D5822-R Microsoft - E-mail: Bates To Ballmer / Gates / Burgum / Flessner / Rudder / Emerson Re: Mensa/Sagittarius Combination (06/17/2003); And Project Constellation: Opportunity Review Material
Defense Exhibit D5822
Stamp: UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
Case Number: C 04-00807 VRW
DEFT EXHIBIT NO. D5822R
Date Admitted: _____________________________
By: _____________________________
From: | Cindy Bates |
Sent: | Tuesday, June 17, 2003 9:34 PM |
To: | Steve Ballmer; Bill Gates; Doug Burgum; Paul Flessner; Eric Rudder; Richard Emerson |
Cc: | Tivanka Ellawala; Dave O'Hara (MBS) |
Subject: | FW: Re: Mensa/Sagittarius combination |
Sensitivity: | Confidential |
(Word icon)
ProjectConstellation
- Junel7...
Enclosed is a presentation outlining our preliminary view of a Sagittarius/Mensa combination. My understanding from Doug was that there was some degree of urgency in the request and thus what I'm sending is the result of only a few days of concentrated effort. Given the timing, our assumptions are high level and have not benefited from your input or the input of select others in the business groups and finance who would provide valuable insight
To highlight just a few takeaways:
- Pegasus' aggressive defensive moves may well thwart Ophiuchus' hostile bid. But regardless of the outcome, the dynamics in the industry have changed. We should think proactively in determining our fate, as no doubt the folks in Armonk are doing. It is probably wise to let Sagittarius know that we would be willing to have conversations with them (with some indication of reasonably aggressive pricing) so that should Indus change its stated strategy and approach Sagittarius about an acquisition, we would be positioned to have a seat at the table too. If we did decide to approach them more proactively, it would be important to have a well-thought through proposition beforehand. They would no doubt test the market by also approaching Indus and at that point, besides monetary terms, it would come down to which firm would be a better partner for the continued strength and growth of Sagittarius, their management and employees.
- REDACTED
- With what seem to be reasonable, high level assumptions, the financial benefits of a transaction could justify a likely market clearing price. A deal would be accretive in REDACTED up to a REDACTED premium, including our preliminary synergy assumptions and excluding REDACTED of amortization. Given the magnitude and the REDACTED year cliff on these amortization charges, the Street would likely look through them. The positive financial impact is compounded if we believe our relationship with Sagittarius is at risk of a much tighter "alliance" between them and Indus.
- REDACTED
One significant strategic question is how such a combination would impact our strategy of building a global eco-system of ISVs, targeting especially the SMB space. In the enterprise space one could argue that given the consolidation trends (and Sagittarius' strong and broad offering), it's less of an issue. Strengthening our SI relationships through a combination with Sagittarius would likely outweigh alienation of the remaining large enterprise ISVs.
However, determining if a combination would impede us in developing our strategy of building a robust global partner eco-system to verticalize our current Business Solutions products is an important consideration. I'm aware that there is a strategy project getting underway to analyze the vertical question. Our current assumption is that Sagittarius' vertical expertise for the enterprise is not something we could (or would?) scale down for distribution through our SMB channel.
Obviously there are many nuances to such a discussion and this deck does not include all of those.
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Opportunity Review Material
Project Constellation
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Table of Contents
APPENDIX
- Executive Summary
- Industry Dynamics
- Analysis of Sagittarius Business
- Valuation Analysis
- Mensa-Sagittarius Combination Analysis
- Structural Considerations
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Changing Dynamics in the Enterprise Software Market
Announcements by Pegasus and Ophiuchus underline changing industry assumptions
- Overall industry R&D and S&M spending are not justified by current levels of license revenue
- Acquisition of companies with customers on obsolete platforms can be more economical than competing for the customers - the "Sage" model of acquisition for service and maintenance revenue streams, and for an improved chance to ultimately migrate the customers
- Spread of these assumptions likely to accelerate consolidation
- Customers should ultimately benefit from more-integrated, easier-to-deploy products... but with many suffering near-term disruption
