Riding the Wave

Insurance Networking News, January 2006

Joe McKendrick

Over the past two years, many carriers, either to their dismay or bewilderment, saw key software vendors fall under new ownership. And it hasn't been simply a case of small fish being eaten by larger fish. Some of the largest names in the software business have been caught in the net. PeopleSoft and Siebel Systems, giants in their markets, for instance, were scooped up in acquisitions.

Mergers and acquisitions are always sprung on the market by surprise, and it's difficult to predict or sense when a change in ownership may be pending. What's certain is that such market moves can disrupt even the most meticulously laid plans of IT executives.

The recent rash of acquisitions and mergers reads like a Who's Who of the software industry. Oracle Corp. has been grabbing the most headlines lately, scooping up Siebel Systems to build its customer relationship management (CRM) portfolio. Prior to that, PeopleSoft, an enterprise software vendor, which had bought out JD Edwards, was also acquired by Oracle.

Symantec, the computer security provider, merged with Veritas, a storage management vendor. IBM took the reigns of DWL. Enterprise software provider SSA Global Technologies acquired Epiphany, a CRM system vendor. And Attachmate, a provider of legacy system access tools, merged with WRQ, its fiercest competitor.

Past consolidations are still being digested as well. HP, which swallowed Compaq whole in 2003, continued to feel the ramifications for some time, which included the resignation of HP's CEO. Compaq itself was still wrestling with technology acquired through its acquisitions of Digital Equipment and Tandem Computers.

While grabbing fewer headlines, vendors specializing in the insurance space have been doing their own share of changing ownership hands.

Plano, Texas-based IT services provider Perot Systems, for example, recently acquired Technical Management and its subsidiary, Transaction Applications Group, which provides back-office administrative support to life, health and annuity companies.

EMC Corp., a Hopkinton, Mass-based storage management provider, is acquiring Captiva Software, which provides tools that convert paper-based documents into digital formats. Jersey City, N.J.-based ISO, acquired eLIENS (a business unit of Xtria LLC), which provides lien holder and mortgage notification services for insurance carriers. Brookfield, Wis.-based Fiserv Inc. acquired Interactive Technologies, a provider of fee management and billing software.

Unanswered Questions

Some industry analysts see the recent merger and acquisition wave as the result of the confluence of two trends: the growing commoditization and standardization of software, and an increasing trend toward narrowing the range of relationships maintained by customers.

"The IT industry is undergoing massive restructuring and consolidation in all segments. Much of this consolidation is driven by vendor strategies, focused on positioning for the shift to the next generation of IT," says Frank Gens, senior vice president with IDC, a Framingham, Mass.-based research and advisory firm.

"But the massive consolidation we are witnessing is not just about major vendors reshaping their strategies and offerings. It is also about customers shifting strategies for managing their increasingly strategic relationships with IT suppliers."

Meanwhile, end users that have been relying on an acquired or merged vendor's products for critical business functions are often left with unanswered questions:

* Will the new owner continue to move the product along the same path, providing support and upgrades?

* Will the product be discontinued in favor of the acquiring company's technology?

* Will customers be forced to move to a new platform or database?

* Will the product be allowed to survive, but limp along in an IT purgatory, with only a minimum of support and attention from the provider?

* What will be the fallout in product pricing and maintenance costs?

* How will the morale of vendor representatives affect service levels?

No relationship with a vendor-no matter how large, well regarded, and financially stable-is without such risks, IT executives point out.

"There are two risks that you take when you purchase any new technology," says Ben Moreland, vice president of information technology with The Hartford Financial Group, Hartford, Conn. "The first risk is whether you will face a lot of rework if [the vendor] is bought out by a company you don't do business with-or if the vendor goes under. The second risk is [if the vendor] is bought out by a company that takes it in a different direction than why you bought the product in the first place."

Customer Angst

Oracle's acquisition of PeopleSoft Inc., a competing ERP software supplier, is perhaps the most visible example of such customer angst.

"A lot of our customers run PeopleSoft, and they were all frightened or very anxious about the Oracle acquisition," says Ashif Mawji, president and CEO of Upside Software, a contract management systems supplier based in Edmonton, Canada. "What's Oracle going to do? Is PeopleSoft gone? What happens to our investments? Do we have to be retrained? Do we have to bring in the new Oracle product?"

Adding to the angst, vendors' plans for an acquired product line also may remain a mystery for some time following an ownership change.

While changes in vendor ownership are difficult to predict, IT executives need not be caught off guard. The most effective way to survive and thrive through a software vendor change of ownership is being prepared beforehand, and asking the right questions in the wake of a merger or acquisition announcement, according to sources.

This requires an informed grasp of existing contracts with current vendors, and doing homework on the financial situations and technology roadmaps of potential or renewing vendors. In addition, close communications is the best tool-before, during, and after an ownership change.

Safeguards need to be embedded in contracts up front, in the form of change of control provisions, says Patrick Hatfield, attorney and partner with Lord, Bissell & Brook LLP, an Atlanta-based law firm that specializes in insurance and financial services.

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