Sterling Software, Inc.

views updated

Sterling Software, Inc.

8080 N. Central Expy.
Suite 1100
Dallas, TX 75206
U.S.A.
Phone: (214) 891-8600
Fax: (214) 739-0535

Public Company
Founded: 1981
Employees: 2,150
Sales: $259.2 million
Stock Exchanges: New York
SICs: 7372 Prepackaged Software; 7373 Computer Integrated Systems Design

Sterling Software, Inc., is a computer software company that is in the forefront of developing products for electronic data interchange, otherwise known as EDI. EDI’s use of universal standards allows documents to be transmitted computer-to-computer from one business to another even though the businesses may use different software and hardware. Over 40,000 companies in the United States use EDI to communicate electronically, and EDI serves as the foundation for the Clinton administration’s strategy to “reinvent government.” As the leading EDI supplier, Sterling provides software for the banking, grocery, hardware, transportation, and retail industries, and the federal government. Of all the industries using this software application, however, Sterling has been most influential in the health care industry, where its market share is an impressive 88 percent.

The company was jointly founded in 1981 by Sam Wyly, Charles Wyly, Jr., Sterling Williams, and Philip Moore, but the driving force behind Sterling was Sam Wyly. Occasionally, a company that is led by a strong-willed chief executive officer or chairman of the board will reflect the characteristics of the person himself. This is what happened at Sterling. At the age of 28, Wyly started University Computing Company (later renamed Wyly Corporation), and built it into one of the first and largest of the data processing firms. After a number of years as head of University Computing, Wyly then decided to establish a telecommunications network called Datran. Competing directly with AT&T was too difficult, however, and after huge losses Wyly was forced to resign from the company in 1979.

After the unsuccessful venture with Datran, Wyly sold most of his holdings in Wyly Corporation and invested heavily in some less-than-successful enterprises, including Scott Instruments Corporation, a manufacturer of electronics equipment, and Bonanza International Corporation, a steak restaurant franchise. His greatest success came with Earth Resources Company, an operation he founded with his brother Charles for $10 million and subsequently sold to Mapco for $400 million in 1981. With a large cash reserve, and plenty of confidence, Wyly was ready to begin another public venture.

Along with his brother Charles, Wyly brought in Moore and Williams, who had worked for him at University Computing, to help set up Sterling Software. Wyly became chairman of the firm, his brother was appointed vice chairman, and Williams was chosen to act as Sterling’s president and chief executive officer. Organized as a Dallas-based umbrella organization, the group’s strategy was to grow quickly by means of acquisitions and internal research and development. Immediately, Sterling began to purchase small, independent computer software companies. While retaining the engineers from these firms, Wyly applied his financing and marketing know-how in order to promote Sterling’s rapidly increasing software product line. By June 1983, Sterling was performing so well that Wyly decided to issue a public stock offering at $9 per share. After one week, Sterling stock shot up to $18 and at the beginning of August was trading at $23 per share. The Wyly brothers owned approximately 37 percent of the company, or $1.4 million shares.

Sterling was growing rapidly under Wyly’s leadership. In 1985, Wyly and his management group decided to acquire Informatics General Corporation, a firm that developed mainframe utilities and end-user applications. What was surprising about the acquisition was the size of Informatics—the company was nearly 10 times larger than Sterling. Informatics’ sales for 1984 were $191 million, as opposed to Sterling’s $18.7 million. However, the size of the acquisition did not make Wyly hesitate in the least. Wyly knew that Informatics had not performed well financially in 1982 and 1983 and that earnings were down in 1984. He also knew the company had suffered constant change in both organizational structure and personnel over the same period. In fact, many of the executives who helped establish Informatics had recently resigned due to power struggles and personality clashes within the company.

Informatics fought back. Although the company was able to withstand an initial offer of $25 per share for its purchase, Informatics’ management knew that time was growing short and that Wyly was not about to disappear. Walter F. Bauer, chairman of the board of directors at Informatics, enlisted the aid of Smith Barney, Harris Upham & Company to resist what had developed into a hostile takeover attempt. After another offer to acquire Informatics at $26 per share failed, Wyly and his management team made a final offer of $27 per share. Successful at last, Sterling purchased Informatics at the price of $126 million. In a management transition that was notable for its lack of problems, Sterling quickly incorporated Informatics’ applications products into its own banking application software.

Sterling’s acquisitions helped the company move aggressively into three of the fastest growing areas of the software industry: systems applications, professional services, and banking software. The company’s legal software, which allowed lawyers quick and easy access to data bases for thousands of court cases, was so innovative that it developed a stranglehold on that sector of the market. In addition to the rising demand for its legal software, the company’s software applications for accountants, real estate brokers, and other professionals began to sell beyond management’s expectations. At the same time, Sterling also jumped into the big leagues by reaching agreements with such customers as General Motors and International Business Machines. IBM began marketing one of Sterling’s programs that provides a database connection between mainframe computers and personal or microcomputers. Many industry analysts regarded it as a major step in Sterling’s development when IBM agreed to sign a $900,000 contract and market Sterling’s applications and programs on its own equipment in India.

