August 19, 2016

Blackstone's investment in JDA sends "no sale" signal to Honeywell, other suitors

Blackstone's investment in JDA sends "no sale" signal to Honeywell, other suitors

Private equity firm's infusion of $570 million likely to keep JDA under New Mountain umbrella.

By Ben Ames and Mark B. Solomon

A sale of supply chain software firm JDA Software Group Inc. to Honeywell International Inc.—or anyone else—appears to be off the table.

Private equity firm New Mountain Capital, JDA's parent, said today that it will partner with The Blackstone Group, the private equity and investment banking giant, to invest nearly $570 million in Scottsdale, Ariz.-based JDA, which provides software services to support supply chain planning, merchandising, and pricing, all critical areas that are needed to master omnichannel fulfillment. Blackstone, which will invest the vast majority of the total, will receive a guaranteed 7.5 percent return, according to BG Strategic Advisors (BGSA), a Palm Beach, Fla.-based logistics mergers and acquisitions consultancy. New Mountain will use the funds to pay down about one-quarter of JDA's $2 billion debt load, which would reduce JDA's annual interest expense by $70 million, according to BGSA estimates.

The Blackstone investment signals that New Mountain believes JDA is a much more valuable property remaining under its umbrella than it would be as a saleable asset. Honeywell, the Morris Plains, N.J.-based conglomerate, was rumored earlier this month to be readying a $3 billion offer for JDA, which included assuming its debt. Honeywell has claimed a growing position in the warehouse and distribution category with the acquisitions of equipment maker Intermec Inc. and material handling automation provider Intelligrated Systems Corp. Honeywell's rumored bid for JDA was about $1.1 billion more than New Mountain paid for the company in 2012.

Honeywell declined comment on the New Mountain-Blackstone announcement. In a conference call today with analysts, JDA Chairman and CEO Bal Dail also would not comment on the Honeywell rumors. "JDA has had a number of discussions with many different firms, and the Blackstone/New Mountain outcome in my book, from my perspective, is the best outcome," Dail said.

Benjamin Gordon, BGSA's founder and managing partner, said New Mountain could have sold JDA to several suitors, including Honeywell. Instead, New Mountain concluded that they would make more money if they doubled down, brought in Blackstone, paid down debt, and focused on growing the business.

Dwight Klappich, a vice president and supply chain specialist at the Stamford, Conn.-based consultancy Gartner Inc., said New Mountain might be doing Honeywell a favor by declining to sell. "The track record of industrial companies buying into the business application space has been atrocious," Klappich said. That's because most software used by industrial companies focuses on "operational technology," which is the domain of engineers, and not information technology, which is the purview of IT departments, Klappich said. "They are not the same, and success in one has no influence on success in the other," he said.

Despite that, industrial firms enamored by the growing importance of "software" in their business conclude that all software applications are the same and can be effectively executed in a uniform manner, he said.

Today's announcement should compel Honeywell to reconsider its strategic direction in the warehouse and DC space, Klappich said. For example, if all Honeywell wanted from JDA was warehouse management systems (WMS) capabilities, there are more than 30 WMS vendors available at a fraction of the cost, he said.

Klappich added that he wasn't sure what value Honeywell would derive from JDA's strengths in supply chain planning, merchandising, and pricing, areas where Honeywell has little involvement.

In a report issued this morning before the Blackstone investment was announced, London-based consultancy International Data Corp. (IDC), said Honeywell would be overpaying for an asset of questionable value. IDC acknowledged that Honeywell CEO Dave Cote has said that about half of the company's 23,000 engineers are currently working on software, but the consulting company questioned whether those workers have the "software industry acumen to pull their objective off," or if Honeywell is "investing in the hope that JDA's current leadership can do it—something it hasn't been able to do as of late?"

IDC acknowledged that any industrial automation vendor would covet JDA's huge installed customer base. However, it wondered if Honeywell has "fully evaluated the financial value of JDA, a company that is struggling to keep its customers from jumping ship for a more innovative and future-proofed alternative."

IDC noted that JDA was recently downgraded by investment grading firm Moody's because of its high debt load.

John Santagate, an IDC analyst, said that although New Mountain and Blackstone's investment would help JDA balance its books, the news did not have any implications for the future of a potential Honeywell merger.

"One thing for sure is that JDA understands there's a debt issue, and they have to take care of it," Santagate said. "They have two options on the table now: one is a buyout by Honeywell and the other deal is a capital injection by New Mountain and Blackstone. Either way, at the end of the day, the deal is good for JDA."

AN INVESTMENT IN FUTURE PRODUCTS
JDA pledged to devote its new funds to improving its software products, both by enhancing existing, on-premise software solutions and by investing in cloud-based products. Supply chain companies will need tools from both areas as they adapt to industry trends such as the Internet of Things, big data, and analytics, JDA said.

"Clearly some retailers in North America are going through some pain points, as there have been announcements about store closures and what have you because of the move to online," Dail said on the call. "But overall globally we see opportunities in both manufacturing and retail as well the other sector we serve, which is third-party logistics."

JDA plans to target those markets by steering some of its new funds into next-generation applications such as Retail.me, the retail planning application built on the Google Cloud platform.

"The bulk of our $100 million R&D budget is in current products, so we can now accelerate investment in next-generation products," Dail said. "We have a pipeline of things we want to build on that platform, around store logistics operations, manufacturing planning, demand and replenishment, and a next-generation digital hub."

At the same time, JDA plans to continue its support for software applications hosted on-premise, he said.

"We're seeing increased automation in the warehouse, but if you're building a highly automated distribution center, you have to have a warehouse management system that talks directly to the material handling equipment," Dail said. "That has to happen at a very, very rapid pace, so they don't want the latency of having the warehouse management system sitting in the cloud. Even with high network bandwidth, the latency is just too high for a highly automated distribution center."

About the Authors

Ben Ames
Senior Editor
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

More articles by Ben Ames
Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon

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