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SIRSI Acquires DRA
by
Posted On May 28, 2001
Consistent with the trend toward consolidation in the library automation industry, SIRSI Corp. (http://www.sirsi.com) has purchased one of its major competitors, Data Research Associates, Inc. (DRA). While SIRSI has been steadily attracting new customers and developing new products, DRA has been facing declining revenues, a steady decrease in libraries operating its older products, and sluggish acceptance of its next-generation Taos library automation system. This acquisition further strengthens SIRSI's position in the marketplace.
 

Facts and Figures
The announcement issued jointly by SIRSI and DRA on May 17 stated that DRA will be purchased for a total of $51.5 million, or $11 per share. DRA will become a wholly owned subsidiary of SIRSI and will operate as an independent business unit. SIRSI president Patrick Sommers will head the combined company. Michael J. Mellinger, the well-known chairman, CEO, and president of DRA, will take a seat on SIRSI's board of directors, retain the title of DRA chairman of the board, and report to Sommers.

Both SIRSI and DRA say that there are no intentions to consolidate operations, close any offices, or terminate employees. The products of both companies will continue to be supported and developed as they were before the acquisition.

SIRSI's offer to purchase the 4.5 million shares of common stock at $11 each represents a significant premium above the $5.91 price per share offered at the close of trading the day prior to the announcement. Although the price paid per share for DRA's stock is high compared to its most recent levels, the offer is relatively consistent with the stock's values prior to January 2000.

In August 2000, DRA announced that it had retained Crescendo Capital Partners, an investment banking firm, to assist with strategic acquisitions and investments. While the announcement emphasized interest in developing investments and acquisitions, it was widely speculated that DRA was seeking a buyer. SIRSI has had a strong business relationship with venture capital firm Seaport Capital since October 1999.

The transaction between DRA and SIRSI is expected to be complete within about 75 days of the announcement, or about the end of July. Until that time, DRA remains a public company and the two companies are officially still competitors, though it's virtually certain the acquisition will happen.
 

DRA's Background
A veteran library automation company, DRA began in the mid-1970s, successfully marketing the ATLAS system it originally developed for the St. Louis Public Library and the Cleveland Public Library. That system evolved into the product known today as DRA Classic. The company's Library System for the Blind and Physically Handicapped (LBPH) was also successful within its more specialized arena.

DRA had its initial public offering to become a publicly owned company in 1992. In October 1993, it acquired the INLEX/3000 system from the now-defunct INLEX Corp. of Monterey, California, and purchased the multiLIS product from Sobeco Ernst and Young in October 1994.

In its 25 years of operation, DRA has built a large customer base. Today, many libraries continue to use DRA's legacy products, with 68 running INLEX/3000, 660 using multiLIS, and 856 still operating DRA Classic, according to Library Journal's most recent "Automated System Marketplace" report. This combined customer base of some 1,584 libraries running automation systems due for replacement is an extremely attractive asset as it translates into a significant level of income through support contracts. However, as these libraries migrate to other systems, this revenue source will diminish.

DRA developed the first Web-based OPAC, which has evolved into the current Web 2 product. To maximize the investment in Web 2, it operates with all four DRA systems.

From the mid-1990s it was clear that none of DRA's existing products could survive into the future in their current state—they each relied on operating platforms that had lost industry support. Additionally, library requirements, particularly those of academic libraries, were exceeding the capabilities of these legacy systems' underlying technical components. DRA Classic relied on the OpenVMS architecture and INLEX/3000 relied on Hewlett-Packard's MPE operating system. multiLIS is in a somewhat better position in that it operates on UNIX in addition to VMS. DRA continues to upgrade this product.

Knowing that its existing product lines wouldn't remain long-term choices for libraries, DRA set a strategy to develop a new state-of-the-art system, beginning around 1995. Based on DRA's prior success with its Classic product and reflecting a high degree of confidence in the company as a leading developer of library automation software, there was an initial period of strong market acceptance. As early as August 1996, UCLA committed to the new system, Taos, with a contract of about $500,000. Other large and prestigious libraries and library consortia followed, including The University of California-Santa Barbara (December 1997) Harvard University (June 1998), Tacoma Public Library (August 1998), and the Minnesota Library Information Network (August 1998).

Taos, unfortunately, took much longer to complete than originally planned. The system is only now coming into finished form and its acquisitions module won't make its public debut until the ALA (American Library Association) Annual Conference in June. The only large academic library that went forward with installing Taos was UCLA, which experienced an incredibly painful implementation process. The largest public library system that has implemented Taos is the Bucks County Library Network in Pennsylvania. One of the key reasons for the delay in developing Taos has been attributed to the lack of available programmers with expertise in object-oriented programming. DRA had the financial resources to fund the design and development of its new system, but recruiting technical talent proved to be a major obstacle.

The loss of several major contracts for Taos, the delayed and difficult implementation at UCLA, and the sluggish market acceptance of the system have weakened DRA's overall market position. To date, 23 libraries have implemented Taos, according to Mellinger. Except for UCLA and Bucks County, all the libraries that have installed Taos are relatively small in size. Another 20-plus sites are in the process of implementation.