Although revenues for Sterling jumped tenfold and reached $239 million shortly after its acquisition of Informatics, the company began to experience some difficulties. As the stock market boomed during the late 1980s, and as stocks of software companies began trading at 15 to 20 times their cash flow, Sterling gradually lost its ability to acquire new companies. In 1986, the Dallas-based firm lost a bidding war with other suitors for a California-based graphics company, Integrated Software Systems Corporation, and for Martin Marietta’s software division. In addition, the company’s earnings fell nearly 15 percent at the beginning of 1987, to $1.2 million on sales of almost $50 million. The decline in earnings was partially due to IBM’s decision to suddenly terminate four out of nine programming contracts agreed upon during the previous two years. Sterling’s stock fell precipitously and was trading at a price of $9 per share.

Throughout 1988 and 1989, Sterling’s sales remained flat. Yet Wyly and his management team were working on a strategy to reinvigorate the company and increase sales. By 1990, Sterling was climbing its way back and reported sales of over $200 million. The Federal Systems group, which provided specialized technological services to the federal government, experienced its best year yet. One of the company’s two largest divisions, the Federal Systems group accounted for nearly half of all revenues in 1990 and was awarded a five-year $210 million contract by the National Aeronautics and Space Administration (NASA). At the same time, the Systems Software group, the company’s second largest division, which accounted for 37 percent of its revenue, implemented three new business ventures, including the Corporate Storage Management Initiative, the Corporate Applications Management Initiative, and the Corporate Data Communications Initiative.

The creation of the Electronic Data Interchange (EDI) group, however, signaled a promising future for Sterling. Established in 1990, the Electronic Data Interchange group soon became the fastest growing division of the company’s business; in the group’s first year, Sterling’s EDI contracts experienced a 79 percent jump in revenue. The development and growth of Sterling’s EDI group was partially due to the purchase of two leading EDI companies, Lakestone Systems, Inc., and Metro-Mark Integrated Systems Inc. With these two acquisitions, almost overnight the company became the leader in EDI software and the second largest supplier of EDI services. Not wasting any time, the EDI group began to take advantage of its market position and quickly expanded its international presence.

Due to Wyly’s highly effective management, Sterling’s revenues continued to grow during 1991. The company reported revenues of $228.9 million, an increase of 10.6 percent over the previous year’s figure. With the major part of the debt from its acquisition of Informatics paid off, Sterling began purchasing software and information services firms once again. Knowledge Systems Concepts was acquired and merged into Sterling’s Federal Systems group, and Redinet Services Division of Control Data Corporation, one of the largest suppliers of electronic data interchange services, was also acquired and subsequently merged with Sterling’s EDI group. The company continued its plans for worldwide expansion by acquiring a software development facility in Tefen, Israel. This purchase gave Sterling a presence in the burgeoning information management services market in the Middle East. Because the majority of Sterling’s revenues in 1991 was derived from repeat business, the company’s strategy was to help its more than 90,000 customers develop their advanced-computing systems and to provide comprehensive client support.

Sterling had a watershed year in 1992. The company had clearly developed into one of the leading suppliers of storage management tools, data communication products, information management reporting applications, and software development items. Although the market in which its Federal Systems group operated had almost stopped growing, this news was more than offset by the rapid growth and phenomenal success of its EDI group. In both 1991 and 1992, the company’s EDI revenues grew by more than 30 percent. More importantly, however, was that Sterling’s EDI business amounted to approximately 20 percent of the entire market. Sterling had cornered the market in certain areas: the company provided services and products to over 90 percent of the total customer base in the pharmaceutical industry, to nearly 70 percent in the hardgoods industry, to over 50 percent in the insurance and healthcare industry, and to approximately 46 percent of the grocery stores in the United States. With the acquisition of Entity Software, a British firm, Sterling planned to move more aggressively in the European market for EDI services. The two most important acquisitions of the year included National Systems, a firm that specialized in EDI products for the banking industry, and Knowledge Systems Concepts, a supplier of professional engineering services to the United States’s armed forces.

If 1992 had been a good year for Sterling, 1993 was even better. Revenues increased to $411.8 million while earnings per share jumped a whopping 336 percent to $1.22. The acquisition of Systems Center, Inc., a leading software supplier and one of Sterling’s major competitors, was an important move for the company. Systems Center was one-half the size of Sterling, and dramatically increased Sterling’s presence in the systems management and data communications software markets. The purchase of Systems Center led to a reorganization of the entire company: the Electronic Data Interchange (EDI) group was reconfigured into the Electronic Commerce group by adding both Sterling’s and System Center’s communication software product lines and broadening its approach to electronic communications; the Systems Software group was rechristened the New Enterprise Software group and concentrated on the company’s systems software business; the Federal Systems group remained much as it had always operated; and the International group was established to coordinate the activities of Sterling’s growing international operations.

Under Wyly’s leadership, by the mid-1990s Sterling had grown into one of the largest software and computer services firms in the world. His uncanny ability to incorporate the services and product lines of firms that Sterling purchased was evidence of his managerial acumen. With 22 acquisitions since the company first started business, undoubtedly Wyly would continue to look for new opportunities to expand Sterling’s business.