RBZane Availability Services & Industry Update, 12/11/07  

As a quick review, in August 2005, SunGard Availibity Services (SAS) was acquired by a consortium of seven (7) Private Equity companies led by Silver Lake Partners and Texas Pacific Group (TPG). 

Following is a recap of the significant events that have transpired since our last update:  

• In August 2007, SAS acquired Houston based VeriCenter Inc. The terms of the transaction were not disclosed and it is not expected to have a material impact on SG's financial results.  VeriCenter is a managed services, application hosting and IT infrastructure outsourcing company focused on large and mid market enterprises. Their seven (7) data centers enhance SAS' managed services delivery capabilities and complement their existing facilities.  
• In September 2007, SAS launched a new version of their Paragon software which expands the information availability planning and management tools organizations utilize to help them ensure uninterrupted access to their critical business data and systems.  These software enhancements raise the bar; in helping;SAS customers manage their overall information availability program by making it easier to link business continuity and disaster recovery plans with specific business strategies and expanding options available in managing personnel deployments and communications during disruptions. The new  capabilities appear to enhance all the Paragon components.   
• October 1, 2007 SAS announced an improved managed E-mail archiving solution for highly reliable email retention, availability and management design to address specific regulatory business and technical needs. This service provides a secure and reliable way to capture, transmit, archive, store and retrieve emails while helping meet compliance requirements. This solution also allows companies to optimize server performance and reduce email message volume substantially. SAS also offers a suite of other email services including email availability services, email protection service, service replication and vaulting.  
• On October 22, 2007, SAS announced that Eric Berg has been appointed CEO of SAS.  Mr. Berg joined SAS from NCR Corporation where he was Chief Administrative Officer responsible for NCR's Strategic Planning, M & A, IT, Procurement and Real Estate functions.  Previously, Mr. Berg was CIO at Goodyear Tire and Rubber Company and a Regional VP of Pepsico's Frito-Lay Division. Mr. Berg started his career at IBM and then held management positions at McKinsey & Company. He holds a BS in Industrial Engineering from the University of Illinois and an MBA from Harvard. Mr.Berg assumed the CEO position from Ted Gaasche. Mr. Gaasche was named "interim" CEO after the acquisition; prior to that he was SAS CFO.   

IBM Business Continuity and Resiliency Services (BCRS) continues to be SAS's only viable vendor competition. However, the anticipated and growing trend for many enterprises to migrate to internal business continuity alternatives is also a major challenge for them. SAS and BCRS represent approximately 90% of the BC/DR vendor revenue. 

In our opinion, SAS will continue to struggle to meet their sales and financial objectives. They appear to be behind Plan year to date. Their competitor is also facing similar challenges. While SAS has done a good job of making synergistic acquisitions and expanding their high availability, hosting  and other services, the slow growth of their traditional shared  "hotsite" business continues to be a major challenge.  

SAS provides a full range of excellent recovery services; however, particularly in the SMB market, there is a growing concern related to customer service and responsiveness. In our opinion, due to the ongoing challenge of protecting and growing their large, reoccuring revenue base, SAS will continue to have difficulty ensuring broad based customer satisfaction . 

While SunGard acknowledges SAS is very different from their other businesses, there has been no indication they plan a SAS Initial Public Offering, as was the case prior to the acquisition. SAS represents approximately $1.4B of SunGard's total annual revenue of $4B. For additional information please visit www.sungard.com   

RBZane Advisors will continue to focus on future industry developments and provide updates when appropriate.  We are available to assist you in strategy development and/or assessment, vendor selection, contract negotiations, and to share our extensive intellectual property and provide our best of breed consulting services. 

Thank you for visiting our site.  We always welcome your comments and point of view, rich@rbzaneadvisors.com.

Sungard Availability Services Update August 9, 2006

A year ago, August 11, 2005, SunGard Availability Services (SAS) announced the completion of the acquisition of the Company by a consortium of seven (7) private equity firms led by Silver Lakes Partners and Texas Pacific Group.  The purchase price was $36 per share, a total of $11.3B of equity and debt. 