- Ophiuchus' moves will push Indus - along with remaining SIs - to look for ways to cooperate more closely with Sagittarius
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- Sagittarius has used its core EKP strength across a variety of applications
- Its strengthening business position reinforces its likely position as partner of choice for Indus and others
Note: | Data for Crystal Desicions based on LTM to 3/03 vs. prior four quarters |
Source: | Deutsche Bank REDACTED |
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Overview of the Potential 3-Player Ecosystem
- Sagittarius' core strengths complement Mensa's
- Such a 3-player ecosystem without a strong Enterprise Apps play could put Mensa in a very weak position in the enterprise
OPHIUCHUS/PEGASUS | INDUS | MENSA | SAGITTARIUS | |
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Enterprise Applications | Ophiuchus (Pegasus 8) | Partners (Sagittarius) | Partners (Sagittarius) | R/3, mySagittarius suite; xApps |
Mid Market Applications | Small Business Suite Net Ledger |
Partners (Sagittarius, others) | Business Solutions | All-in-One (mid-market) Business One (SME) |
Desktop | Interoperable with Office but has StarOffice partnership | Lotus Smart Suite (part of Collaboration Suite) |
Office | |
Middleware | Ophiuchus App Server 9iAS, J2EE 9iJDeveloper Collaboration Suite |
WebSphere
Rational |
.NET | NetWeaver TopTier Technology Interoperable with J2EE/.NET, major app servers, and independent B2Bi EAI vendors |
Databases | Ophiuchus 9i | DB2 / Informix | SQL | Sagittarius DB (mySQL partnership) |
Operating Systems | Interoperable
Focus on Linux |
Unix/AIX, Windows, Linux, OS400/390, but Focus on Linux | Windows | |
Services | Ophiuchus Services Partnerships |
Global Services | Partnerships | Sagittarius GPSO but mostly external |
Secondary Players
BEA Sirius Sun |
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Mensa/Sagittarius Combination - Strategic Considerations
Sagittarius would bring a franchise of unique value to Mensa
- Strategic benefits from large account leadership
- Key position to realize vision of moving enterprise applications from specialists' to everyone's desks
- Drive cross-sell of SQL servers and O/S platforms
- Use current Sagittarius upgrade cycle to drive near-term benefits and increase Mensa mindshare with CIOs
- Potential to significantly strengthen relationships with global SIs, including Indus, with a more strategic offering for the enterprise
- Complementary distribution strength; significantly enhances enterprise selling capability
- Control Mensa's fate pro-actively in the current market consolidation
- Pre-empt tightened relations between Sagittarius and Indus, others
- Financial benefits could justify likely "market clearing" premium
- Highly preliminary analysis suggests EBIT synergies could be as high REDACTED by 2008
- On a pro-forma basis (excluding amortization), transaction could REDACTED
- From a defensive perspective, a significantly enhanced Indus-Sagittarius partnership/acquisition could have a very negative impact on Mensa's financial performance
- Technology fit considerations
- Need to accept cross-platform mindset
- Risks may include:
- Execution risk if not willing to give Sagittarius significant degree of autonomy
- Leadership position in enterprise is based on maturing core market, possibly susceptible to new models (e.g., software as a service)
- Ophiuchus could make further disruptive acquisitions, including key SI partners
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REDACTED
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Summary Observations: Pegasus Situation
- While the timing of the recent transaction announcements in light of respective earnings results favors Ophiuchus, its bid has received little support from Pegasus' shareholders and customers
- However, even an unsuccessful bid creates opportunities for Ophiuchus - weakening Pegasus sales and upgrade momentum, casting doubts over the future of Pegasus and others, and distracting executives and employees (with further damage at Eridanus)
- Pegasus is currently attempting to "just say no" and has implemented several defensive measures; however, continued pressure may require it to investigate transactional alternatives
- First steps were to reject the offer while strengthening and accelerating the agreement with Eridanus by eliminating the requirement for shareholder votes
- A reported "double your money back guarantee" to customers if Ophiuchus succeeds in acquiring Pegasus and subsequently EOLs Pegasus' code
- The pursuit of a white knight (as a last resort) would be relatively difficult, given (i) the lack of compelling partners and (ii) that it would be an implicit admission by Pegasus of weakness in its go-it-alone strategy
