OpenText Buys Cloud B2B Integrator GXS: Great For IT Departments, Bad For Broader Procurement Market

Canadian business software firm OpenText has announced that it will buy GXS Group, a B2B cloud services company (and one of the largest EDI providers), for $1.165 billion, mostly in cash. GXS had $490M in revenues, and the 2.4X multiple is fairly decent for a firm that has been predominantly focused on low-level B2B data integration, although still less than the minimum 3-5X multiple we’ve seen for business networks that feature B2B integration in addition to other services such as collaboration (e.g., via extensible SaaS products), financial services provisioning, information/intelligence services, and the like. By way of comparison, Tungsten, which only has connectivity services revenues from invoicing network OB10 at this stage – and whose own top line is less than 8% of GXS overall revenues – is currently valued at nearly 35% of the valuation OpenText is paying for GXS (it should be noted GXS has an e-invoicing product line as well).

OpenText has already made three other acquisitions this year, and this fourth deal (it is expected to close in 90 days) is part of OpenText’s broader acquisition strategy to buy various IT infrastructure firms as part of its widely defined EIM (Enterprise Information Management) market space. The post-merger integration is expected to conclude within two years as part of the “OpenText Operating Model” – which doesn’t sound very promising to us for some reason (i.e., rationalize operations, eliminate redundancies, add to the price list, and cross-sell like crazy!) And unlike Oracle, which is more than just a holding company because it brings both economies of scale commercially along with the ability to combine integrated software and hardware advantages – something we’ve seen recently behind the scenes with a new solution that is just getting ready for prime time, which is extremely exciting – OpenText plays at one end of the stack.

OpenText started as a dominant player in the document management and workflow arena, but eventually realized that one can't use document management to perform the needed data management endemic to structured data models in modern commercial B2B business systems. So, essentially, document management begat B2B content management (over the web of course) and workflow begat BPM (Business Process Management). And this now includes process modeling/management and B2Bi over the web – including the space that exists between trading partners rather than just within the enterprise.

As such, GXS in our opinion was the top independent B2Bi player to acquire with its “Global Trading Grid.” It has nearly 3,000 employees (255 in R&D) in 20 countries and counts over 50% of the Forbes Global 1000 companies as customers. It connects over 550,000 trading partners in 60 countries (with 40,000 mappings) and supports 12 languages, 200 document types, and over 14 billion transactions per year (about 10X of Ariba Network).

Now, you can argue that most of this is traditional EDI-type machine-to-machine integration that is supported on equally traditional pricing models for such integration (e.g., 10 pennies for an invoice rather than, ahem, $10), but that’s not such a bad thing, especially given the connectivity that GXS also has into various banking networks.

Yet, even with other assets beyond transactional B2B automation (e.g., with RollStream like we’ve written about here), it’s this prowess at low-level integration that we fear will relegate GXS to a low-level B2B capability buried as just another infrastructure asset in a big IT-oriented infrastructure firm. We’d bet that the higher value pearls hidden in the GXS B2Bi integration rough (transportation management/logistics, e-invoicing, payments, supply chain visibility/collaboration, payments, etc.) are bound to get lost – or at least go unpolished – in the new OpenText shell (especially those that are deemed competitive).

Still, we are happy that GXS has found a larger home, given that it was not profitable (although not by much), and revenues from ‘messaging’ (think cost per kilocharacter), as well as on the applications side (with the inability to climb up the technology value stack), were degrading. OpenText scores a big win here, no doubt, as will GXS shareholders. And SAP/Ariba will be happy to see GXS relegated to the IT infrastructure markets rather than getting rolled into a player that could have elevated the capabilities into a broader business networks strategy.

As such, we fear for the health of the general market and for procurement professionals looking for choices in a Procurement Platform as a Service (PPaaS) provider or a business networks provider (see our paper and related series on this here). Also, we apologize for creating a stupid FLA (four/five letter acronym), but it fits, so we’re sticking with it.

Of course, maybe we shouldn’t write off OpenText just yet. There are some intriguing assets in its portfolio, but there’s a ton of overlap as well – and a portfolio of tools is very different from a broader business-focused solution strategy and cohesive platform to tie these elements together. Moreover, when it comes to connectivity pathways and uptime, GXS, under the OpenText umbrella, will need to respond to the type of service level agreement (SLA) requirements of the next generation of e-invoicing and supplier network connectivity providers that look more like SaaS/cloud software companies in their ability and willingness to meet highly stringent requirements. Ariba, for example, guarantees 99%+ uptime on a 24/7 basis.

There’s so much more to cover around this transaction and what it means for the procurement, finance, and IT areas. We have been talking to various stakeholders in some firms (sorry to be cryptic), and in our next installment, we’ll discuss some of these elements, and their realistic ability to support procurement groups with their diverse needs in building a Procurement Information Architecture. Stay tuned!

See related research and coverage:

RollStream (GXS): Supplier Management Prospect, Customer and Competitive Recommendations and Analysis

M&A Watch: Five BPO/Solution Oriented Procurement Firms That Are Most Likely to Be Acquired

Procurement Acquisitions: M&A Forecasts and Customer/Market Implications

Procurement Vendor Valuation, M&A, and IPOs: Recent Deals and 2014 Forecast

Big Network + Big Money + Big Data: Tungsten Floats a New IPO Boat With OB10

Tungsten Agrees to OB10 Buyout, Also Combines a Bank and Analytics Capability Into IPO Candidate 

Expert Interview: OB10, Tungsten and Supply Chain Finance

Tungsten and OB10: Supplier Networks – Connectivity Today, Analytics Tomorrow

Supplier Networks and E-Invoicing: Selection Strategies Emerging In 2013

JPMorgan Chase to Shut Down Xign 

Visa Exits Syncada Relationship 

10 Reasons For Procurement to Work With Payments (Part 1)

10 Reasons For Procurement to Work With Payments (Part 2)

10 Reasons For Procurement to Work With Payments (Part 3)

An Opportune Time for Collaboration: Procurement and Accounts Payable

CPOs Owning Accounts Payable – Does Supply Chain Finance Make it Interesting at Last?

Are Supplier Networks Addressing Supplier Risk, Performance and Compliance?

Ariba and SAP…Exploring the Network Elephant in the Cloudy Room

The Future of the Ariba Network with SAP (Part 1)

The Future of the Ariba Network with SAP (Part 2)

The Future of the Ariba Network with SAP (Part 3)

SAP and Ariba: Customer and Prospect Implications – E-Invoicing (Part 2)

SAP and Ariba: Customer and Prospect Implications – E-Invoicing (Part 1)

Ariba: Probing on SAP’s New Procurement and Supplier Network “Angel”

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Voices (2)

  1. Pierre Mitchell:

    Agreed. If I were OpenText, I would just leave GXS alone and push them to be an Integration Platform-as-a-Service play (with obvious heavy emphasis on B2B eCommerce), and then abstract the BPM layer to plug into rest of OpenText portfolio. Gartner actually does a good job describing iPaaS, and GXS’ trading grid could still be a compelling alternative to SAP/Ariba by touting itself as the “postman of B2B” in that the postman doesn’t read your mail and then charge you based on the value of the contents.

  2. Enrico Camerinelli:

    I could not be more in agreement especially when you write “we fear will relegate GXS to a low-level B2B capability buried as just another infrastructure asset in a big IT-oriented infrastructure firm.”

    I was actually expecting GXS being bought by Oracle as a response to the SAP/Ariba deal.

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