both companies.

A potentially big synergy could come from the sale of Acumatica solutions into IFS' larger enterprise customers. This could be a solid two-tier ERP architecture play and one that could present issues for other ERP players.

Making this big deal work

To make this deal a big success, EQT needs to ensure that:

It supports a high growth combination and does not resort to bad private equity practices other PE firms have used in software deals. In particular, efforts that result in debt loading Acumatica, charging high management fees, triggering high debt service costs, etc. will make the realization of this deal's potential doubtful. This deal should trigger many years of unbridled growth. The harvesting of shareholder capital can happen years later when the firms hit maturation.
EQT encourages the exploitation of technology synergies between the two firms. This deal should NOT be about financial engineering but rather on building two vendors into behemoths.
The culture of the two firms remains relatively intact. Acumatica's culture is young, aggressive and scrappy. Nothing should be done that would disrupt the workforce of either firm and changes in management teams and directions should be kept to an absolute minimum.
Handlers aren’t ‘assigned’ to the executives of Acumatica. One recent combination was particularly painful to watch as the acquirer assigned its executives to shadow the executives of the acquired firm. That was really dumb as two of the acquired executives now have assumed major roles in the combined firm.
The deal doesn’t upset existing customer relationships with either firms’ installed bases. Nothing triggers material attrition within either firm. To grow aggressively, both firms will need to retain all of the best and brightest people they have. They can't deliver outsized growth if they are creating job vacancies.
Both firms get the growth equity they need.

Our assessment

Brian’s Viewpoint: This deal should be a win-win for everyone involved. The alignment opportunities are obvious and represent significant potential upsides for both firms. The deal also creates a bigger, multi-product line solution but, thankfully, it doesn't really present a lot of functional or market overlap.

In other ERP deals, redundant product lines were acquired that possessed little cross-functional improvement opportunity. Here, IFS and Acumatica can both contribute IP, channel assets, vertical knowledge, cloud capabilities, etc. to each other and make the pie materially bigger for both firms.

Personally, I think the management teams at both firms should mesh. Both firms have a lot of good people and yet each has a way of making their events (and customers) happy. Acumatica's fun, energetic culture is infectious and it just might creep into IFS' (and that would be just fine).

Our first real look at exactly how things will mesh will likely be at IFS World Conference in Boston this October. I hope to see Acumatica get a piece of the spotlight there and I hope they discuss progress against new synergies (e.g., 2-tier ERP or IIoT) at that event.

Jon's Viewpoint: Provided that both firms retain an independent approach to the market, this is a deal that is a far better solution for either than outright acquisition. In the midst of a merger-happy market, it would have been disappointing to see another conglomerated entity.

Acumatica and IFS argue that customers want choice in their ERP deployment options – one reason for their alignment here - but the need for choice goes further. Acumatica has an interesting approach to international expansions already, via their OEM model. But there is no question that this alliance with IFS will aid in the global capabilities Acumatica can offer companies. And in the ERP space, companies of almost any size can end up needing global reach to compete.

IFS was already embarked on a path of technical and cloud modernization. Now, they have plenty to gain from Acumatica's cloud platform approach – Acumatica is the only cloud ERP player I know of to have a partner build an entire vertical on their platform (Manufacturing). As the ERP market continues to verticalize, IFS can gain from Acumatica's platform know-how here.

Meanwhile, IFS has Enterprise Asset Management (EAM) strengths that should prove relevant to some of Acumatica's customers, assuming Acumatica can package up or integrate those assets. We're told that the leadership of both firms will remain intact, but as always, it all comes down to execution.

It is important to note that this deal also removes Acumatica's remaining Russian investors from the equation. While I have nothing against Russian investors and Acumatica's leadership was always upfront when we asked about their role, in the current geopolitical environment, this was always an awkward aspect of Acumatica's growth profile. Now any questions about that are settled.

Finally, Acumatica's pricing model - which is a lot closer to a consumption model and doesn't tie licensing charges to individual users - is one of the most refreshing in our industry, along with Zoho, though the two are different. It would be a shame to see anything happen to this aspect. If anything, IFS should look at this pricing model closely and how it could be adapted in their markets.

Brian noted there isn't too much functionality overlap between the two firms. But there are areas, like Field Service, where there is some overlap. This overlap may eventually result in a stronger offering, but customers will be eager for roadmap news on both sides, as well as how product development efforts will be combined- and which development areas will remain separate. I expect IFS World 2019 to be the first round of clarifications on those matters, but we'll see - it's very early days.