By Matt Rosoff [Bio]
Posted: May 20, 2002

• Sidebar: Navision's Product Lines

A bid for Danish software company Navision could give Microsoft a channel for selling software and services to European small and mid-size businesses, which are more numerous than their North American counterparts. However, integrating the new company will take time, and in the meantime, customers, resellers, and ISVs will face six overlapping lines of Microsoft accounting and business management software. Although Microsoft has reiterated that it is not targeting enterprises with the move, the deal signals once again that Microsoft considers business management software a key growth area, and could impact relationships with partners in the same market such as SAP and Siebel.

Business and Product Lines Echo Great Plains

Microsoft has offered 10.8 billion Danish kroner (DKK)—about US$1.33 billion—for Navision, which sells accounting and business management software to mid-size businesses (defined as having between five and 1,000 employees and US$1 million and US$800 million in annual revenue). Today, Navision offers three lines of software: Axapta for its largest customers, and Attain/Financials and XAP for smaller businesses. (For a detailed rundown, see the sidebar "Navision's Product Lines".)

Navision sells these products exclusively through its network of 2,400 channel partners, which mix and match the modular applications in each line into a tailor-made solution for each business. Its software is in use at 136,000 business sites, mostly in Europe, where it gets 76% of its revenues. In contrast, about 80% of Great Plains' revenue comes from North America.

Other than their different geographic strengths, Navision resembles the pre-Microsoft Great Plains so closely that it could almost be called the "Great Plains of Europe." As independent entities, the two companies were almost identical in size, product offerings, target market, partner-oriented business model, and acquisition history. Both had even acquired a competitor within the last two years: Solomon in the case of Great Plains and Damgaard in the case of Navision. Perhaps most important, both companies are loyal Microsoft partners — both build their solutions exclusively on Windows and SQL Server, and both were early supporters of .NET.

Once Navision is incorporated into Microsoft's Business Solutions Group (the same business unit in which Great Plains resides), customers, resellers, and ISVs might be confused as they face six overlapping Microsoft product lines in the same market: Navision's Axapta, Attain/Financials, and XAL, and Great Plains' eEnterprise, Solomon, and Dynamics. In addition, integrating Great Plains was costly (and is still not finished), and the purchase scared some of Microsoft's ISV partners in the same market, potentially dampening their enthusiasm for important Microsoft initiatives like adopting the .NET platform. The Navision deal compounds these risks.

Main Benefit: European Channel

Microsoft is willing to assume these risks primarily because it wants Navision's European channel. Europe is important because the PC market there is less saturated than in North America, allowing more room for growth. Navision's channel is particularly useful because it has experience selling to small to mid-size businesses, which are more numerous in Europe than in North America. (According to small-business research firm AMI Partners, at the end of 2000 there were 13.4 million of these businesses in Europe and only 8.6 million in North America.)

While Microsoft will continue to sell the Navision software and the servers it runs on, it will also use the Navision channel to roll out future technologies, such as the .NET business platform (which will allow ISVs to incorporate Great Plains business logic, such as a general ledger, into their applications without writing the underlying code from scratch), to small and mid-size businesses worldwide. It could also use the channel to sell other Microsoft servers, such as Commerce Server (which recently added support for multiple languages and currencies), and Exchange to these businesses, and to convince them to upgrade to the latest version of Microsoft's core revenue generators, the Office and Windows clients.

Apart from acquiring the Navision channel, Microsoft had some other reasons for the purchase:

Technology. Axapta includes fairly sophisticated supply chain management (SCM) applications for manufacturing businesses, products that Great Plains lacks. In addition, European businesses must deal with multiple languages, currencies, and sets of laws and accounting practices. The Business Solutions Group will use Navision's expertise in these areas to help tailor all its products to the global market, according to Business Solutions Vice President Satya Nadella. Finally, Axapta offers a customer relationship management (CRM) application for telemarketing — functionality that Microsoft wants to add to the next version of its own CRM product, MSCRM. (For background, see "New CRM Server Planned" on page 6 of the Apr. 2002 Update.)

Defense. In Feb. 2002, Navision announced plans to increase its number of North American channel partners by 30%, from 200 to 260, by the end of the year. This could have posed a new threat in Great Plains' strongest market.

What Happens Next?

Microsoft expects the deal to be completed by Sept. 2002, pending approval by Navision shareholders and regulators. According to Navision, shareholders representing 60.05% of outstanding shares have already agreed to the deal, including Navision's five founders. Despite an ongoing antitrust investigation by the European Union, Microsoft foresees no regulatory interference because Navision is one of many small competitors in the business management software market in Europe. (Indeed, most of Microsoft's past acquisitions have been approved by regulatory bodies, even while the company has been under investigation almost constantly for the last eight years.)

Microsoft has offered 300 DKK (US$37) in cash or Microsoft stock for each Navision share — a 36.7% premium over Navision's share price before news of the deal was leaked on Apr. 30, and more than seven times the smaller company's projected annual revenue. (In comparison, Microsoft paid a 29% premium for Great Plains.) The cash payouts are expected to knock US$0.01 per share (about US$60 million) from Microsoft's expected earnings for the 2002 fiscal year, which ends June 30, and integration costs will continue to have a negative impact for several years. The company expects Navision to contribute positively to net earnings by 2005.

Most of Navision's 1,300 worldwide employees will become part of the Microsoft Business Solutions Group, although there might be some layoffs, primarily of administrative staff. Navision's development center in Vedbaek, Denmark, will become the development center for Great Plains in Microsoft’s Europe, Middle East, and Africa (EMEA) region, and it will be led by current Navision co-CEO Preben Damgaard. Navision's other co-CEO, Jesper Balser, will become the director of global strategy for the Business Solutions Group.

Until the Navision and Great Plains product lines are consolidated in three to five years, Microsoft will continue to offer all the product lines from both companies. The company was unable to provide any details about specific geographies (for example, whether Navision would be offered in North America, where it would compete against Great Plains), but said that this information would be forthcoming in summer 2002.

Resources

For more information on Navision product lines and categories, see www.navision.com/hq/view.asp?categoryID=148.