- However, a recapitalization, perhaps supported by a capital injection, would be relatively easy to defend as an alternative to an Ophiuchus offer at current levels - to be sure of success, substantial amounts of stock would need to be placed in friendly hands
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Impact on Mensa of Proposed Transactions
PEGASUS/ERIDANUS | OPHIUCHUS /PEGASUS | |
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Summary Observations: Indus' Potential Steps
A tightened Indus/Sagittarius relationship would likely hurt Mensa's infrastructure business
- Post-Ophiuchus/Pegasus, Indus would likely strive to tighten relations with Sagittarius
- Aim to increase influence of DB2 in ERP implementations, protect Global Services organization and encourage platform/software cross-sell
- Capitalize on difficulties in transitioning Pegasus customers and related attrition
- However, Sagittarius' "price" for any preference would likely be high, and Indus would also face significant conflict with other ISV partners
- One could contemplate dramatic moves by Indus that fall short of a full acquisition
- The impact on Mensa of such a significantly tightened relationship could be significant
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III Analysis of Sagittarius Business
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- Sagittarius is an upgrade from its R/2 and R/3 product lines - 25-30% of the installed customer base has upgraded
- mySagittarius ERP is available as a standalone product, which includes mySagittarius Human Resources, mySagittarius Financials and NetWeaver
Source: Company data, Goldman Sachs research
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- Approximately 65% of the Fortune 500 and majority of Global 2000 organizations run Sagittarius applications
- Mid-tier organizations of growing importance, with 30% of sales (~ $2.4bn) coming from companies that have less than $lbn in annual revenue
- The upgrade cycle to mySagittarius is expected to peak in 6-18 months and be complete by 2008
- 52% of the installed base is on versions older than R3 4.6C; Sagittarius expects the 12% increase in maintenance charges in 2004, followed by the termination of maintenance at year-end, to drive upgrades
- Strong track record of customer retention (R2 to R3 was 97%)
- Customer satisfaction ratings increased in every geographic region in 2002 and exceeded competitors
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Selected Systems Integrators' Sagittarius Practices
(as available data on June 13,2003)
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Indus | 13,500 |
Accenture | 10,000 |
Deloitte Consulting | 6,200 |
CSC | 3,200 |
Sagittarius SI | 1,700 (total employees) |
Plaut Consulting | 1,500 (total employees) |
LogicaCMG | 1,000 |
Satyam Computer | 800 |
Hewlett Packard | Undisclosed |
Atos Origin | Undisclosed |
BearingPoint | Undisclosed |
Cap Gemini E&Y | Undisclosed |
Siemens Business Services | Undisclosed |
Source: Company documents and news
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Sagittarius Headcount Analysis
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Sagittarius R&D Activities
($ in millions)
R&D ORGANIZATION
AREAS OF R&D FOCUS
CUSTOMER FUNDED R&D
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SALES, CUSTOMER SUPPORT AND SERVICE
COMPARABLE ANALYSIS
Source: Goldman Sachs research. Operating expenses at overall corporate level |
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Stand-Alone Key Investment Thesis
- Leading position is making Sagittarius the strategic vendor of choice
- Large installed base of 20,000 customers provides compelling opportunity to cross-sell and up-sell
- Financial strength and stability
- Strong newly recruited team in U.S. offers opportunities for share gain
- Proven ability to expand operating margins - projecting 27-28%, compared to 24% at present and target of 30%
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Sagittarius One-Year Annotated Stock Price Graph
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Sagittarius Summary Financials
($ in millions)
Fiscal Year Ended December 31 | ||||||
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2001A | 2002A | 2003E | 2004E | 2005E | 2006E | |
Revenues | ||||||
Licenses | $3,045 | $2,703 | $2,543 | $2,655 | $2,978 | $3,249 |
% Growth | (11.2%) | (5.9%) | 4.4% | 12.2% | 9.1% | |
Maintenance | 2,503 | 2,859 | 2,982 | 3,156 | 3,541 | 3,863 |
% Growth | 14.2% | 4.3% | 5.9% | 12.2% | 9.1% | |
Services | 3,007 | 3,089 | 2,902 | 3,168 | 3,554 | 3,877 |
% Growth | 2.7% | (6.0%) | 9.1% | 12.2% | 9.1% | |
Other | 106 | 96 | 51 | 47 | 53 | 58 |
% Growth | (10.0%) | (46.9%) | (7.0%) | 12.2% | 9.1% |