DRA, a very successful company through the mid-'90s, has experienced a steady decline in both revenue and earnings. Revenues steadily fell from $38.6 million in 1996 to $28.3 million in 2000, while earnings dropped from $4.5 million to $1.9 million in the same period. Despite the company's gradual decline in strength, it remained profitable overall and ranked fourth in revenue among library automation companies, according to ALA's Library Systems Newsletter, falling below only epixtech, Innovative Interfaces, and Geac. DRA's annual revenue for 2000 was roughly the same as SIRSI's.
 

SIRSI's Background
SIRSI has been in the library automation industry for 22 years. Its Unicorn product has had a steady course of development and adoption by libraries throughout that period. SIRSI was founded in 1979 by Jim Young, Jacky Young, and Mike Murdock. The Unicorn library automation system they developed was first installed at Georgia Tech, and is now in almost 1,000 libraries.

From its beginning, Unicorn was based on the UNIX operating system. This was a fortunate choice, as it allowed the product to steadily evolve in the same basic computing platform over a long period of time. SIRSI was never forced into starting over in its development, as was DRA (because of the demise of its underlying operating system). Unicorn has evolved and reshaped itself significantly over time. Its original terminal-to-host environment has morphed into a true client/server system and its textual interface has now been replaced by the graphical, Windows-based WorkFlows clients. SIRSI was one of the early library automation vendors to add a Web interface for its public access catalog, and has recently led the field in bringing additional content to the Web OPAC through its iBistro product.

As a privately owned company, less information is available about SIRSI's finances. Library Systems Newsletter's annual vendor survey estimated SIRSI's revenues at about $25 million. Throughout its history, SIRSI has operated as an independent private company, owned and managed by its founders. In October 1999, SIRSI entered into a partnership with CEA Capital Partners of New York and obtained the venture capital it needed for more aggressive product development. (CEA was renamed Seaport Capital in February 2000.) As part of its investment relationship, Seaport occupies two seats on SIRSI's board of directors.

On January 13, 2001, SIRSI announced that Jim Young would step down and that Sommers would become the company's president. Before joining SIRSI, Sommers had most recently served as president and CEO of Dialog Corp. Last month, Laura N. Dawson, previously director of content development at Barnes & Noble, was hired into a similar role for SIRSI. Although most of the other key managers have remained in place, SIRSI has evolved significantly in the last year from a mid-sized company managed by its founders to a more formally managed company with strong growth ambitions.
 

Who Benefits?
The acquisition of DRA significantly enhances SIRSI's position in the library automation marketplace. To the degree that the price paid for DRA was a good value, SIRSI as a company is strengthened through its larger size, access to new customers, and ownership of new technology assets. With the purchase of DRA, SIRSI gains ownership of four additional library automation products: DRA Classic, multiLIS, INLEX/3000, and Taos. As noted above, the company gains access to a large body of potential customers in the 1,584 DRA sites ready for conversion. It also obtains ownership of new technology. Unicorn, in its 25-year evolution, continues to rely on some fairly dated underpinnings. DRA comes with more up-to-date technical expertise and development tools. Unicode support, for example, conspicuously absent in SIRSI's Unicorn product, is one of the fundamental features of Taos.

The holders of DRA stock will benefit from this transaction. According to DRA's 2000 annual report and other press announcements, directors Mellinger and F. Gilbert Bickel III and their families together hold about 56 percent of the company's stock. DRA's stockholders will be generously rewarded for their investments.
 

Who Loses?
Through this acquisition, SIRSI takes on a large financial burden. The cost to SIRSI for the DRA purchase includes the $51.5 million less $18 million cash assets held by DRA. The net cost of $33.5 million clearly represents more cash in hand than is currently available within the company, and some long-term financing is involved. SIRSI, like DRA, is a company that has traditionally claimed to be debt-free. There are no indications, however, that this commitment will be unmanageable for SIRSI.

DRA, by virtue of its ownership by SIRSI, loses the autonomy it formerly enjoyed. Its strategies will now be set by its parent company.
 

Customer Concerns?
So soon after the announcement, the implications for SIRSI's and DRA's customer libraries are uncertain. There has been little concern expressed by SIRSI's customers. Since this event reinforces SIRSI's strength in the industry, libraries that use Unicorn should generally be reassured of their vendor's viability. But it's less clear what the implications are for DRA's current customers. Many faced some degree of uncertainty before the merger, given the problems with the delivery of Taos. This event may provide an improved environment for these libraries, through which they have a choice of migration paths under the umbrella of the same vendor. Any libraries unsure about Taos may find Unicorn more palatable.

DRA and SIRSI held a joint Webcast for DRA customers shortly after the announcement, in which strong commitments were made by both companies that Taos would be aggressively developed and that all existing commitments of support would be honored. In talking with DRA customers, most seem to be reassured that their interests will be well-regarded.
 

Wait and See
The library automation field has consistently experienced consolidation of companies. This event is a clear example. Compared to other industries, library vendors are reluctant to consolidate product lines after a merger takes place. DRA, for example, has yet to consolidate the three systems it acquired almost 8 years ago. This has been a very gentle course for the library customers using those systems. Likewise, we shouldn't expect any drastic changes in product availability and support with this acquisition. At most, there may be some acceleration in the timing of changes that would have occurred anyway.

We all await additional information on SIRSI's plans for DRA. The dust has yet to settle. By the time of the ALA Annual Conference, there will likely be more clarification from SIRSI and DRA on their combined corporate strategy. Stay tuned.


Marshall Breeding is a library technology officer at Vanderbilt University and a columnist for Computers in Libraries.

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