The Big News that broke just before this year's ALA Annual Conference, which was held June 25-28 in Chicago, was the acquisition of Dynix by rival Sirsi. The combined company, SirsiDynix, is by far the largest in the library automation industry.
That such a merger took place isn't a shock. Many, including me, have seen it coming for quite some time. It's only surprising that it took this long; such consolidation has taken place in other industries earlier and more aggressively. In my May column I forecasted this:
The business landscape will change. A broad look at the slate of companies developing library software reveals a fragmented industry, consisting of a number of companies struggling to increase their slice of a fairly small economic pie. ...
Although this has been predicted for years, I still believe that there will be another round of vendor consolidation in the library automation industry. It could happen before this column makes it to press, or it could brew for another year or two, but expect some change in the business landscape, whether it's a minor reshuffling or a major restructuring of the industry players.
The change that I predicted turned out to be a major restructuring. Folding two of the largest companies into one transforms the dynamics of the industry. Let's take a look at some of the acquisition's details.
Dynix Finds a New Owner
Although characterized as a merger, what took place was an acquisition of Dynix, the largest company in the industry, by Sirsi, the third-largest player. (Innovative Interfaces, Inc. still holds the No. 2 rank, by most measures.) The financial backers of Sirsi, primarily Seaport Capital (SC), bought out the owners of Dynix, a group of venture capital funds controlled by Hicks, Muse, Tate & Furst. When the transaction is complete, SC will hold ownership of at least 80 percent of the company, executives and directors of the company will hold 10 percent, and Hicks, Muse, Tate & Furst will retain a 10-percent interest. Pat Sommers, the president and CEO of Sirsi, will hold the same position in the combined company. Jack Blount, who was president and CEO of Dynix, will be retained as an executive technical consultant in charge of the completion of Horizon/Corinthian 8.0.
It isn't all that shocking that Sirsi emerged on top. For the last several years, I've noticed that Dynix is an atypical investment for its venture capitalists. Their other holdings tend to be in real estate and manufacturing. Since the burst of the high-tech bubble, holding a software company isn't very sexy, and the library automation arena isn't exactly a highgrowth sector. With 6 years elapsed since its initial investment, and with the bank debt assumed in the purchase largely paid down, it makes sense that Dynix would need to find new ownership.
How SirsiDynix Came to Be the Biggest Fish
Seaport Capital shows a better affinity for the library automaton industry than Dynix's venture capitalists do. The company's portfolio of investments includes companies in information and business services-a broad category that easily covers library automation. SC has also demonstrated interest in growing its investments related to Sirsi. In addition to its initial recapitalization of Sirsi in August 1999, the company backed Sirsi's May 2001 acquisition of Data Kesearch Associates (DRA). And in January of this year, when Sirsi acquired Docutek, a small company with products in virtual reference and electronic reserves, it became clear that SC was interested in further expanding-not divesting-its investments in this industry.
The acquisition of Dynix represents another major investment in Sirsi. From the perspective of the Dynix employees, it may well be that SC, with its proven commitment to the automation industry and its experience with companies with similar business activities, will be perceived as a more progressive buyer.
The Birth of a Leviathan
SirsiDynix emerges as the largest company in the industry by far. Its earning power exceeds $125 million in annual revenue, and it will employ well over 700 and have a customer base of 5,200 libraries. The combined companies' software development personnel will total more than 180-the largest ever in the industry.
The new company takes charge of quite a number of library automation products, including two flagship automation systems (Sirsi Unicorn and Dynix Horizon), three legacy automation systems (DRA Classic, MultiLIS, and Dynix), and a resource-sharing application (URSA). Both companies also have portal front ends for their automation systems (Sirsi's Enterprise Portal Solution and Dynix's Horizon Information Portal), and both have digital library platforms (Sirsi's Hyperion Digital Media Archive and Dynix's Horizon Digital Library).
The company also rolls up the remnants of many companies and products that the two had previously acquired (see figure). As noted earlier, Sirsi acquired Data Research Associates in May 2001. DRA completed its initial public offering to become a publicly owned company in July 1992. In January 1993, it obtained the Australian Starlight Management System (SMS), and in October 1993, it acquired the INLEX/3000 system from the now-defunct INLEX Corp. of Monterey, Calif. In October 1994, the company purchased MultiLIS from Sobeco Ernst & Young.