As we pointed out in our initial SunGard “Point of View”, there were conflicting opinions related to the future success of this very large transaction. Today, the jury is still out!

What RBZane Advisory Group predicted has evolved. The fundamental concerns regarding aggressive competition from IBM BCRS and the increasing trend to bring BC programs in house, have continued to be a major challenge for SAS. To their credit, SAS has done some needed retrenchment and prioritized their focus. Following are a few specifics:

• Thus far, the acquisition of Inflow appears to be a good strategic decision.  Inflow’s multiple data centers throughout the U.S. have helped facilitate SAS’s increased hosting and managed service business. Inflow’s offerings are complimentary and synergistic with SunGard’s core business; this has been a key to their success.. While it took more time than it should have, they now show one face to their customers. Having Inflow’s facility and infrastructure resources can be a major competitive advantage. This capability also enables SAS to more effectively convince customers they have a viable alternative to an internal solution.
• SAS has increased their focus on the SMB market; they now have approximately 130 sales reps selling new accounts; that’s approximately 50% of their sales force. They claim to have sold over 600 new accounts in 2005. We’re certain their year to date 2006 new business bookings are at least 10-15% below target. Lately, they have increased their hiring efforts with the perspective that “revenue growth with more feet on the street.” We know this definitely is not always true in this industry.
• SAS continues to be successful providing a full range of recovery services – “one stop shopping” sales approach has strong SAS marketing support and is getting traction in the marketplace. This approach is credible to customers, particularly, when IBM or HP are forced to bring in multiple business partners to meet sophisticated client requirements, or when smaller  competitors can not respond to a complex customer requirements.

Recently, Forrester Research, in their “Disaster Recovery Service providers, March 2006” report stated “SunGard Availability Services is the most complete solution provider of disaster recovery services”.  They further stated “SAS offers the most resources in North America and also is a provider offering mobile, fixed and hosting services”.  The Forrester report continues, “Working with a single vendor can simplify planning and testing efforts as well as improve service levels over time. SAS’ considerable resources and physical locations across NA provide an advantage for staging of mobile fleets”. This report further stated that SAS has a broad range of hardware installed, providing many flexible services options.  However, they also pointed out the growing number of subscribers and lack of expansion has resulted in increased risk to many clients.

Both SAS and IBM, and in some situations HP, have similar services and capabilities. IBM’s extensive and complimentary corporate resources deployed properly can have a negative impact on SAS sales. All the recovery vendors have successfully supported regional disasters, like Katrina, with 100% recoveries.

We recommend our readers do the necessary due diligence to determine which vendor best meets their company’s requirements—there are many considerations! The flexibility provided by Mobile and Equipment Quick-Ship vendors such as Rentsys, and particularly Agility Recovery Solutions, have highlighted the financial, operational, and logistic advantages of bringing the recovery solution to the customer. However, effective recovery with these solutions requires a minimum of 60-72 hours Recovery Time Objective.

As predicted, SAS has struggled to meet their financial objectives over the past year.  They missed their revenue and margin targets in 2005.  The first quarter of this year didn’t fare any better.  For the 3 months ending March 31, the revenue was flat at $330M and income was down 15% from the same period in 2005. A major dilemma for SAS is the slow growth of their most profitable business, “shared assets”, the traditional shared hot site business. These subscriptions have approximately twice the gross profit of the faster growing high availability dedicated and managed services solutions. Readers should understand all the issues effecting SAS’ continued profitable growth. For additional financials and current press releases please visit www.sungard.com.

Since Jim Simmons, the former CEO, abruptly “resigned” at the end of 2005, Ted Gaasche has remained the “Interim CEO and COO/CFO”.  For those of us who have been in similar situations, it is easy to understand the concern many employees have related to SAS’ future leadership and direction. Furthermore, currently there are rumors that Mr. Gaasche was passed over to be the permanent CEO and that he will be departing September 30.  No names have come up related to a new CEO. We believe “where there is smoke there is fire”, particularly since the rumor is wide spread!

