Aladdin Knowledge Systems
Aladdin Knowledge Systems
By: Shmuel Vashdi, Amit, Tomer Kanishai , Ori Kanfer, David Sugarman
1. Analyze the business environment in which Aladdin is active.
The Business Environment
Market need: The rapid growth in use of software applications that prevent software piracy and keep the intellectual property of the software manufacturers. Software losses in 1995 due to software piracy were estimated to be 13.1 billion US$.
What does Aladdin do (in 1996)? Aladdin Knowledge Systems Ltd. is a supplier of information security solutions for software developers. Aladdin develops, manufactures and markets proprietary software security and smart card products. Aladdin has 20,000 clients in over 100 countries including AT&T, CA, DEC, HP, IBM, Quark and Siemens.
The Products – The goal of Aladdin's products is to control access rights of an application or application group in premium packaged software and proactively protect the system against malicious activity. This includes a software suite that incorporates antivirus scanning, sandbox protection, personal and application firewalls and console-based deployment tools, as well as the hardware-based protection of the HASP dongle aimed at protecting against software piracy.
Business Arena – Hardware-based software security solutions section within the Anti piracy / Software Security market. Market size (1996) 150 MUS$.
The market – the market is segmented and analyzed from various perspectives:
Segmentation between software based solutions and hardware based solutions. The hardware based solutions account for approximately 80% of the total market. Consequently Aladdin is operating within the majority section in the market.
Segmentation is according to the major solution providers: FAST,Software Security,Rainbow (Today’s SafeNet) and Aladdin. Worldwide leadership of the Market is dominated by Rainbow (established just a year prior to Aladdin).
Customers of the software security products can be identified as:
- 70% leading developers and publishers of expensive software packages such as Microsoft.
- 15% – Vertical market software developers (market place information)
- 15% – Multinational corporation such as HP.
- Premium market – dominated by FAST
- Midrange market – divided between Rainbow and Aladdin
Geographic Segmentation of global market sales (in Units):
- 40 % -USA(high growth)
- 25% – EU
- 25 % APAC (High Growth)
- 10 % – ROW.
Aladdin Milestones (1984-2007)
Why did Aladdin buy FAST?
Meeting the strategic goals – As Aladdin indicated in their 1996 IPO on NASDQ they aimed at being a leading supplier of information security solutions for software developers. The business environment was dominated by Rainbow who controlled the world-wide market with respect to annual sales (1996 – 72M US$ – which accounted for almost 60% of the total market).
Financial stance and capability – FAST was a comparable size business rival to Aladdin. In order to gain dominance an acquisition had to take place. Rainbow's business size could not permit Aladdin to purchase them. Therefore, FAST posed a strategic potential opportunity for gaining market dominance and becoming a substantial rival to Rainbow.
FAST's sales in 1995 totaled 13M US$. Aladdin's Sales in 1995 totaled 11M US$. Thus both companies were equal in size with respect to annual sales (note – it doesn’t mean that they were equal in total market value).
Market share – By acquiring FAST and its intellectual property, Aladdin could gain access and control over the Premium market and have top to bottom market cover with respect to product positioning.
Price Competition – Price competition could become an increasing factor in the software market, which could, in turn, increase pressure on profit margins in the future.
Other reasons – New geographical markets, maximize shareholder value, acquire new products and services and gain control over supply chain.
2. Who are the customers for each product? How do they buy these products? How does this affect the nature of the customer acquisition and retention process?
- Hardware Dongle – Both Aladdin and FAST provided solutions for this market segment (HASP R3 and Hardlock respectively)
- Software Key – a product registration number that is entered upon installation in order for the product to be usable.
Sales and Distribution – Aladdin's products are marketed through independent distributors, resellers, mail order companies, directly to corporates, educational accounts under site licensing agreements, volume purchasing agreements and directly to end-users through direct marketing campaigns.
Customers and purchase decision process – The differentiation between customers of the various products differed by corporate size and ease of product use. Most premium software companies (product market cost of over 1000 US$) were inclined to purchase hardware-based security solutions as the software-based solutions were not sufficient. In small companies the decision to purchase a product is made by the top management which is usually more budget and ease-of-use oriented than security oriented. In large companies the decision for technological solutions lies upon the IT/Technological professionals thus ease of use is less of importance and the technology solution is of greater importance.
Consequently,Aladdin's HASP product which was cheaper and easier to implement was more appealing for smaller companies whereas FAST's HARDLOCK product was more appealing for big companies.
It was not likely for a company of any size to acquire two different solutions.
3. Who will be affected by the acquisition?
The M&A affects the market and the companies in various aspects:
Internal point of view – M&A affects a company's structure such as HR, Operations, R&D and may affect employees in all levels. For example since the products are similar in their solution a requirement to consolidate the R&D departments may rise and require retrenchment of employees.