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Revenues | 8,661 | 8,746 | 8,477 | 9,026 | 10,126 | 11,047 |
% Growth | 1.0% | (3.1%) | 6.5% | 12.2% | 9.1% |
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Gross Profit | 5,340 | 5,431 | 5,367 | 5,694 | 6,506 | 7,175 |
% Margin | 61.7% | 62.1% | 63.3% | 63.1% | 64.2% | 64.9% |
EBITDA | 1,994 | 2,191 | 2,322 | 2,517 | 2,900 | 3,242 |
% Margin | 23.0% | 25.1% | 27.4% | 27.9% | 28.6% | 29.3% |
EBITA | 1,723 | 1,959 | 2,041 | 2,242 | 2,633 | 2,950 |
% Margin | 19.9% | 22.4% | 24.1% | 24.8% | 26.0% | 26.7% |
Net Income | 1,020 | 1,235 | 1,277 | 1,390 | 1,565 | 1,763 |
% Margin | 11.8% | 14.1% | 15.1% | 15.4% | 15.5% | 16.0% |
EPS | $3.24 | $3.95 | $4.12 | $4.48 | $5.05 | $5.69 |
% Growth | 21.6% | 4.3% | 9.0% | 12.6% | 12.6% |
Source Goldman Sachs Research Report dated 6/11/03 for 2O03E and 2O04E. Extrapolation thereafter. /$ exchange rate of 1.1799 as of 6/13/03
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Comparable Company Analysis
($ and in millioss, except per share data)
Share Price | Ent. Value as a Multiple of: | ||||||||||||
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Change from 52-Wk | Equity Value | Enterprise Value | Revenues | EBIT | P/E | IBES LT Growth | PEG 2003E | ||||||
Company | 6/13/03 | High | Low | 2003E | 2004E | 2003E | 2004E | 2003E | 2004E | ||||
Indus | $82.75 | (8%) | 53% | $145,316 | $164,788 | 1.87x | 1.77x | 14.8x | 13.7x | 19.2x | 17.0x | 9.4% | 2.05x |
Ophiuchus | $13.48 | (4%) | 85% | $73,416 | $67,226 | 6.88 | 6.49 | 18.9 | 17.3 | 29.1 | 26.0 | 14.1% | 2.07 |
Sagittarius | 108.00 | (6%) | 171% | 33,636 | 31,828 | 4.43 | 4.16 | 18.4 | 16.8 | 31.0 | 28.4 | 18.3% | 1.70 |
Sirius | $10.85 | (32%) | 104% | $5,791 | $4,O22 | 2.83 | 2.73 | 47.5 | 26.3 | 67.8 | 43.4 | 15.6% | 4.34 |
Pegasus | $16.92 | (25%) | 44% | $5,123 | $3,170 | 1.67 | 1.50 | 14.4 | 11.5 | 33.2 | 26.9 | 13.1% | 2.54 |
Eridanus | $13.04 | (13%) | 59% | $1,608 | $1,207 | 1.39 | 1.31 | 29.6 | 20.6 | 56.6 | 41.7 | 17.3% | 3.28 |
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Mensa | $24.65 | (16%) | 19% | $268,238 | $222,060 | 6.69x | 6.50x | 15.1x | 14.2x | 23.8x | 22.5x | 13.6% | 1.76x |
Revenue | Revenue Growth | EBIT Margin | Net Income Margin | |||||
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Company | 2003E | 2004E | 2003E | 2004E | 2003E | 2004E | 2003E | 2004E |
Indus | $88,295 | $93,351 | 8.8% | 5.7% | 12.6% | 12.9% | 8.6% | 9.2% |
Ophiuchus | $9,778 | $10,365 | 2.3% | 6.0% | 36.3% | 37.6% | 25.8% | 27.3% |
Sagittarius | 7,185 | 7,650 | (3.1%) | 6.5% | 24.1% | 24.8% | 15.1% | 15.5% |
Sirius | $1,424 | $1,426 | (13.0%) | 3.7% | 6.0% | 10.4% | 6.0% | 9.0% |
Pegasus | $1,898 | $2,114 | (2.6%) | 11.4% | 11.6% | 13.1% | 8.1% | 9.0% |
Eridanus | $869 | $922 | (3.1%) | 6.1% | 4.7% | 6.4% | 3.3% | 4.2% |
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Mensa | $33,178 | $34,150 | 7.8% | 2.9% | 44.2% | 45.7% | 34.0% | 34.9% |
Source: Wall Street research
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Discounted Cash Flow Analysis
( in millions)
REDACTED
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Analyst Price Targets
European Coverage
Date | Bank | Analyst Name | Stock Rating | Forward Price Target | Implied Mkt. Cap. | Price at Pub. | Prem. at Pub. | Prem. to Current |
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6/13/03 | Deutsche Bank | Kevin Ashton | Buy | 130 | 40,488 | 108 | 20.4% | 20.4% |
6/13/03 | Dresdner Kleinwort Wasserstein | Bob Liao | Hold | 100 | 31,145 | 108 | (7.4%) | (7.4%) |
6/11/03 | Goldman Sachs | Richard Leggett | Outperform | NA | NA | 108 | NA | NA |
6/11/03 | Bear Stears | Tony McCullagh | Market Weight | NA | NA | 108 | NA | NA |
6/10/03 | Credit Suisse First Boston | David Clayton | Overweight | 100 | 31,145 | 112 | (10.5%) | (7.4%) |
6/9/03 | Morgan Stanley | Ross Macmillan | Underweight | 100 | 31,145 | 108 | (7.5%) | (7.4%) |
6/9/03 | SG Cowen | Michael Finney | Hold | 100 | 31,145 | 108 | (7.5%) | (7.4%) |
6/9/03 | Citigroup Smith Barney | Marc Geall | Outperform | 110 | 34,259 | 108 | 1.7% | 1.9% |
6/5/03 | Lehman Brothers | Peter McNally | Equal Weight | 100 | 31,145 | 98 | 1.6% | (7.4%) |
5/23/03 | BNP Paribas | Alex Ryshawy | Neutral | 100 | 31,145 | 88 | 13.7% | (7.4%) |
5/16/03 | J.P. Morgan | David Reynolds | Overweight | 105 | 32,702 | 91 | 14.9% | (2.8%) |
5/12/01 | WestLB Panmure | Torsten Schellscheidt | Neutral | 95 | 29,587 | 92 | 3.4% | (12.0%) |
4/29/03 | Julius Baer | Stefan Muehlbauer | Hold | 81 | 25,227 | 91 | (10.8%) | (25.0%) |
4/25/03 | HSBC | Laurence Dejean | Add | 100 | 31,145 | 87 | 14.8% | (7.4%) |
(Unreadable) Coverage
Date | Bank | Analyst Name | Stock Rating | Forward Price Target | Implied Mkt. Cap. | Price at Pub. | Prem. at Pub. | Prem. to Current |