Dynix brings forward an even broader legacy. Dynix Systems, Inc. was originally founded in October 1983. The ownership of the company changed a few times before "Baby Bell" Ameritech finally purchased it in January 1992. Ameritech had previously purchased NOTIS Systems, Inc. in October 1991, and in April 1990, the company had acquired the rights to the library automation products of the OCLC Local Systems Division (LS/2, LS/2000, ACQ-350, and SC350).
Ameritech Library Systems (ALS) was formed as a separate division in May 1994, headed by Dynix executive Paul Sybrowski. ALS acquired the URSA resource-sharing product from the Australian company CPS Systems in November 1999. Following the acquisition of Ameritech by SBC, its library automation division was sold to venture capital investors (21st Century Group, Green Leaf Ridge) and the company's name was changed to epixtech, Inc. In January 2003, the company adopted the name Dynix.
This history shows the huge legacy of library automation now concentrated within a single company. Several of the companies listed have antecedents not mentioned that stretch the history back at least another decade.
So What Does It All Mean?
SirsiDynix, through the combined customer libraries of both companies, commands a significant share of the market. Precise figures are not yet available, but I estimate that the company holds at least 50 percent of the U.S. public library market and 30 percent of the U.S. academic library market. Both companies market worldwide, with offices and distributors in Europe, Asia, Latin America, and Africa. With the saturation of the North American market, international sales will play a huge role in future growth.
So what does this mean to Sirsi and Dynix customers? I see no major cause for alarm. The company has put forward a strategy to continue developing and supporting the flagship automation systems of both companies. Both systems have a large and growing installed base of libraries, and it would not be in the company's best interests at all to disrupt either product's trajectory.
Dynix is on an ambitious development effort to finish a comprehensive redevelopment of Horizon, which will culminate in an integrated library system that will be called Corinthian 8.0 for academic libraries and Horizon 8.0 for all others. This effort has been validated by a study that Sirsi commissioned Gartner to perform as part of its due diligence research prior to the acquisition. The success of SirsiDynix depends on whether it can retain the loyalty of both the Dynix and Sirsi customer libraries. If either side sees its product threatened, that essential loyalty will be in jeopardy.
A look at the business details of the acquisition shows that it's quite plausible for the new company to sustain the same levels of support and development for all its product lines. Both companies were profitable prior to the merger, with revenues sufficient to fund their operations as independent companies. Combining the two companies creates plenty of opportunities to reduce costs and to increase profitability without reducing product development or support. For example, administrative departments such as human resources, finance, accounting, and marketing that existed in both companies can be combined.
There will also be savings in executive salaries. As the companies merge, the number of positions at the vice president and director levels will be far fewer than the total number was in the separate companies. It will, of course, be interesting to see how SirsiDynix blends the two camps'leadership. I expect to see a fairly even division between Sirsi and Dynix executives.
Sirsi comes into this acquisition with recent experience in blending companies, gained through its 2001 acquisition of DRA. In the 4 years since that merger, DRA has been fully integrated into Sirsi. DRA's former offices have been maintained, and the current management of Sirsi includes several former DRA executives. In my conversations with former DRA staffers, I'm impressed by the warm loyalty they now show to Sirsi. Integrating Dynix into Sirsi, however, will be a much larger project.
Looking Toward Tomorrow
As I write this column, it's been only a few short weeks since the announcement. We'll soon see the shape of the new company as vice presidents and directors are appointed. By late 2005, the new Horizon/Corinthian 8.0 ILS will hit the streets. Will the new company be successful in winning the loyalty of the remaining Dynix Classic sites as they come up for inevitable migrations? How will the company position Horizon and Unicorn relative to new sales? SirsiDynix faces major challenges as it works out its future.
It will also be interesting to see how libraries will respond to this changed landscape. We librarians demand choices as we pursue automation options. Will the emergence of a leviathan move us toward more underdog companies? If so, this new dynamic in the industry may create opportunities for its smaller competitors. Will some of these band together to compete better? Will companies that rely on steady sales ultimately win over those that grow through acquisition? The answers to all these questions are yet to be worked out. The only thing I can be sure of is that interesting times lie ahead. Stay tuned.