From a market prospective the effects can be differentiated from different points of view:
Customers – may be worried that Aladdin will decide to cease production of one of the products. Customers may also fear lack of technical support, product updates and upgrades availability. that the reason for these concerns is that Aladdin will aim for efficiency and produce and promote just one. In retrospect Aladdin has taken the less expected yet more market oriented path and chose to continue the promotion and development of both products thus maintaining customer loyalty.
Distribution channels – since both products were sold and distributed by both companies there is overlapping of sales and distribution channels. Needs for efficiency may require consolidation of channels and consequently some of the channel suppliers may be adversely affected.
Business partners – FAST's business partners and strategic alliances may be adversely affected and may turn to promote competition.
Competition effects – as indicated before, the competitors may on the one hand benefit from available business partners and sale channels promoters and on the other hand may be adversely affected as their dominance is tampered by a significant expanding competitor.
4. What synergies do you see in this acquisition?
M&A can cause synergy or antagonism – If managed properly by the leaders of Aladdin the synergy will prevail.
The synergies in this M&A are of great importance with respect to economy of scale and may be viewed in the following ways:
- R&D – the merge of state of the art technology and engineers can leverage the engineering strength of both products and deliver next generation scalable product.
- Logistics,operations and production – merging production can save substantial expenses with respect to costs of manufacturing,logistics and operation. Reduce manufacturing costs by 20%.
- Distribution channels – consolidation of channels is of great importance especially with respect to the smaller target markets.
- Marketing and sales promotion – consolidation of products can provide Aladdin with enhanced marketing and sales flexibility,reduce costs were overlapping between the products,distribution,operations,logistics costs exists and enhance promotion and focus in less addressed (yet equally or more important) markets.
- Profit and loss – M&A can provide Aladdin with the financial flexibility in managing Marketing and sales efforts and thus increasing revenue and market dominance.
5. How do HASP and Hardlock measure up on a country-by-country analysis (for each country mentioned in the case)?
A country-based analysis presents the following data. Studying the information available indicates that FAST has dominant market share in central and western Europe (expected since it is a German based company) whereas Aladdin has a more non EU and ROW dominance especially in rising markets such as USA (technological Rise) Russia (post- perestroika economic growth) and Japan.
By acquiring FAST,Aladdin gains a strong overall global presence and can shift focus and marketing efforts in a more efficient and cost effective manner.
6. What is your plan? How should Aladdin go about merging its business with FAST? Should it phase out Hardlock?
Positioning ourselves as the board of directors of the consolidated company we would evaluate the following options:
- Phase out Hardlock and maintain only Aladdin original products and provide FAST's customers with alternative solution. Upside – R&D cost savings, simplification and easiness to maintain current overall business set-up. Downside – harming customer satisfaction loyalty.
- Consolidate products. Upside – on the long run: unifying the product life cycle, increasing efficiency and reducing production and marketing costs. Downside – immediate increase in costs due to need to redesign and set up a new unified product. May affect current FAST customers' satisfaction and raise their concern for product support.
- Maintain current situation. Continue to market and sell both products yet consider on the long run to move to either option 1 or 2 above. Upside – maintain customer loyalty and satisfaction. Downside – maintain high costs of production and distribution channels and be less efficient to a certain extent.
The decision recommended to be taken is option 3 (even though in retrospect we know exactly what was done – keep both products). In a market strongly oriented by sales and customer loyalty and branding it is almost vital to keep a product for a while. We would have considered altering it and branding it to an Aladdin brand name (Whereas Aladdin in fact maintained the same name for quite a while). In addition an option of strengthening the branding of the products based on geography and target market (premium vs. regular) is highly recommended to be done and can benefit Aladdin without creating overlapping distribution costs. The distribution channels should be altered to be efficient as the do not have substantial effect on the customers and may enhance overall time to market capacity of Aladdin.
7. What do you know about the challenge of M&As? Could you suggest examples? What aspect of this case did you find most interesting? Why? (for discussion in class)
M&A is among the most dynamic and difficult activities a firm can undertake. M&A can be viewed from many different perspectives. The high-tech sector has been one of the most dynamic in the economy over the last ten years. Competition here is based more on speed,talent and innovation than in most other industry sectors.
There are three types of Mergers: Horizontal Mergers,Vertical Mergers and Conglomerate Mergers.
M&A is basically about: Economics of Opportunity,strategy,organization,brand,law and ethics. The views of M&A process and key success factors differ. In the book Applied Mergers and Acquisitions By Robert F. Bruner, Joseph R. Perella, (Wiley Finance), 2004 , the key to overcoming the challenges and succeeding in an M&A are: Plan, goal-setting and benchmarks, getting prepared and adopting the best practice. On the other hand the KPMG firm indicate in their Mergers and Acquisitions: Global Research Report 1999 that they found that only 17% of deals had added value to the combined company, 30% produced no discernible difference, and as many as 53% actually destroyed value. In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value. KPMG recommends the following steps: pre-deal steps would be synergy evaluation, integration project planning and due diligence. During the process the following steps are recommended: selecting the management team, resolving cultural issues and communications.
