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General, Manufacturing Automation

Kalypso Acquires Integware; What is Driving Consolidation of System Integrators?

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Integware KalypsoFirst of all let me congratulate Kalypso Managing Partner Bill Poston and Integware CEO Chris Kay on their recently consummated merger (See Press Release).  Both companies are fine organizations that will do great things together going forward.  This truly is a case of excellent synergies that will make an ideal combination.

When Chris approached Mirus to help him find his next partner with which to grow he was looking to satisfy 3 needs:

1)      Scale.  Chris knew that because of Integware’s small size, and despite clearly superior technical expertise, he was having a hard time winning large contracts at key customers.

2)      Off-shore cost advantage: Top flight talent comes at a premium price, and while people were willing to pay top dollar for strategic consulting, Chris also knew he needed access to lower cost off-shore resources to be able to handle the complete implementation for his customers in order to “own” the account.

3)      Back office support:  Look, Chris and his management team are bright guys, but when you are small it is tough to sell, deliver AND run the business.  It takes scale to add staff, freeing Chris to do what he and the team do best; work with customers

The good news was that Integware had assets; Domain expertise (Medical Devices), PLM platform breadth, a premier reputation with some of the largest customers in their industry, and an extensive customer base.

Bill Poston of Kalypso recognized the need and the strengths and acted.  It is in this context that Kalypso was able to address all of Integware’s needs as well as considerable expertise of their own in an aggressively growing, constructive environment.  I was struck at our first call with something that Bill told me, “We don’t buy companies; we are looking for the right partners that want to join Kalypso and build something bigger and better.”  Together Integware and Kalypso will be bigger and better.

So what does this “smaller” merger mean in the context of mergers and acquisitions for systems integrators in general?  Seven of the top System integrators did a total 21 acquisitions over the past year, most notable led by Accenture who did roughly a dozen themselves.  Translation:  System Integrators are in a growth spurt both organically and inorganically.  And this trend, as we have seen with Kalypso/Integware, is not just for the top tier.  Small SI’s need to scale to thrive, and medium size SI’s are looking for vertical expertise to help them grow and become attractive acquisition targets for the big boys.

As Mirus canvassed the industry for potential partners for Integware, we were able to have many in-depth conversations with a number of systems integrators, small, medium and large in the market for acquisitions.  What we found were several recurring themes driving their goals:

  • Large SI’s are only acquiring companies in excess of $20M.  Domain expertise is nice, but if you don’t have size, they just can’t justify the effort to acquire.
  • Everyone needs the cost advantage of off-shoring to be competitive.  If you don’t have it, acquire it.  Simple partnering doesn’t work.  Customers want single source of control and don’t believe a partnered situation is enough, and there are enough options available today that they don’t have to settle for less.
  • Scale is still king.  Smaller SI’s struggle to command .8 to 1.2 revenue multiples while public companies are running substantially over 2X.  To command premium exit multiple you need scale as well as capability.
  • More and more customers require specialization in their industry, especially where compliance and regulatory issues are important (where isn’t it now-a-days, but that is another article).  As you grow, specialization is a necessity, so if you are small, pick a niche and get good at it.
  • Broaden platform expertise within a single application area, or go really deep with multiple products from one vendor.  There is no one way to be successful here, but best in class results have typically come from either creating competitive friction across a broad base of vendors, or by becoming indispensable to a single vendor.