IssueAlert Emerging Technologies ~ June, 2004

Harris Computer Systems recently acquired Cayenta Canada Corporation. Cayenta is a provider of customer information systems and enterprise resource management solutions to utilities, city governments, and educational institutions.

For background, Harris addresses the customer service and financial management requirements of municipal and cooperatively owned utilities. Harris offers two completely integrated customer information systems, billing and financial management solutions for single and multi-service utilities. The company's NorthStar and Select suite of products targets utilities serving less than 100,000 customers. Harris services over 1,250 customers throughout North America, the majority of which are in the United States.

This marks the fourth acquisition that Harris has undertaken in the last two years. For a better understanding of how Harris is able to achieve such an aggressive number of purchases, one must first understand the company's ownership structure.

The Constellation Connection
Harris is a member of the Constellation Software Inc. group of companies. Constellation Software is a rapidly growing conglomerate of vertical market software companies. The company is quite reminiscent of a venture capital firm. Constellation's growth is based on a strategy of identifying promising vertical market software firms, acquiring them, and then integrating them into the Constellation family while building on their fundamental strengths to help them succeed.

A visit to Constellation Software's web site (www.csisoftware.com) also reminds one of a venture capital firm. The company lists its acquisition criteria, and invites inquiries from companies that meet its criteria. Unlike a venture capital firm, however, the company utilizes a “buy-and-hold” strategy.

Harris was Constellation's second significant acquisition back in 1996. According to Jeff Bender, President of Harris Computer Systems, the relationship has been quite beneficial to the Company, its employees and its customers. “Constellation Software provides operational benchmarking and best practices, long term strategic planning assistance, as well as, access to capital when required, while at the same time leaving each company to operate independently.,” said Bender.

In March 2004, Harris purchased substantially all of the assets related to Computer Software, Inc.'s Software Division. As a result of the sale, Harris now owns all of the Utility Billing, Fund Accounting, and related software that Computer Software, Inc. (CSI) had developed over the last twenty years. Harris is now responsible for the support of the more than 130 CSI customers who utilize these solutions.

In May of last year Harris purchased substantially all of the assets related to Manatron Inc.'s Financials Product Line. As a result of the sale, Harris now owns all of the Fund Accounting, Payroll, Utility Billing and related software that Manatron had assembled over the last fifteen years. Harris is now responsible for the support of the more than 500 Manatron customers who utilize these solutions.

In October of 2002 Harris acquired MCS Spectrum (MCS), a provider of software solutions for utilities and local government. The product suite of MCS included a customer information system (CIS), a financial management system, as well as local government software. Harris now operates and manages the 350 utility and local government installations.

The Cayenta Acquisition
According to Bender, Harris had been interested in acquiring Cayenta for some time, and felt fortunate to have made such a strategic acquisition. “Cayenta extends our existing core CIS portfolio and enhances our financial management product line with a complete enterprise offering,” said Bender. “The combination of the two companies under Harris provides the market with a single, vertically-focused vendor with solutions for organizations of almost any size.”

Indeed, the acquisition of Cayenta does provide Harris with a product footprint to serve virtually any municipal or co-operative of any size. Prior to the acquisition, Harris could serve utilities that had less than 100,000 customers with its Spectrum practice targeted to smaller utilities, and its Northstar practice targeted to mid-size utilities. The acquisition of Cayenta will now provide the products needed to allow the company to compete for the larger utilities.

This sentiment was echoed in a recent discussion I had with Michael Gardner, President of Cayenta. "The Harris acquisition of Cayenta positively demonstrates that the market is too varied for a single product,” said Gardner, President of Cayenta. “Bringing these organizations together provides the industry with a single vendor who can provide the right complexity of application to any size of utility. Other organizations have tried to fill this void by fitting their solutions into utilities that are either too large or too small for their core applications, and the results have been less than stellar. This acquisition finally addresses the needs of unique utilities across the broadest spectrum of the market. I think Jeff Bender and Craig Ross have got a winning combination here, and this quiet market finally has something to watch."

Harris plans to continue to build the Cayenta brand, and is committed to the continued development of the Cayenta flagship products Cayenta Utilities, Cayenta Financials, and Operations Manager.

The acquisition of Cayenta also provides Harris with a firm footprint in both the cooperative utility market and the city and educational financial management segment. Cayenta's products, technical knowledge, and services staff also appear to be complementary to Harris's own. Moving forward, Harris will also look for synergies that enhance the company's competitive position.

On June 3, 2004, Cayenta became a wholly owned subsidiary of Harris. Cayenta will operate as a separate business unit of Harris, and will continue operations from their existing offices in Vancouver, British Columbia. Craig Ross succeeds Mr. Gardner as President of Cayenta.

So is Harris' acquisition of Cayenta an indication that there will be a near-term consolidation among CIS vendors? According to Bender, the answer is yes. “The CIS market dynamics will force this to happen,” said Bender. “Time lines in the CIS market are generally much longer than other industries. Therefore we do not believe that there would necessarily be a significant increase in the natural consolidation trend that we have witnessed over the past few years. We would, however, expect to see one or two additional acquisition transactions occur over the next twelve months. We are encouraged by the recent consolidation activity that we have been seeing in this market space. We believe that a fewer number of financially strong and mark et focused companies will result in better applications and better future products for utilities.”

I agree with this assessment. A large number of vendors will likely force some organizations to increasingly look at acquisition strategies. Don't be surprised to see Harris oblige some of these companies.