Examples for deals can be the 1998 $77.2 billion merger between Exxon and Mobil as an example of a successful horizontal deal. They can also be vertical transactions,in which suppliers merge with buyers or distributors. The 1993 $6.6 billion merger between Merck,a pharmaceutical manufacturer,and Medco,a pharmaceutical distributor,is an example of a vertical deal.
In our view the most interesting aspects of the current case study of Aladdin and FAST M&A is the economics of scale – i.e. the fact that Aladdin has decided to basically risk its own existence and the shareholders give up a significant proportion of their holdings in order to double the company size. This is especially difficult and requires substantial leadership in light of the data presented above by KPMG where the majority of the M&A that were studied by them were unsuccessful. While putting together the business case for acquisition,there is usually a strong assumption about the sales of the related products. Meaning,the revenues generated from the products impacted by the acquisition will continue while the companies are busy with the integration process. This is a significant challenge that requires management's attention in all of the aspects of the organization.
Aladdin Signs Definitive Agreement to Acquire FAST Software Security AG
TEL AVIV,Israel–(BUSINESS WIRE)–April 16,1996–Aladdin Knowledge Systems Ltd. (NASDAQ/NMS: ALDNF) today announced that it has signed a definitive agreement to acquire FAST Software Security AG,a leading provider of software protection products. The consideration will consist of 3.15 million Aladdin shares. The transaction is accounted for as a pooling of interests.
FAST,a privately held company with headquarters inMunich,Germany,is one of the three largest firms in the international software security market,with 1995 revenues of approximately $13.5 million and operating income of approximately $6 million. FAST's Hardlock products,which are marketed in 20 countries,combine hardware and software to prevent unauthorized use of computer programs.
"The merger positions the joint company as the industry leader in technology,product quality,growth and profitability,and as the leading supplier inEuropeof software security products," said Yanki Margalit,Aladdin s Chairman and President. "In addition,the move adds considerable critical mass to Aladdin in terms of global market presence,financial strength and technological capabilities. These factors will be a solid platform on which to build our success in the future. Our increased resources will enable us to accelerate investments in the marketing and development of new and existing products." Margalit added that the company expects the deal to be accretive to its EPS.
"Aladdin now becomes the clear choice for all software developers in need of software security," said Margalit. "We will continue to develop,promote and support both the Hardlock and HASP product lines. We have a lot of appreciation for FAST and we intend to keep it as an independent German company. FAST customers will continue to enjoy the quality service and support they are accustomed to,with the added benefit of the strong financial backing of aUSpublicly-traded company with increased resources for R&D and marketing. Our synergy with FAST will improve our technology and support,worldwide," Margalit added.
The transaction is subject to the completion of a due diligence process,shareholders approval and other customary approvals and arrangements. Robertson,Stephens & Co. represented Aladdin in the transaction.
Aladdin Knowledge Systems Ltd. is a leading supplier of advanced solutions for software developers. Aladdin develops,manufactures and markets proprietary software security and development systems,including HASP(R) (Hardware Against Software Piracy),which combines hardware and software to prevent unauthorized use of computer programs,ASE(TM) (The Aladdin Smartcard Environment),an integrated toolkit for developing PC-based smartcard applications,and HOPE(TM) (The Human-Oriented Programming Environment),a revolutionary object-oriented team development environment. Aladdin,a public company traded on NASDAQ,currently has 5 international offices,distributors in 26 countries,and 10,000 clients in over 60 countries.
CONTACT: Aladdin Knowledge Systems
Aladdin signs FAST Software deal.(Aladdin Knowledge Systems plans to acquire FAST Software…
Publication: Israel Business Today
Date: Tuesday, April 30 1996
Aladdin Knowledge Systems has signed a definitive agreement to acquire leading Munich,Germany-based software protection product manufacturer FAST Software Security. An Aladdin spokesperson described the transaction,which involves the exchange of 315 million Aladdin shares,as "a pooling of interests."
Privately-held FAST is one of the three largest providers of software were security systems with 1995 revenues of around $315 million and operating income of nearly $6 million. FAST's Hardlock products,which are marketed in 20 countries worldwide,combine hardware and software.
Aladdin Signs Letter of Intent to Acquire FAST Software Security AG; Aladdin Also Signs Letter of Intent to Acquire the Software Security Business of Glenco Engineering Inc.
From: Business Wire | Date: March 4,1996 | COPYRIGHT 1996 Business Wire.
TEL AVIV,Israel–(BUSINESS WIRE)–March 4,1996–Aladdin Knowledge Systems Ltd. (NASDAQ: ALDNF) today announced that it has signed a Letter of Intent to acquire FAST Software Security AG,a leading provider of software protection systems. The consideration will consist of 3.15 million Aladdin shares,plus an additional number of shares with a total value of $8 million at the closing. The transaction is expected to be accounted for as a pooling of interests.