Economy and Manufacturing & Technology

Software firm on the rebound: Move to private status, restructuring help Made2Manage move into profitability

March 7, 2005

Made2Manage Systems Inc. is beginning to make strides, both in profitability and perception, since completing its metamorphosis from a public to private enterprise 18 months ago.

The software maker that staged its initial public offering in 1997 posted a peak loss of $4.7 million four years later amid a soft economy. Its health improved the following year in 2002, when losses totaled $690,000. But by then, Made2Manage executives had concluded an investor-led acquisition would be the best elixir to nurse the company back to health.

Suburban Boston-based Battery Ventures, a venture capital giant, acquired the company in August 2003 for $30 million, or $5.70 per share.

Through a restructuring, which included letting go more than a quarter of the work force, Made2Manage achieved its highest profit level in its 19-year history last year. It further recorded its sixth consecutive quarter of profitability in the fourth quarter of 2004, with a 34-percent increase in revenue over the fourth quarter of 2003, according to a company statement.

CEO Jeff Tognoni declined to divulge the profit amount but said revenue this year should increase 15 percent from last year's figure of roughly $30 million.

"It wasn't losing money when we bought it, but it wasn't making money, either," Tognoni said. "We did restructure the business three weeks after we closed. It wasn't a hack job, let's put it that way. We didn't do it just to make it profitable."

Battery Ventures brought in Tognoni and Tom Millay, vice president of sales and marketing, to take the reins of the 19-yearold company after cutting loose former CEO David Wortman.

Wortman directed the company's shift to a private venture and told IBJ in June 2003 that it could be more flexible and innovative in its strategies and no longer would be driven by the quarterly reporting cycle.

Wortman, who is now president and CEO of locally based Mezzia Inc., which operates an Internet site for hospitals and group purchasing organizations to accept real-time bids from suppliers, declined to comment about Made2Manage's turnaround.

The stringent financial reporting rules imposed under Sarbanes Oxley have made it far more expensive to be a public company. The cost for one of Made2Manage's size can reach $1 million annually. That, coupled with the short-term, highgrowth expectations of stockholders, are aspects Made2Manage no longer needs to stress over.

Instead, the maker of enterprise resource planning software can be satisfied with slower growth while focusing on existing customers instead of constantly ogling new markets, which is commonplace in the industry, Tognoni said.

Most of Made2Manage's customers are small or midsize manufacturers and distributors. The company has grown its customer base from 1,700 at the time of the acquisition to 2,000.

To shore up its customer service, new management streamlined existing customer sales by rolling the area into one team-an upgrade from the previous setup in which nine people separately phoned customers, Millay said.

In the restructuring process, Tognoni sliced the staff from 210 to 146. The cuts came in three areas: sales, marketing, and research and development. Employment should rise to 155 soon, however, as growth has prompted the first round of hiring under new ownership.

Battery Ventures is pleased with its purchase, said Neeraj Agrawal, a partner at the venture capital firm.

"We knew it was a good company through our diligence," he said. "But in fact, it's better than we thought. The management team has really executed."

The transformation to a private company has not been without some pains. Competitors, including one Tognoni described as "ethically challenged," jumped on the job reductions to portray Made2Manage as an unstable operation.

"We were perceived as raping and pillaging here," he said. "Why would a venture capital company buy something and proceed to destroy it? It's just stupid. You don't get an investment return by making something less."

Even today, the attacks affect sales, Tognoni said, as he still hears from customers who tell him rivals continue to take jabs at the company. The progress the company has made the past 18 months speaks for itself, Tognoni said, evident by its growing customer and revenue base.

Made2Manage's biggest threat is publicly traded Epicor Software Corp. in California, Tognoni said. Although Tognoni declined to divulge specific financials, he said the company's percentage of profit compared to revenue is larger than Epicor's.

Epicor posted profit of $25 million on $226 million of revenue in 2004, according to its financials.

As an analyst who follows Epicore and who used to track Made2Manage, Mark Schappel, vice president of equity research for Cleveland-based KeyBanc Capital Markets, said size does matter.

"[Made2Manage is] a solid company with solid products," Schappel said. "But still, it's just a matter of scale. That's what it gets down to."

If the steady growth continues, Made2Manage could return to the public realm, Tognoni said, noting the company would need to reach much larger annual revenue than its current range of $35 million. It has made a few small moves.

In August, it purchased Jacksonville, Fla.-based DTR Software International, a provider of manufacturing, distribution and financial management software for plastics processors. Made2Manage has 20 employees at the location.

The next month, the company bought some of the assets of now-defunct Minneapolis-based ADS Software and ADS Information Systems, a former reseller of Made2Manage Systems.

Under the terms of the agreement, Made2Manage acquired the intellectual property rights to Made2Manage-centric products formerly owned by ADS.

When Made2Manage went public in 1997, it made perfect sense for a growing software maker to cash in on the burgeoning NASDAQ's access to new capital markets. In fact, Tognoni's role as CEO of the former Millennium Dynamics Inc. in Cincinnati was to take the company public or sell it, upon his arrival in 1997 from Texas Instruments.

Tognoni later joined Battery Ventures as a "quasi employee" to locate software companies the investor could take private. He found Made2Manage and brought Millay with him. Millay also worked at Texas Instruments and is an Evansville native.
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