Aldon Acquired by Marlin Equity Partners

May 14, 2007 Timothy Prickett Morgan

Another private equity firm has swooped into the i5/OS and OS/400 market and snapped up a big player in the business. Last week, application lifecycle management software maker Aldon, announced that Marlin Equity Partners, a private equity firm based outside of Los Angeles in El Segundo, California, had acquired it. Since Aldon is privately held, the financial terms of the deal were not disclosed.

Marlin Equity was founded in 2005 by a group of people who used to work for another investment firm called Gores Technology Group. Marlin Equity’s founder, David McGovern, was a managing director at Gores and was the head of mergers and acquisitions for many years. People in the i5/OS and OS/400 market would recognize the Gores name as the firm who took Systems Software Associates private in April 2000 for $52 million; that company was bolstered by other private equity backers, retaken public five years later, and then acquired by ERP giant Infor a year later for $1.6 billion and taken private again.

The other time you might have heard McGovern’s name is a few weeks ago, when Marlin Equity first appeared on IT Jungle’s radar when it acquired CMS Software, a mid-tier provider of ERP software that runs on the i5/OS and now the Windows platform, and merged it with another company that it acquired called XKO Software, which has ERP software for Windows boxes. Those combined firms have annual sales in the range of $50 million and have 1,400 customers. Marlin Equity, as it turns out, has acquired a number of other ERP players, including Intuitive Manufacturing Systems, Relevant Business Systems, and SupplyWorks–each which have capabilities that complement each other and customer bases that will eventually allow for cross-selling of technologies. This is exactly the same strategy that big acquirers like Oracle, Infor, and others have taken to build up their businesses, but on a different scale and aimed at different customer sets.

Don’t get the wrong idea by the way. Marlin Equity is not going to try to merge Aldon’s ALM products, which help manage the way companies create and deploy their own applications, with its new ERP holdings. Although it may end up using Aldon products to create and maintain those suites.

Marlin has been very quiet about exactly how it plans to integrate these five ERP companies–if at all–which is a luxury that you have when you are not only a private company, but one backed up by a $150 million investment war chest. You don’t have to say squat to anyone, but you just go about your business, which in this case is to find companies that have good products, solid roadmaps, loyal customers, recurring revenue streams (in this case, for both software licenses and maintenance), and a bold product vision–but who are missing the one big thing that Marlin can provide: capital to make vision into reality, and to do so in a manner that is a lot faster than Aldon could do on its own.

This is precisely why Daniel Magid, who used to be president and chief executive officer at Aldon until the acquisition last week, and his father, Albert, who was chairman, decided ultimately to sell their company to a private equity firm. Magid has not left the company, by the way, but is staying on as a strategic consultant to help steer Marlin’s acquisition strategy as it builds up a presence in the ALM software market. For the past several years, in fact, Magid has been grooming Matt Scholl, who was chief operating officer at the company, to take the reins so he could spend more time talking to customers and thinking about how to grow the company, so the title changes at Aldon are not as significant as you might think. Scholl is now, in the wake of the Marlin Equity acquisition of Aldon, the company’s president and chief operating officer, and he says that the company is hiring as it builds in the wake of the acquisition.

Aldon was founded in 1979 by Albert Magid and Don Parr, and was initially a services company focusing on the IBM System/3X minicomputer market. A few years after its founding, Magid wanted to turn Aldon into a software company and Parr wanted to stay in the services business, so Magid bought out Parr and took over the whole enchilada. Today, the company is located in Emeryville, California, in the Bay Area, has 14 offices around the world, and over 1,400 companies using its software change management and now application lifecycle management tools. Scholl says that Aldon just closed out its fiscal year and grew sales by 12 percent, which is dramatic growth against the decline in the System i5 sales in recent quarters. “New sales are driving growth,” says Scholl, “and we think that we are one of the few ALM vendors in the System i market that grew in the past year.” Aldon has talked to customers about the deal, and says that they universally are pleased that Aldon will have more capital to bring to bear, and Scholl has committed to keep Aldon’s support top-notch.

According to Magid (the son, not the father), Aldon looked at all the options it had as it tried to find a way to fund its future development and marketing projects, including venture capital firms (who invest in companies that they plan to help take public), private equity firms (which may or may not be interested in public offerings in the company’s they invest in), as well as financing through bank loans and other debt. In tandem with these financing efforts, Magid and Scholl were looking at the kinds of features they wanted to add to the products, and calculating the time it would take to build them versus acquiring another firm or partnering to provide that functionality. Magid says that partnering was not ideal, because a partner can take its code in a different direction than where Aldon might want to go. Acquiring other companies is very expensive, and would be limited by the amount of cash that Aldon could come up with on its own. And building new features, modules, and products takes time and money to get to market, and even longer to get established.

“We ended up picking a private equity group where their object is to find a platform product and then buy other products to build out that platform,” says Magid. “Marlin Equity is looking for Aldon to be that platform in the ALM space.” In fact, Magid has already reached out to potential companies to be acquired, and Marlin could be doing more deals in the next few months. “My job is basically unchanged,” says Magid, except for the additional role of evaluating companies that should be brought under the Aldon umbrella with Marlin Equity’s money. “This is what is exciting to me–looking at companies, evaluating them, and working out deals that make sense for everyone involved.”

The economies of scale and scope, as well as cross-selling potential and recurring maintenance streams, are what all acquirers in the IT space are after–whether they are public companies, private companies, or private equity firms backed by the deep pockets of people and institutions that invest in their funds. “It is a whole lot easier to sell products to a happy customer than to try to sell something to someone who doesn’t know who you are,” says Magid.

While not tipping his cards too much, Magid gives a few hints about where Aldon might be doing some acquisitions. Magid is looking for tools that visualize project management and task management in the development process that have Web-based, graphical front ends. He is also looking to expand Aldon’s ALM toolset from deploying in-house developed applications to deploying third-party packages and integrating with help desk support software. Deals will almost certainly be done to increase Aldon’s support application development and deployment using a services oriented architecture approach, too, and Magid has his eyes on various and unspecified utilities and testing tools. He does not, by the way, envision Aldon moving into other sub-segments of the i5/OS and OS/400 market, such as high availability software or systems management.

It seems likely that Marlin Equity will move fast, since every company is apparently for sale these days and there is an awful lot of private equity money sloshing around. So watch this space.

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