This Stock Could Be On The Verge Of Imploding
Remember GEAC Computer
(www.geac.com)?
That was way back when. In the 1990s, GEAC had a bright outlook and the
company’s stock was fairly loved in the past by Canadian investors. But in the
latter 1990s, control of GEAC shifted to one or two large strategic investors;
the company went on a buying spree — buying up numerous software companies — and
became somewhat of an unfocused mess.
The stock’s current
9.1x P/E ratio and 1.6x P/S ratio is tough to find in tech companies not on the
verge of going out of business. Also, it’s probably too small to register with
some of the momentum players.
Lately, much of
GEACs more recent earnings growth appears to have come from cost cutting; not
sure where any real growth in the future will come from, though. Cost cutting
tightens a company and improves operating leverage; but it will only take a
floundering company so far. GEACs product niche sounds reasonable: It’s sort of
an operations and / or finance approach to what Seibel does with sales /
customer service. There are multiple levels of product so GEAC can go back and
re-sell to existing customers, which could be a positive if management plays it
right.
GEAC was originally
an SI (systems integration) and custom software builder — it was involved with
library software years ago. It then morphed into being a software company by
acquiring various pieces of software and was a rollup of mainframe software. (A
rollup is a company composed of various acquired pieced that are bootstrapped —
or “rolled up†— into one, hopefully integrated, whole.) Management then
combined its in-house solutions with the packages it bought in order to create
the industry solution pieces.
Extensity is one of
the companies GEAC purchased in order to roll up into its package — specifically
it’s the piece that deals with expense management. It’s not a bad package and
the Extensity product was OK, but it didn’t seem to integrate well with anything
else. Many potential customers passed on Extensity in favor of the SAP package
that didn’t do as much as well, but which integrated nicely into all the other
pieces they have. Integration is a big plus. The buyers’ assumption was SAP
would catch up with functionality more quickly than Extensity would catch up
with integration.
That, I think is the problem with GEAC: The budgeting piece is MPC, which
came from Comshare; the next big piece is Extensity; and the next largest piece
is the E/M series ERP (enterprise resource planning) software — the origin of
which isn’t clear. Virtually all the other software modules are ones I’ve seen
in the past, and which GEAC clearly bought as well. The company’s “industry
solutions” appear to be customizations of the existing pieces. Not all that
unusual — SAP and Oracle’s industry solutions are built the same way, often in
cooperation with outside consultants.
GEAC could be on the verge of imploding, in large part because its operations
are so messed up. The company is a rollup of a bunch of different pieces with a
somewhat common theme. In general I’m wary of companies like this: Tech mergers
are always complex and getting any kind of synergies – especially from pieces of
software developed independently – can be tough.
The fact that GEACs
management team is stacked with lawyers and M&A (mergers and acquisition) folks,
but has very little product-related strength, suggests the strategy is to grow
revenues through acquisition of niche products with existing customer bases.
Computer Associates did this for years, living off ongoing maintenance
contracts.
However, bios
like
this raise a red flag. “Real†software companies have people on the
management team with lots of software experience and bring in M&A people (from
law firms and investment banks) only when they want to do a deal. To the extent
GEAC brings in an M&A type like Craig Thorburn to the team it sure doesn’t have
him continue his ongoing outside practice at the same time. It’s not clear that
he has any conflicts, but also it’s not clear that he doesn’t. I’m not familiar
with where Canadian law stands on this, but with the many changes ushered in the
U.S. in the rubble of the Bubble it could present potential conflicts in the
U.S. GEACs chief technology officer seems like a lightweight and also appears to
have geographic region responsibility, which confirms my impression that GEAC
has placed a limited priority on actually working on its software. The only
other tech industry person on the management team is a sales guy, formerly of
SAP, and from what I know of his track record he seems fine as a sales guy.
Last year, at the time GEAC had just swallowed Comsys, there was industry
chatter swirling around that the sales people in the “integrated†company really
know all the pieces they was trying to sell. Although, that not unusual for
companies that grow through acquisition — recall Hewlett Packard’s acquisition
of Compaq? It seemed that no one knew what was going on for a couple of years
after that merger, and it was particularly acute in the sales and customer
service areas. and that made it particularly difficult. This may have been a
transitional problem at GEAC, but from what I can tell the company seems to
maintain separate partners for the various product lines, suggesting that any
integration is purely on the surface.
While GEAC is trying to position itself as an enterprise package provider with
the focus on the financial side, I’m not sure they really deliver. It seems more
as though it has a few point solutions and is possibly trying to acquire even
more of them. But it’s not clear that GEAC is able to pull the various pieces
together into an integrated package; or even whether its able to create the kind
of loose “object focused” integration that others — SAP, Oracle, Siebel — are
pursuing these days.
I’d be a lot more
confident if GEAC had a really strong chief technology officer and if it was
talking about how it’s working to provide a seamless integration of its various
products. Until then, the company is just a rollup of non-integrated software
packages, perhaps saving a bunch of overhead and gaining some sales leverage by
having them all under one roof
That said, there
could be a few good reasons to buy into this stock for a few months position.
Rollups like GEAC can continue to look good for a while. But eventually, lack of
internal growth can overwhelm the attempts to continue acquiring new revenue.
Organic growth from existing product lines is a stronger business model. Maybe
there’s growth in the medium term, but I’m not convinced about the long-term.Â
While companies on acquisition sprees rarely end well, an awful lot of money can
be made (usually for senior management) along the way. Tyco, Cendant Corp., and
even Cisco Systems made lots of money for a long time by constantly acquiring
outside revenue streams. The key is to realize that when the acquisitions slow
down, so does revenue growth. In addition, operating costs often get bloated
since acquisition sprees usually entail buying “fat†as well as revenue streams.
Bottom line is that in the short term management is betting on a good series of
acquisitions to keep the revenues growing. Longer term, GEAC is betting that can
make this into a nice integrated offering or it get bought out by another
company that will.
To that end, there are fewer and fewer potential acquirers out there. Oracle and
SAP both have much of what GEAC has, so I’d write them both off as potential
acquirers. I can’t see GEAC fitting with Siebel either; not just from a product
perspective, but also from a company culture perspective. Microsoft seems to be
the only large software company whose business solutions architecture is still
evolving and is still actively looking for targeted acquisitions. That’s
both an opportunity and a threat. Microsoft could use some of
what GEAC has,
but is also well on its way to having many of the pieces already. Microsoft
could buy GEAC, but could also bury it.
It’s worth noting that Microsoft has also had a lot of trouble trying to
integrate its various offerings, not to mention the many concerns I’ve written
about previously in this column with fixing some of its code, security, etc.
Bear in mind it has a substantially bigger budget and much better technical
competency than exists at GEAC.
Technically
speaking, GEAC stock has consolidated over the last few months between $8 and
$8.5, climbing up from the low single-digits three years ago. It reached this
consolidated level on light volume surges indicating to me that someone is
accumulating. Last month, the stock attacked the upper end of the range, and hit
the mid-$9s. If volume picked up to over 150,000 (average day), then another
attack of $8.75 is possible. That scenario would suggest the recent buyers’ edge
is correct and Big Mo would join the party (i.e. a breakout should happen) a
close over $8.8 would indicate that it’s not a false breakout.
I see no
fundamental catalyst to drive it higher: The stock needs a close over $8.59 on
heavier volume for me to get bullish. That would be the turning point to bring
Big Mo back to ‘Da House. Otherwise, its remains range bound between $7.5 to
$8.5.
Melanie
Hollands