Following Simmons’ departure, Jim O’Brien, the VP of Sales, and most of the first and second line sales managers have also left or have been reassigned.  The new EVP of Sales, John Cooper, seems to be well received so far, but his impressive resume does not indicate any business continuity/disaster recovery experience. Mark Hughes, SVP Operations, joined SAS with the acquisition of Inflow. They continue to have two sales organizations, one to sell only new business; the other to manage the existing customers. They have a high rate of attrition, approximately 30%, but that doesn’t seem to be a SAS concern?! Adding to the external and internal problems, SAS has reduced commission plans resulting in a “one foot in, one foot out” situation for many sales reps.  While still employed by SAS, these sales people are actively seeking other employment. This usually has a negative impact on morale and sales!

In addition to Gaasche, some other key long term SAS executives have remained with SAS.  These senior managers include Patrick Dougherty, SVP marketing, business and product development; Rick Tolar, EVP of Sales support, J Spencer Slattery, SVP Global Services, and Ken Smith,  EVP of Strategy and Software.

What should you do now? The suggestions we made a year ago still hold true.  Please refer to “what should current SAS customers do” in the Point of View SAS announcement. 

In summary, due to the ongoing challenges of protecting their large account revenue base, SAS will continue to have difficulty achieving their current and future revenue and profit objectives due to revenue erosion, resulting from:

• Lower subscription fees to maintain current business (contracts renewed, but at lower fees)
• Loss of revenue due to competition
• Loss of revenue due to Customer bringing BCP program in house
• Reduction in new accounts

As we predicted, SAS’ new owners appear to be focused on short term revenue and profit, therefore, we are not seeing the historical capital investment.  Recently, two separate sources asked us if we knew anything about SAS being acquired. Whether there is any validity to that, or if perhaps the new owners are resurrecting the previous SAS IPO plan, today’s environment is one where most anything can happen?!

A positive for some customers has been the acquisition of Inflow and strategic partnerships with organizations such as Recall Data Protection Services.  “Recall located in Atlanta is one of the most comprehensive global record storage and information management companies.  They operate at 300 locations in 24 countries.  Recall secures, protects, and stores their client’s most sensitive information, minimizing risk and providing peace of mind.”

RB Zane will continue to focus on future Industry developments and provide updates as appropriate.  We are available to assist you in strategy development or validation, vendor selection, contract negotiations and to provide our unique Intellectual Property and comprehensive suite of BC/DR consulting services when requested. 

Thanks for visiting our site we welcome your comments and perspective- http://www.rbzaneadvisors.com/contact.html

RBZane's Initial Sungard Point of View - 2005
SunGard Availability Services Status Following Acquisition Announcement

What goes around always seems to come around again. Back in the early 1980’s as SunGard came into existence as a subsidiary of Sun Oil Company, a decision was made by the parent company to divest itself of all non-energy related businesses that had been acquired or created during the late 70’s when the energy industry was booming. In stepped the investment banking community and SunGard was acquired for positioning as a separate company. Much of that history can be found on the SunGard website (PDF file). When the company was being assessed for an IPO in 1986, Comdisco, who had become SunGard’s major competitor, considered acquiring SunGard, but made the decision it was over-priced and they would continue to grow market share without having to acquire their only real competitor. That proved to be an excellent decision.

Fast forward to this decade and just three years ago, SunGard acquired Comdisco’s Availability Services unit for $825M. CAS was the gem within an otherwise lackluster Comdisco, Inc., forced into bankruptcy due to poor management, weak board of directors and a new CEO who took the road of least resistance, and made millions in the process! It is noteworthy, and quite extraordinary, Comdisco’s unsecured creditors have been paid over 90% of their claims.

Now, 20 years after going public, SunGard will again be owned by private investors. So what does this mean to current SAS customers? SAS is a $1.2B business, approximately 35% of SDS’ total revenue. Referring to the SunGard web page, there is an “open letter” to all SunGard constituents sent by Glenn Hutchins, the co-founder and managing partner of Silver Lakes Partners, the lead private equity firm. Mr. Hutchins would have everyone believe that it will be business as usual and that the consortium of seven (7) high profile private investment firms are in for the long haul—we will see?