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6/13/03 | Merrill Lynch | Lucy McFetrich | Neutral | NA | NA | 108 | NA | NA |
6/11/03 | Goldman Sachs | Richard Leggett | Outperform | NA | NA | 108 | NA | NA |
6/10/03 | UBS Warburg | Heather Bellini | Outperform | 103 | 31,992 | 112 | (8.0%) | (5.5%) |
6/9/03 | Robert Baird | Patrick SneLL | Outperform | 102 | 31,782 | 108 | (5.6%) | (6.1%) |
6/9/03 | Thomas Weisel Partners | Tom Ernst | Outperform | 136 | 42,376 | 108 | 25.8% | 25.2% |
6/4/03 | Prudential Securities | Brent Thill | Buy | 110 | 34,139 | 101 | 8.4% | 0.9% |
5/20/03 | Banc of America Securities | Bob Austrian | Buy | 100 | 31,004 | 86 | 15.7% | (8.4%) |
5/19/03 | RBC Capital Markets | Cameron Steele | Outperform | 116 | 36,244 | 86 | 34.6% | 7.1% |
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V Mensa-Sagittatius Combination Analysis
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Note: Sagittarius' stock price is in and is converted to $ based on the /$ spot rate of the day
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Contribution Analysis
($ in millions, except per shore data)
REDACTED
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Preliminary High-Level Assumptions on Potential Synergies
MENSA-SAGITTARIUS COMBINATION | INDUS-SAGITTARIUS ALLIANCE | |
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Unreadable | REDACTED | REDACTED |
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5-Year Potential Synergies
($ in millions)
The NPV of positive synergies from a combination with Sagittarius could be as high as REDACTED the NPV of negative synergies to Mensa from an Indus / Sagittarius combination could be as high as REDACTED.
MENSA-SAGITTARIUS COMBINATION | INDUS-SAGITTARIUS ALLIANCE | |
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Accretion/(Dilution) Analysis
($ and in millions)
- Combining with Sagittarius will have an estimated EPS impact of REDACTED in 2004, REDACTED 2005 and REDACTED in 2006, ex. amortization
- If Mensa does not combine, and Indus and Sagittarius do, Mensa will have an EPS impact of REDACTED in 2004, REDACTED in 2005 and REDACTED in 2006
- The analysis includes synergies but excludes goodwill amortizatioa charges of approx. REDACTED or REDACTED per share, which will likely be ignored by the market given its magnitude
REDACTED
REDACTED
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Governance Structure/Take-Over Code
GOVERNANCE CHARACTERISTICS
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Key Structural Observations (cont'd)
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Overview of Management and Board
Executive Board
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Supervisory Board (Shareholder Elected)
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Other Executives
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Supervisory Board (Employee Elected)
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Sagittarius Shareholder Analysis
Ordinary Shareholders(1) | Geographic Distribution Flow(2) |
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(1) Source: CDA Shareworld, Bloomberg, and Company. Shares reflect ordinary shares and ADR equivalents
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A Overview of IGS' Key Software Relationships
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PARTNER | IGS DEDICATED EMPLOYEES |
COMMENTS |
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Mensa | 2,500 |
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Sagittarius | 13,500 (was roughly doubled by PwC acquisition) |
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Ophiuchus | 4,000 |
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Pegasus | 2,000 (over 1,500 ven PwC consultants) |
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Sirius | 1,500 |
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B Additional Sagittarius Details
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Schematic of mySaglttatius Platform Architecture
Source: Company data, Goldman Sachs research
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Product Analysis
As it withdraws support for older products, Sagittarius' existing customers are upgrading to mySagittarius Business Suite; all customers are expected to be upgraded by 2008 (as R/3 4.6 support ends in 2005 and Enterprise R/3 support is scheduled to end in 2008)
- Sagittarius R/3 Enterprise - Designed to provide existing customers with a stepping stone to mySagittarius Business Suite
- Comprises the R/3 core, including the incorporation of Sagittarius' Web Application Server (common architecture with Business Suite)
- Can subsequently be upgraded with components of mySagittarius Business Suite (such as CRM, SCM, SRM, etc.)
