Founder Returns to Rebuild J.D. Edwards
C. Edward McVaney co-founded J.D. Edwards & Co. more than 20 years ago, built it into a major provider of large-scale computer software, became a multimillionaire in the process and then all but retired 18 months ago.
Today? He’s back at work trying to save his creation.
J.D. Edwards’ fortunes have been eroding--fast. The Denver-based company is losing money, its once highflying stock has plummeted, and in April the man who took over for McVaney as chief executive, Doug Massingill, abruptly resigned.
So McVaney reassumed that job in addition to remaining chairman, and now, at age 59, is working furiously to pull J.D. Edwards out of its nose dive. Just two weeks ago, he unveiled a restructuring to slash the company’s bloated costs so that they’re in line with its sales growth--a move that will including cutting 800 jobs, or 13% of his work force.
It “became very clear we were an enormously fat organization,” McVaney said in an interview. Noting that several of his rivals already have streamlined, he said “quite frankly we were late to do it. We should have done it a year ago.”
The move to overhaul J.D. Edwards also came a week before the company posted a meager $1.7-million profit (excluding one-time charges) for its fiscal second quarter ended April 30 on essentially flat revenue of $231 million. Still, that was better than a year earlier, when it posted a $9-million loss.
None of this was supposed to happen. After spending two decades making J.D. Edwards a rival in so-called enterprise software against the likes of Oracle Corp., PeopleSoft Inc. and SAP of Germany, McVaney turned over the CEO’s job to Massingill so that he didn’t have to run the company’s day-to-day affairs.
It was a short-lived reprieve.
“I must tell you that I got pretty hooked on retirement,” McVaney said. “But I knew I was the safety valve” if anything went wrong.
The enterprise, or business-management, software that J.D. Edwards and others provide is a complex system that integrates, manages and links all areas of a business, including sales, manufacturing, warehouse and inventory levels, accounting and so on. J.D. Edwards counts among its customers Kaufman & Broad Home Corp., Dole Food Co., Sony Pictures and the city of Santa Monica, to name just a few.
And for most of the late ‘90s, J.D. Edwards’ revenue and earnings grew sharply, with revenue nearly doubling to $934 million in 1998 from $478 million in 1996. (Its fiscal year ends Oct. 31.)
The software providers and their stocks also were Wall Street favorites for much of the ‘90s, because demand for their products from large corporations and municipalities was stout. But starting in 1998, their fortunes began an ugly descent. The companies’ once-exceptional earnings and growth rates began slowing, in good part because of Y2K fears that made customers delay orders.
J.D. Edwards and some competitors made an effort to attract smaller companies--those with annual sales of $100 million to $1 billion--and to diversify into new areas such as adapting to increasing corporate use of the Internet, but it wasn’t enough. Investors, shaken by the slowdown when the stocks were selling at extremely lofty price-to-earnings multiples, sold the stocks with abandon in 1998.
At J.D. Edwards, matters seem to stabilize last year. Between April and December, amid hopes that the Y2K fears were facing, J.D. Edwards’ stock more than doubled in price from its depressed base, even though the company reported a $39.2-million loss for its fiscal year ended Oct. 31. The worst, it seemed, was over.
It wasn’t. In the quarter ended Jan. 31, J.D. Edwards turned in a modest $3.6-million profit (excluding one-time items), down 16% from a year earlier. Then Massingill quit and the company’s stock, already sliding, went into a free fall.
The stock has now plunged a stunning 65% since mid-March--far outpacing the overall Nasdaq decline--wiping out about $3 billion of J.D. Edwards’ overall market worth. (The stock closed Friday at $13.75 a share, up 69 cents for the day, on Nasdaq.)
The March plunge is particularly bad news for McVaney, who with affiliated trusts owns 5.7 million, or 5.4%, of the company’s shares, according to the company’s proxy statement filed in February. Translation: McVaney’s stock has suffered a loss of nearly $150 million.
But it wasn’t just Y2K or excess costs that derailed J.D. Edwards, according to analysts and McVaney, who is careful not to lay the company’s woes only at the feet of Massingill. Some of the problems, McVaney conceded, were in the works when Massingill took over.
In the end, both might deserve to share the blame because Massingill had been J.D. Edwards’ chief operating officer before being promoted to chief executive. Regardless, the company’s struggles again illustrate the chronic problem of a skillful and effective CEO handing the reigns to a comparable successor.
“They were probably too slow to integrate the Internet in their product line,” said analyst Charles Phillips of Morgan Stanley Dean Witter in New York. “They’ve done a lot of that now” but lost ground to rivals such as Oracle, “which has been marketing that for the last year,” he said.
“I don’t think they [J.D. Edwards] understood how important the Internet was to decision makers” at corporations, Phillips added.
McVaney said J.D. Edwards’ software has proven to be ideally suited to incorporate the Internet as part of the software that links an entire business. But he acknowledged that the company violated “one of the cardinal rules of marketing” by promoting itself with “multiple marketing messages” instead of the “singular vision” that had made the company successful. The company, he said, had “a lack of focus.”
“We lost track of what made us different than our competitors,” McVaney said.
Which is? J.D. Edwards’ expertise, he explained, is in the “post-implementation” area, meaning that after its software is installed, it can readily adapt to any strategic changes the business customer wants to make, whether it involves the Internet or some other facet of running a business.
“We are awesome killers at adjusting to changes in the field,” McVaney said. “That was our theme.”
So McVaney, whose net worth Forbes magazine estimates at more than $600 million, is working to reestablish the company’s “clear, focused strategy.” But he doesn’t discount the fact that potential customers might be wary of buying from J.D. Edwards because of its recent troubles and will instead turn to a rival vendor.
“We’ll pay a price, especially in this quarter, because of that competitive situation,” he said. But, he added, “our [order] pipelines are healthier than they’ve ever been” and “toward year-end you’re going to see a really healthy J.D. Edwards.”
But Wall Street is sharply divided about that prospect. Some analysts upgraded their ratings on the company’s stock earlier this year, but others cut their ratings after the company’s second-quarter results came out May 24.
Phillips, though, noted that J.D. Edwards is still growing at a decent pace. In the latest quarter, the company’s “license fee revenue”--essentially its sales of software--rose 22% from a year earlier. That was second among its peer group only to Oracle’s 35% gain, he said.
But for McVaney, reversing Edwards’ course is also a personal matter. He’s not the first executive to build a business and, upon retirement, see it lose course. “I have my heart in [the company] so much,” he said, “that I can’t just let it get that way.”
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EDWARDS’ ECLIPSE
Once a rising, prosperous star in the field of large-scale computer software, J.D. Edwards fell on hard times and is now relying on its once-retired chief executive and co-founder, Edward McVaney, to turn things around.
Source: Bloomberg News
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J.D. Edwards at a Glance
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