JDA Software (Nasdaq: JDAS; MGI-X:1153;) today announced a definitive agreement to acquire i2 Technologies (Nasdaq: ITWO; MGI-X: 766; ). Previous MGI research on i2 (Nov 30, 2007) has predicted a transaction between the two firms and highlighted the business and financial rationale for a JDA - i2 combination at a price point close to the announced $14.86/share cash offer.
Given the softening of the overall business for JDA and i2, both firms are eager to create value through an economically oriented combination. Our research indicates that in spite of a record turnout at its recent user conference, JDA's pipeline was weak going into the second half of this year. Many of the former Manugistics customers have expressed reluctance to move to the latest release of Manugistics software due to the perceived product performance issues. This stall in upgrade revenue has created a challenge for JDA at a time when its core software products - upper-mid-market and enterprise retail offerings are hitting softness in the retail industry. In the meantime, i2 has successfully settled its outstanding legal suit with SAP, resulting in a $83.3 million cash payment from SAP to i2. We understand that the actual cash has hit i2's bank account on July 28 2008. With JDA's earnings announcement out of the way, and i2's recent forecast that its Q3 will be flat vis-a-vis last year's Q3, the stars finally aligned for the consummation of a deal.
In the most recent MGI Research Application Software Vendors benchmark of 75 companies, JDA ranked #21 out of 75, while i2 came in at #39. JDA's MGI-CV ("Change Vector") was negative 26%, while i2's MGI-CV was essentially flat, - both pointing to softness in mid- to long- term business momentum. Given the mediocre current health of the North American (and soon European) retail industry, JDA's relatively modest competitive position, and the continued lack of legacy Manugistics upgrade revenues, we believe that without an acquisition, JDA's calendar second half results would have been disappointing. Likewise, i2 remained stuck in neutral, with a gradual erosion of its services and maintenance revenues likely.
The JDA/i2 combination creates a combined entity with $635 million in revenues and a broad portfolio of products and services that extends JDA's reach into new verticals. Still, JDA management will have to step up to the plate and make some very hard financially-oriented decisions to improve the health of both companies. JDA's expanding R&D operation in India will have to meld into i2's Indian R&D juggernaut - this could be the first major offshore integration effort attempted in the software industry. So far, amongst major software companies, - only Oracle has been successful in integrating offshore operations on a major scale.