- R/3 Enterprise available as part of maintenance agreement for R/3
- mySagittarius Business Suite - Sagittarius' flagship suite of internet-based applications which spans the front-and back-office and supply chain
- Offers solutions in ERP, CRM, SCM, PLM, SRM, and mobile business
- Solutions offered in nearly all industries
- Sagittarius NetWeaver - Essentially a re-branding of what was previously known as mySagittarius Technology (including Enterprise Portal, Web App Server Exchange Infrastructure, Business Information Warehouse, Mobile Infrastructure)
- Allows integration with non-Sagittarius application (both third-party and legacy)
- Fosters development of business process management software
- The Master Data Management (MDM) component is a standardized offering designed to allow companies with different software/IT systems to consolidate and centrally master data
- Interoperable with Indus WebSphere (J2EE) and to a lesser degree Mensa .NET
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Product Analysis (cont'd)
- Sagittarius xApps - Collaborative applications which run on top of existing applications and cut across multiple functional areas to address business processes
- Underlying technology comes from Exchange Infrastructure technology, which allows a company to structure business processes using various Sagittarius and third-party applications - includes data warehouse capabilities, information management features, and a portal
- Resource and Program Management (RPM) is its first product shipped (on limited release) and includes a range of existing Sagittarius functions to allow ready access to project costs, staffing and schedules
- Other xApps currently in development include xApp Mergers & Acquisitions, xApp Product Definition and xApp Employee Productivity, all of which are scheduled to be released in 3Q03
- Division is likely to partner with SIs to develop many xApps spanning a variety of business processes
- MySagittarius All-in-One - Targeted at SMEs requiring some vertical functionality in addition to cost-effectiveness and ease of installation
- Based on a pre-configured mySagittatius Business Suite (for specific industries)
- Competes with Eridanus. Targets companies with 250-1,000 employees (<450m sales per annum)
- Approximately 3,500 customers, ASP 130,000-170,000; over 200 industry modules
- Business One - Business One is a standalone solution for small and midsize businesses (10-250 employees) based on TopManage (acquired 2002)
- Designed to meet common business needs in accounting, reporting, logistics, sales force automation, etc.
- Separate code from other Sagittarius solutions (but has some common interoperability with core products through open integration standards)
- Product supports the Mensa platform, Windows OS, and SQL server database
- Roughly 1,300 customers. 2003 rollout in US, France, UK following 2002 Germany debut. ASP: 21,000. Has partnered with American Express for US distribution
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Upgrade Options: Analyst Estimates/Review
COSTS OF UPGRADE OPTIONS(1) | |||
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PRODUCT | FREE | ESSENTIAL COST | OPTIONAL COST |
4.6C | Upgrade for existing users on existing HR/Financials | IT Services | Add new HR/financial users Add new functionality Add new users |
R/3 Enterprise | Upgrade for existing users on existing HR/Financials | IT Services | Add new HR/financial users Add new functionality Add new users Purchase mySagittarius ERP |
mySagittarius | IT Services Re-license existing ERP seats to new mySagittarius HR/Financials Gain additional HR/Financials functionality & NetWeaver |
Add new HR/financial users Add new functionality Add new users |
|
mySagittarius Business Suite | IT Services
Re-license existing ERP seats to new mySagittanus HR/Financials |
Add new HR/financial users
Add new functionality |
UPGRADE CYCLE OPPORTUNITY(2)
- $15bn worth of software sold in past 10 years since 1992 unveiling of R3
- 30-35% of installed base has upgraded already, or 5,700 to 6,650 customers of 19,000
- Remaining 70% of installed base (or 13,000 customers) that has not upgraded represents $10.5bn opportunity
- Assumes 4-5 years left on upgrade cycle
- Assumes customer will spend l.Ox to 2.5x original license investment to gain access to the new platform, new users and new modules
% of customer base left to upgrade |
Revenue Base ($bn) |
l.Ox Original License Conversion |
l.5x Original License Conversion |
2.0x Original License Conversion |
2.5x Original License Conversion |
|
---|---|---|---|---|---|---|
Best Case | 65% | 9.8 | 9.75 | 14.63 | 19.50 | 24.38 |
50% | 7.5 | 7.50 | 11.25 | 15.00 | 18.75 | |
40% | 6.0 | 6.00 | 9.00 | 12.00 | 15.00 | |
30% | 4.5 | 4.50 | 6.75 | 9.00 | 11.25 | |