There are conflicting perspectives from the industry pundits and the media. In a recent ComputerWorld article, Enterprise Strategy Group said “customers should definitely be concerned from the perspective that a group of investment bankers are not interested in building value for the long haul.” On the other hand, Gartner “sees no reason for clients to be concerned at this point ….. “The sale of SunGard Data Systems should have no immediate or midterm effect on SunGard Availability Services clients”, and it puts any spin-off plans to rest for now. But, “clients should still take sensible precautions.” We agree and have our own Point of View (POV) that there may be some short and long term impacts on customers and investors that require attention. Following are a few thought-provoking points of interest and suggestions for our readers:

• SAS has, in our view, always been a second-class citizen to the core SDS business which is integrated software and processing solutions, primarily for the financial services industry. While there is some relationship between the two business units, the planned spin-off of SAS announced last year and now abandoned, has always been a viable strategy. We believe that the new owners may still want to spin off SAS to get the jewels embedded in the software and services business. SAS’ results over the last few quarters indicate slowing top line revenue growth and reduced profit margins.
• Many of you have worked for a company that was acquired or merged. There is the old joke: “Question: How do you know when the new management team is lying about what the future will bring? Answer: Their lips move”. So what do you think is the main topic of conversation at the SAS water coolers at locations around the world? It is likely the new owner’s plans will be to squeeze more profit out of a business that has been built on long term service contracts. The premium acquisition cost of $36 per share, results in a $11.3B purchase, over $8B in debt. Today, SAS faces extremely competitive pricing from their competitors and the headwinds of a growing trend of many enterprises bringing BC/DR Programs in house. So what are they talking about inside the largest recovery services company in the world? Could be they just want to know what the next move will be and when? That’s the question many customers also have, which effects their decisions as they commit significant resources to long term BC/DR implementations. What is SAS’ future direction? What will happen to the service levels that have already declined since the Comdisco acquisition? What commitments is SunGard making to their customers and employees that are guaranteed?
• What should current SunGard customers do?
  We encourage all SAS customers and companies considering their services to keep their options open and negotiate knowing there is significant pressure on SAS to retain existing customers and revenue. 2004 saw a number of large subscribers migrate to their competitor, IBM BCRS, or an internal solution. We strongly recommend the following actions:
  • Whether a current customer or considering SAS, ensure you use a competitive business process. Contracts should be negotiated for one (1) year terms and include verbiage allowing you to terminate if ownership changes again
  • If your current contract allows a review due to change of ownership, use this opportunity to negotiate better pricing and T’s and C’s.
  • If your contract has an auto renewal clause, make certain you note the date, and prevent an automatic renewal. In the future, eliminate from the contract.
  • Do not extend contracts without competitive bids. Consider IBM, HP, and other local providers. SG will, in most cases, allow you to upgrade without extending the contract.
  • If you are comfortable with extending or entering a new agreement, ensure you reduce or eliminate the automatic annual price increases.
  • SAS contracts have no customer limitations to any of their offerings. Ask them to tell you how many other customers are in your immediate geography? What are your risks if there is a regional disaster? Most customers will be surprised and concerned to know “first come, first serve” may be much more onerous than they ever thought!
  • Look to other sources if you require significant test time. Your subscription fees include test time, but if you have an alternative source, you can, potentially, decrease those costs and/or be able to get additional test time at less cost.

So for the fate of the SAS customers around the world, it is not in the hands of the current SunGard management, but rather the decisions to be made by the new owners (seven private investment firms all historically driven to turn short term profits) that will now dictate the future of SunGard and its ongoing success or something less. RBZane Advisory Group has our finger on the pulse and will keep you posted on any new developments. We welcome your perspective - please contact us.

RBZane Advisory Group is available to assist you in your contract negotiation, either directly or indirectly. We would be happy to answer any of your questions or provide further information at anytime. Thanks for taking time to read our Point of View.