What is Happening?
In a move that both makes sense and is somewhat puzzling at the same time, UK-based business management software company Sage Group has agreed to purchase 19-year-old cloud/SaaS accounting software pioneer Intacct for $850 million. San Jose, CA-based Intacct has evolved over time, from being a darling of the small-to-midsize segment to increasingly selling into upper mid-sized enterprises where it competes with Salesforce’s FinancialForce and Oracle’s NetSuite. Leadership of the privately-held Intacct reports a three-year revenue CAGR of just over 33%, with revenues for the trailing 12 months through May 2017 of $88 million, over 90% of which is subscription-based.
Intacct raised more than $130 million in equity funding between 2000 and 2014, including investments from Battery Ventures, Bessemer Venture Partners, and Emergence Capital. Its most recent round, a Series G that closed in early 2014, valued the company at just over $200 million – although more recently rumors of an IPO have been heard. The acquisition is expected to add $26 million to Sage’s revenue this fiscal year. Sage will fund the acquisition through cash on hand, existing lines of credit, and a new $390 million term loan.
Once the deal closes, Intacct will be known as Sage Intacct. The closing is expected to occur by the end of September 2017, and possibly by the end of August – a relatively accelerated timeframe, which makes sense given that we have heard the two companies have been quietly planning the deal for a year or longer. Intacct’s “experienced senior management” will remain, according to a statement by Sage. That same experienced senior management apparently has also agreed to invest a minimum of 25% of their proceeds from the acquisition into new Sage options that vest 12 months after the closing – an approach that should help smooth the transition for both firms.
Why is it Happening?
The industry has long expected Intacct to move toward an IPO, and in fact company leaders had hinted at such over the past few years, especially after the 2014 funding round. In fact, Intacct leaders and investors have told us and others that the company had reached a scale of business that made sense to pursue a public offering. And given that 2017 has seen a variety of cloud-centered enterprise software firms such as Cloudera, Mulesoft, and Alteryx issue successful IPOs, one could reasonably expect that the environment would also benefit an established and growing business software vendor like Intacct. As recently as May 2017, financial and IT industry media reported that Intacct was increasingly likely to pursue an IPO.
But agreeing to Sage’s acquisition offer suggests that Intacct leadership and investors did not see substantially-greater benefits in an IPO – nor did it believe that it could achieve an 8.8x valuation to revenue multiple from the public markets. It may be – at least in part – that accounting / ERP software is not seen by investment bankers as offering the type of growth potential that other software does. In such circumstances, the Sage deal offers a safe alternative that still rewards Intacct shareholders while enabling global growth via additional paths.
The deal makes great sense for Sage, because it fills a gap in the company’s three-pillar business software approach: Accounting, Payroll and HR, and payment management. Sage has long had accounting software offerings that address a range of company types and sizes, from SOHO up through small-mid-sized enterprises of several hundred to a few thousand employees. Intacct brings a customer base (greater than 11,000 strong) that overlaps with Sage’s base, but which also has been rapidly adding larger enterprises as customers over the past few years. Intacct should fit in between between the SageLive and X3 ERP offerings.
Intacct also brings significant improvements in software feature sets, user interface, modularity, and customer loyalty. The majority of Sage’s software base has been acquired over many years, and while the company has done tremendous work to improve integration of operability, data, and UI across dozens of applications that were developed and brought to market independently, the portfolio and customer base still tend to be somewhat fragmented. Intacct may be seen as enabling even better integration across more aspects of the portfolio.
Intacct, being among the earliest of cloud-native business software providers, brings significant experience and expertise to Sage that should help Sage accelerate its organizational, cultural, and technology / offering transformation to being “cloud-first.” Sage’s broad legacy of on-premises financial management and ERP software has enabled it to continue to derive revenues from a widely-established ecosystem – but it has also hamstrung the company when it comes to enabling and benefiting from a cloud-first business model. Again, the company has gone to great lengths to improve its legacy portfolio, and to appease legacy software customers, to the point of delivering on-premises, single-tenant, and multi-tenant versions of key software offerings. Unfortunately, while appeasing customers and helping to retain revenue streams, such an approach also reduces the profitability of those revenue streams over time as the applications become more complex and capable, and as the business world moves toward a more digital-oriented approach. (In the interests of disclosure, ISG Insights has consulted for both Intacct and Sage on business and market opportunities and strategies in our previous existence as Saugatuck Technology Inc.)
With Intacct, Sage gets a well-established presence in the US business software market – a presence which has eluded the company so far. While the Sage brand is known and seen as competitive in Europe and Asia, and in some parts of Canada, it has not been able to build the same cache in the US. Intacct will be an important and useful foundation piece that should help Sage land and expand in US markets, while improving the odds of Sage sales teams and partners gaining an enterprise CFO’s ear. And as noted above, Intacct reasonably fills a significant portfolio gap for Sage, while longer term offering the potential to internationalize the Sage Intacct offering in terms of country-specific ledgers and native language support. Intacct investors meanwhile get a very solid return, and Intacct customers should benefit from a much larger pool of R&D and support resources.
That being said, Sage faces substantial integration challenges. The company has grown mostly via acquisition over many years, and as noted above, it faces challenges dealing with a broad and incredibly diverse base of offerings and customers, and, as a result, channel partners. Sage’s tech leadership has outdone themselves in enabling multiple versions to suit customer and partner demands, and also to enable good integration across those versions. But the company still faces challenges moving customers up the chain from simple accounting to ERP because it still lacks seamless integration of features, functions, and UI across the entire solution spectrum. Despite good work by Sage’s tech teams, features and data do not necessarily translate from one level to the next. And while both Sage and Intacct derives most of their business through accounting channel partners, we don’t (yet) see much that is complementary from one set of partners to the other – we see markets, customer types, and sales approaches that need continued and expanded improvement and integration. Given that Intacct is Sage’s third acquisition so far in 2017, there is a lot of work to do on the integration front.
Another challenge for Sage – and potential customer disruption – is Sage’s reliance on the Salesforce platform for its SageLive offering, and its close integration with Salesforce for its Sage One and X3 accounting and ERP offerings. Adding Intacct adds another cloud platform to integrate (see above), but it also places Sage more directly in competition with Salesforce spinoff FinancialForce, whose CMO Fred Studer stated the following in response to the deal announcement: “Any market mergers and acquisitions create uncertainty for the customers involved, and we see this as a tremendous opportunity for FinancialForce as we deliver our differentiated value and help our customers drive speedy success.”
Meanwhile, we have seen no official statement from Oracle NetSuite, but given the investment that Oracle has already made in NetSuite and what has been promised since then, we expect some interesting sales and marketing battles among these three influential competitors. Customers and channel partners are likely to see some compelling incentives as a result.