Over the last few days I have been hearing persistent rumors that Sage Software has put its US operation up for sale. Nothing is confirmed and some speculate that this could be a ploy to pump the share price in advance of the annual shareholders' meeting. However, the company's share price has been steadily climbing in recent weeks suggesting that investors are more sympathetic towards the company's strategy.
Sage has a chequered history in the US. While never getting on an equal footing with Intuit, its past accounting solution acquisitions like Peachtree and ACT! have enjoyed steady market share. However, things began to go horribly wrong in 2006 when the company acquired Emdeon, a land grab play in the healthcare market. At the time I said:
When you look in detail, Sage is going to have its work cut out.
EPS appears to be in maintenance mode, having grown its business in FY2005 by 2.7%. The six months to 30th June, 2006 have seen virtually no revenue growth though earnings have risen significantly over the comparable period in 2005 to $22.3 mill or 14.6% of revenues. Way below where Sage likes to be. Assuming that tracks forward for the year then Sage is paying roughly the equivalent of 13 years current profit.
There is overlap because EPS has billing capability. This means Sage needs to do some re-engineering to make a medical services version of its US products.
Sage has a good record of turning around its acquisitions but I can’t help thinking that on a first pass, this looks like a mighty price to pay for what’s really a slice of market share.
Today’s price means Sage has taken a $245 million hit or 43% of the original price but in reality that reflects a decline in revenue and earnings.
If that wasn't enough, senior management positions in the Americas have been something of a revolving door as the company both struggled to make Emdeon profitable while effectively cutting back on innovation in the core product lines, often to the chagrin of its channel partners. None of this has been helped by Sage's stated policy of revitalising the brand in the US, which has met with considerable resistance from many channel partners. Many want more innovation that builds on established brands rather than more marketing.
If Sage is indeed gearing up for a trade sale then this will be a good thing.
Sage is rudderless. It is battling against declining real market share as it hikes prices for old products and support services. In the UK, all its natural growth is going to the new generation of cloud players who are far more nimble and innovative, providing solutions that are relevant to the 21st century. Sage has tried valiantly to build and market a cloud play but has mostly been met with tepid success.
Disposing of a large trading unit would allow the company to both send cash back to shareholders while providing it with the funds to go after new markets in ways that are difficult for it to do today.