The lessor or merger of two evils?

Dealer management software (DMS) is a multi-billion dollar industry and until recently was managed by three separate entities. Well, more specifically, two large companies, Illinois-based ADP and Ohio-based Reynolds & Reynolds, each with about 40% of the market, plus a group of smaller companies that made up the additional 20%.

To say that ADP and REY REY are archrivals really doesn't capture it. These two have been feuding like the Hatfields and McCoys now for years, the most recent bout of which took place at this year's NADA convention in February. And while data sharing and privacy still play at the heart of the dispute, it is Reynolds & Reynolds takeover by one of the larger (and scrappier) companies in that 20% crowd that is making news.

Texas-based and privately-held Universal Computer Systems (UCS) was a much smaller entity with slightly over 2,000 employees and less than 800 dealer customers when it (and Goldman Sachs and Vista Equity Partners) decided to take over Reynolds & Reynolds this past August. REY REY had 4,600 employees and some 20,000 customers, not to mention a stock trading in the high 20's prior to talk of the merger. At $40 per share, the deal certainly represents a premium for shareholders, which comes in at $2.8 billion.

The deal itself and both involved parties weren't without controversy however, as UCS had been publicly criticized prior to the deal by some of their customers for forcing expensive hardware upgrades and new fees. Their solutions are seen by many as the best in the business, though the company itself has a reputation as being difficult to work with. They require long-term (15 year) contracts, for example.

Also, on the Reynolds side, CEO Fin O'Neil has been taking some heat for the company's ongoing "Who's the Boss" campaign, which some in the industry find underhanded based on the well-known policies for dealership data extraction and use. In terms of the deal, one group of shareholders even filed a lawsuit claiming among other things that talks between the companies weren't made public and whether or not Mr. O'Neil's employment after the merger was part of the deal.

In the months following the deal additional dust was kicked up when the newly formed company cut some 450 people from the workforce after stating earlier that there wouldn't be any trimming. And just recently, it was reported that some other new policies are causing a stir. The company, which has been slammed recently for cutting off all information used by dozens of third party vendors (companies can become approved by R&R, for a fee), is requiring employees to sign new contracts with a three-year no compete clause.

Sounds like "difficulty" is really rubbing off on them.

While the company will maintain both the REY REY headquarters in Ohio and the Reynolds & Reynolds name, this is starting to suspiciously look more like a much larger UCS. And while R&R and ADP spend much of their time focusing on each other, one small company that knows a thing or two about software has recently announced it will enter the industry in earnest later this year. Microsoft has been flirting with the idea for years, but has only recently lined up a team of who's who in the business to make an honest go of putting all the DMS guys in their place.

Stay tuned for what should be a very interesting showdown.

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