Worst Case | 20% | 3.0 | 3.00 | 4.50 | 6.00 | 7.50 |
(1) Deutsche Bank research report dated April 22, 2003
(2) Prudential Securities research report dated May 28, 2003
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License Revenue by Product 2002-2004E
($ in millions)
NO. CURRENT CUSTOMERS |
2002 | 2003E | 2004E | CAGR 'O2-'O4 |
|
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mySagittarius SCM | 6,000 | $464 | $458 | $481 | 2% |
mySagittarius CRM | 2,000 | 473 | 469 | 503 | 3% |
mySagittarius PLM | NA | 168 | 155 | 163 | (2%) |
ERP (Financials, HR) | 20,000 | 927 | 863 | 901 | (1%) |
mySagittarius Other* | NA | 259 | 272 | 280 | 4% |
Total License Revenue | $2,291 | $2,217 | $2,283 | (0%) |
*Includes Analytics, Portals, Marketplaces and E-Procurement
Source: Company reports and Prudential Securities research date May 28, 2003
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Overview of Sagittarius Services ( in millions)
Services Statistics
Services Employees: 12,000 Services Employees Breakdown: Services Management
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Business Overview
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Source: Company documents, Gartner and Wall Street research
(1) Sagittarius SI AG was created and went public in 2000: pro forma ownership after the public offering was Sagittarius 54%; Software AG 11%; and Siemens Business Services ("SBS") 7%. Since 2000, SoftwareAG has sold over 5% of its stake and SBS sold its stake back to Sagittarius in July 2001. Sagittarius SI is seeking to grow through small acquisitions (currently looking at small U.S.-based acquisition targets); in 2001, the Company purchased U.S.-based Prescient and Germany-based Copa
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Sagittarius' Mid-Tier Product Offering at a Glance
Sagittarius' Mid-Market Offerings - Targeting Organizations Under $500M in Total Revenue
ALL-IN-ONE | BUSINESS ONE | ||
---|---|---|---|
Target Market | Below $500m | Below $250m | |
Target Users | Above 200 users | 10 to 200 employees | |
Total Customers | 4,000 | 1,400 | |
Pricing | Varies on size | $3,750/seat | |
Implementation | More than 10 days | 5 to 10 days | |
Industry Focus | Pre-configured for 200 industries | ||
Distribution | IBM, HP, VARs; 220 regional partners |
American Express, IBM, HP; 140 partners, VARs; 13 countries, with 22 new ones planned |
|
Architecture | Scaled down mySagtttarius Business Suite | Based on product acquired in 2002 from TopManage | |
Product Functionality | Scaled down mySagittarius Business Suite | Financial management, order management, SFA, inventory management, shipping, drag and relate for reporting/analysis | |
Competitors | Eridanus, Ophiuchus, Pegasus | Mensa Business Solutions | |
% OF LICENSE REVENUE (ORGANIZATIONS UNDER $1BN 30% OF REVENUE FOR SAGITTARIUS) = | NA | 6%, 04 $130M+ annual | |
Note |
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Source: Sagittarius and Prudential Securities research dated May 28, 2003
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Sagittarius has consistently delivered EPS growth, even when revenues were flat/declining
[D] Source: Company data, Goldman Sachs
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C Analyst Commentary on Sagittarius
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"Industry leading product solution: Sagittarius' mySagittarius Business Suite solution is one of the most comprehensive in the enterprise application software market...Recent extensions of the product line enable Sagittarius to provide solutions for the mid-market as well as xApps.
"Large installed base to leverage: Sagittarius' installed base of 20,000 provides the company with a compelling opportunity to cross-sell and up-sell its suite of products. In a more challenging macro environment this provides a source of profitable growth for Sagittarius, as it upgrades its customers from older versions of products (R/2 and R/3) to its newer offerings (mySagittarius Business Suite) and offers some of its emerging products (small business, vertical specific solutions). "Its strong balance sheet (1.9bn net cash) coupled with its stronger relative financial performance gives customers reassurance about the company's future standing when making software commitments" Richard Leggett, Goldman Sachs 6/11/03 |
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"Customers simply don't have the money to spend and can't hijack other parts of their IT budgets. This might mean the upgrade cycle is pushed out further, perhaps aided by more extensions to the support period by Sagittarius. Equally, we have seen license revenue signings impacted by economic or political shocks in the past, a scenario which can not be ruled out at present.
