Microsoft Acquisition Underscores Midmarket Move

Moving to strengthen its global position in mid-market business software, Microsoft Corp. has unveiled plans to acquire Danish ERP software vendor Navision.

Navision is the combination of two leading Danish software companies that serve the mid market -- Damgaard and 18-year old Navision Software -- which merged a year and half ago. The deal, which is expected to close in August, is valued at $1.3 billion. Microsoft executives said they do not expect any regulatory hurdles in Europe or the United States.

The company's key product lines include business management products Navision Axapta, Navision Attain/Navision Financials and enterprise resource planning software Navision XAL.

Navision competes against software companies such as SAP and Oracle Corp. for larger mid-market customers, and against Microsoft's Great Plains division in the market for smaller and mid-sized accounts.

Though Microsoft's Great Plains Business Solutions group and Navision focus on the same market, with similar products that are sold entirely through the channel, there is virtually no geographical overlap, Microsoft executives said. Eighty percent of revenue from the Great Plains division comes from the U.S., while 86 percent of Navision's sales are in Europe, according to David Thacher, general manager MS CRM for Microsoft.

"There are a lot of synergies and this is a good acquisition for Microsoft," Thacher says. "Navision has been a great partner to Microsoft, like Great Plains was, but the geographic element drove this more than anything else." Microsoft purchased Great Plains in December 2000 in a $1.1 billion stock swap deal.

Thacher says that all of Navision's solutions, which are sold in more than 60 markets in Europe, will continue to be developed and marketed. Over time though, the product line will move to a common brand under the umbrella of the Great Plains Business Solutions group. The next generation of Navision products will also be built on Microsoft's .NET platform. "We will be merging those efforts more quickly," Thacher says.

In addition, Doug Burgum, senior vice president of Microsoft and president of Microsoft Great Plains says that Microsoft also plans to deliver .NET functionality via components, such as general ledger functionality, to all who license the technology. He expects more .NET framework architecture elements to be announced at the close of the Navision deal.

Once the acquisition has been completed, Navision will become part of Microsoft's Business Solutions division. Navision's corporate headquarters in Vedbaek, Denmark, will become the center of development and operations for Microsoft Business Solutions in Europe, the Middle East and Africa (EMEA), the largest Microsoft product development center outside the United States, according to Thacher.

"While most developers would love to live in Seattle, not 100 percent of them want to live there. This allows us to recruit great talent from around Europe," Burgum says.

Navision co-chief executives Jesper Balser and Preben Damgaard are expected to remain with the company. Balser will become Director of global strategy and Damgaard will be Director of EMEA operations for Microsoft Business Solutions. The other three founders will take on key product development roles within the company.

"Navision and Microsoft share a common vision for business applications. Through our combined technologies, we will enhance and broaden the solutions that our customers already have invested in, and continue to provide customers with new generations of business applications that make business processes easier and more interconnected," said Balser.

In the CRM space particularly, Thacher says the acquisition represents a huge opportunity for Microsoft. "Navision has built basic CRM functionality into the heart of its ERM products. That's great for those that need a low-end CRM solution, but in cases where customers need more CRM functionality, we will be able to bring that to Navision customers will MS CRM," he says.

Microsoft unveiled its CRM offering, aimed at small and medium sized businesses, in February. The product is slated to ship by the end of the year, according to Microsoft officials.

Burgum says Microsoft is sticking with plans to roll out MS CRM to a half dozen countries in Europe at the beginning of 2003. "We are going forward with those plans and you can expect some kind of cooperative marketing with Navision on that," he says.

Burgum stressed that the combined companies have no plans to enter the enterprise market. "If anything, we are more interested in bringing products down market, than moving up market," says Burgum, who notes that everyone seems to have a theory on Microsoft going into the enterprise. "We are not interested in going into the enterprise market. It's a very different market from the mid-market. We will continue to work with our partners -- Siebel and SAP -- to service enterprise customers."

Still, some competitors wasted no time in dismissing the acquisition as a failure for Microsoft and for its customers. "This potential acquisition is quite remarkable, since it is will be read as an admission that Microsoft cannot turn Great Plains into a global business. Strange for the largest software company on the planet," said Graham Steinsberg, chief executive of the CODA group, a provider of accounting solutions to the European market. CODA was acquired two years ago by Science Systems plc. "The customer will again be the loser if the Microsoft/Navision takeover goes through. Certainly, if Microsoft's last big enterprise acquisition, that of Great Plains last year, is anything to go by, then Navision customers could be in for a prolonged period of uncertainty," he said in a prepared statement.

Analysts disagree.

Benny Lorenzo, general partner of Aspira Capital LLC in Fort Lee, N.J. says this is a good move for Microsoft to help expand it Business Solutions to a critical mass market. "Many people were puzzled by Microsoft's acquisition of Great Plain and wondered what Microsoft was trying to do," he says. "But it turned out to be a good move to get penetration into the medium-size market, so why not expand on that successful move in Europe and internationally? Over time, this will be very successful in helping Microsoft put together all the pieces, CRM, ERP and supply chain management."

Navision has 1,300 employees, 2,400 partners, 130 customers, and subsidiaries in 30 countries. The company expects to close its fiscal year in June with revenue of $210 million and earnings of $36 million, an 18 percent increase over the last fiscal year. Under the terms of the deal, the five founders of both companies, which account for 56 percent of Navision will receive Microsoft stock. The other 44 percent of the shareholders have the option to take their payout in stock or cash.