Where Do Niche Enterprise Software Companies Go To Retire? October 10, 2012Posted by bernardlunn in capital markets, Enterprise Sales, Enterprise Web 2.0, SAAS.
Tags: george koukis, holding company, misys, private equity, rollup, temenos
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Many years ago I worked for Misys, after they acquired a company that I worked for. The founder, Kevin Lomax had simply taken the Hanson Trust model (for industrial companies) and applied it to software. Misys was a good exit option for the founding management team and Misys had a simple model that worked very well for a long time. The basic model worked as follows:
1. Buy a mature enterprise software company in a niche market. Mature meant lots of Maintenance Fees, which has good revenue visibility, almost SaaS like. I worked at Kapiti when Misys acquired the company. This was Misys’s first foray into banking software, their initial market was Insurance.
2. Buy other companies in the same niche, become the dominant vendor and get economies of scale. Fairly soon after buying Kapiti, Misys acquired ACT (a public company that had a couple of bad quarters and was available at a good price). ACT owned Kapiti’s two major competitors – Midas and Kindle. Overnight the instructions changed from “beat the crap out of those guys” to “compete, sort of, but do it nicely and for goodness sake don’t get into a price war”.
3. Then buy lots of young and more technically leading edge companies and sell that into the market that you already dominate.
So, what is wrong with this picture? Today, Misys is a shadow of its former glory. It was nearly bought by Temenos and now is a bit vulnerable after they walked away from the deal. In 1996, when Misys owned Midas, Kapiti, and Kindle (representing the number 1, 2 and 3 by market share), a tiny upstart run by a great entrepreneur called George Koukis decided that Misys was vulnerable and could be taken on! That was some crazy strategy, but he was right. His company was Temenos. The fire had gone from the belly of the Misys folks, but it burned fiercely at Temenos. (Watch George Koukis, a Greek, talk straight about the Greek Crisis, a refreshing entrepreneurial take on a tired old story).
The big question for all the holding companies that emulated Misys and all the Private Equity buyouts and roll-ups is how do you keep that fire in the belly? How do you go for growth when you already dominate your niche? The basic strategy is to move into adjacent niches. This requires a start-up/entrepreneurial mind-set, the kind of skills that the company had in its founding days and then lost.
Misys would have been fine had they not had a really driven entrepreneur like George Koukis coming after them. There was no disruptive technology or new market to worry about. Temenos had no tail winds to help them. The same is not true today. The legacy companies are being attacked by lots of Koukis like entrepreneurs and these entrepreneurs have the huge tail wind of working with native cloud technology. The old-software company’s retirement home is not as serene as it used to be.