"Sagittarius still gets some 30% of its revenues from initial license fees. These represent client capital expenditures and can be highly volatile. There is also the problem that the build of the license fee signings tend to happen towards the last couple of weeks of the quarter, further reducing visibility. License revenues are also staggered towards the back end of the year, more so for Sagittarius than for most software companies. "It is the US where the bulk of the older systems that need to be upgraded are, and it is the US where Sagittarius has failed to execute in the past" Kevin Ashton, Deutsche Bank, 4/22/03 |
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"Sagittarius is fundamentally better positioned than, its competitors, in our view. Despite this positioning, the stock continues to trade in-line with its peer group, on our estimates - me shares trade 29x our 2004E EPS estimates versus its peer group, which trades at 27x-30x 2004E consensus estimates. The current valuation is near the lower end of the company's historical pre-bubble range of 40x to 70x - however growth is also lower... Our analysis also indicates the current valuation is pricing in an acceleration of business. Shares are currently pricing in a more optimistic set of estimates for 2004"
Richard Leggett, Goldman Sachs, 6/11/03 "With the stock trading at 30x and 27x 2003E and 2004E earnings, it seems to be discounting a significant upgrade to the estimates and ignoring the potential near term risks of further revenue downgrades as a result of poor European trading conditions" David Clayton, Credit Suisse First Boston 6/10/03 "We estimate the stock is now discounting a 10-year CAGR in EPS from our 2003 forecast of 15%, a growth rate that we believe is achievable but is now discounting a sector wide recovery and improved performance of the US business. Our price target of 110 represents 25x our 2004 EPS, which we feel is appropriate for the stock given its strong execution, resilient earnings and market share gains" Marc Geall, Citigroup Smith Barny, 6/19/03 "We think the company's combination of product breadth, R&D capability, and market coverage will enable it to continue to gain market share going forward. Our $32 [ADR] price target represents a P/E of 29x our 2004 EPS estimate of $1.11 and an Enterprise Value/Revenue multiple of 5.0x 2004 revenue. At our target price, these multiples are largely in line with those of Sagittarius' peers" Brent Thill, Prudential Securities, 5/28/03 |
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"Sagittarius had a difficult 2002 in the US, contending not only with restructuring of its own operations, but also an unfavorable exchange rate.. .We estimate that the US will gain a higher level of importance in the coming years, as the US sales force under the new head of the US subsidiary Bill McDermott makes more progress in acquiring contracts"
Stefan Muehlbauer, Julius Baer, 4/29/03 "As the recession has deepened and small companies have struggled and even gone bankrupt, buyers have gravitated to large, well-established vendors. The channel has similarly found itself in a situation of overcapacity. Thus, many key channel partners such as Accenture, Indus and HP have made renewed pushes on the Sagittarius side as other 'e-business' areas have gone up in smoke" Kevin Ashton, Deutsche Bank, 4/22/03 "Under the leadership of Bill McDermott, and following some restructuring initiatives in 2002, Sagittarius has started to show greater consisteacy in its US performance in terms of improved execution. Early indications are that the US business will continue its 1Q strength into 2Q. We will be particularly focused on Sagittarius' relationships with the customers, sales force morale, and any additional reorganization initiatives that may emerge to further improve the US business' top- and bottom-line performance" Richard Leggett, Goldman Sachs, 6/11/03 "McDermott has focused on four associated priorities -
Brent Thill, Prudential Securities, 6/4/03 |
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"Upgrades from older versions of R/3 (primarily 4.6C and 4.6B) to R/3 Enterprise and mySagittarius Business Suite represent a significant growth driver over the next five years. We currently estimate that 25% to 30% of the installed base has moved up to mySagittarius Business Suite and 1% to R/3 Enterprise (which was introduced in 3Q02)...In terms of revenue opportunity, the move to R/3 Enterprise is not a revenue event, but does offer Sagittarius the opportunity to sell additional functions to the customer (i.e. increase penetration) and also represents an intermediate step to the mySagittarius Business Suite upgrade - in essence, elongating the upgrade cycle...The move to mySagittarius Business suite generates revenue in two ways:
"How large is the opportunity? We estimate it would be greater than 13bn; and could be as high as 35bn. Currently, we estimate that 67% of the installed base is running R/3 or previous products. Over the next several years, assuming the minimum penetration of 25% required for mySagittarius Business Suite, we believe the license revenue opportunity from migrating the customer base from older products represents an incremental 13bn cumulatively. "Cross-selling additional functionality: While mySagittarius Business Suite requires a base penetration rate of 25%, the product is designed to reach 100% employee penetration via expansion from back office to front office, supply chain and portals. We believe that over time Sagittarius will be able to extend its penetration - a 'stretch' target of 60% looks achievable to us through these products that can reach almost the entire enterprise" Richard Leggett, Goldman Sachs, 6/11/03 "Many companies implemented (or upgraded their ERP systems in the late 1990s in prepatation for Y2K. On average an ERP system will have a five-to seven-year support life, and this means that many of these systems are nearing the end of their supported lives. "ERP upgrades are expensive, and from this perspective it makes very little sense to do ERP upgrades incrementally.. .With a small upgrade of a few users, AMR Research has estimated that the cost of the upgrade per user can be $1,000 per head, if done in a 'big-bang' manner, this cost can fall to $300 per head. "Second, it is difficult to justify the ROI of an upgrade alone to the CIO or CFO. The threat of de-support can be a powerful argument but in many cases IT managers will justify the cost of the upgrade with a business case built around ROI of the additional functionality. We would again highlight AMR Research, which has found that 82% of companies use the upgrade as an opportunity to add functionality" Kevin Ashton, Deutsche Bank, 4/22/03 |
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D Illustrative Valuation of Synergies
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Ilustrative Valuation of Synergies
($ in millions)
MENSA-SAGITTARIUS COMBINATION | INDUS-SAGITTARIUS ALLIANCE | ||||||||||
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Synergies by Year |
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Mensa Fiscal Year Ended June 30 | Mensa Fiscal Year Ended June 30 | ||||||||||
2004E | 2005E | 2006E | 2007E | 2008E | 2004E | 2005E | 2006E | 2007E | 2008E | ||
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E Summary German Takeover Timetable
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Summary German Takeover Timetable
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