How Panasonic’s acquisition of Blue Yonder Impacts Digital Outsourcing

How Panasonic’s Acquisition Of Blue Yonder Impacts Digital Outsourcing

Last week, Panasonic Corporation acquired 80% of digital fulfillment and supply chain management specialist Blue Yonder, formerly JDA Software, for $7.1 billion at an $8.5 billion valuation. This deal is the subsequent significant acquisition from a Japanese company after Hitachi acquired Global Logic last month. In my view, acquisitions by non-strategic acquirers of digital technology companies mark a seismic shift towards insourcing. In this article, i give my insights on how Panasonic’s acquisition of Blue Yonders impacts the digital outsourcing market.

History Of Panasonic-Blue Yonder Relationship

Panasonic develops technologies and solutions for applications in the consumer electronics, home appliance, and automotive sectors. Fueled by the demand for digital transformation, Panasonic wanted to pivot towards software and move beyond its hardware segment, whose growth stagnated.

Panasonic decided to upgrade its supply chain capabilities in one division and approached JDA software. JDA provided a detailed roadmap on how using their software can benefit Panasonic. Panasonic was impressed with JDA Software’s capabilities and became its customer.

Then Girish Rishi — CEO of JDA Software, wanted to expand its presence in Japan as it is a vast market. To get access to Japan, JDA wanted a JV with Panasonic. Panasonic agreed to this idea, and that led to the joint venture in Japan in March 2019.

As a first step towards strengthening its software capabilities, Panasonic acquired a 20% minority ownership stake in Blue Yonder at a $5.5 billion enterprise valuation. As per this JV, Panasonic would develop products with Blue Yonder. Panasonic would get access to Blue Yonder’s autonomous supply chain software and, along with its voice response, object recognition, and analytics technology, would further improve its Visual product Sort Assist, simplify, and speed up sorting parcel destinations. This partnership also helped Panasonic improve its existing out-of-stock detection capabilities, facial recognition, and flowline analysis of human behavior technologies to improve its productivity in warehouses, factory floors, and retail storefronts.

After the success of this JV, Panasonic went on to hold a position on Blue Yonder’s board as a minority stakeholder in May 2020.

About Blue Yonder

Blue Yonder, earlier known as JDA software, is an end-to-end supply chain management platform. The software uses AI/ML to make predictions and identify potential problems in demand planning, sales and operations planning, and inventory management. In 2018, JDA acquired Blue Yonder to integrate the AI technology of Blue Yonder into its supply chain software. With this acquisition, JDA software moved its enterprise supply chain platform into Blue Yonder’s cloud with AI, machine learning, and predictive capabilities.

After this transaction, JDA rebranded its name as Blue Yonder. Private Equity firms Blackstone and New Mountain Capital held the majority stake in Blue Yonder.

Why JDA Acquired Blue Yonder?

JDA’s two substantial assets were its software portfolio and supply chain talent pool. However, JDA did not have any cloud strategy or cloud product to excite its customers. As a first step to shift from on-premise to cloud, JDA partnered with Microsoft Azure.

JDA’s strategy to focus on edge computing yielded benefits as Post-COVID, the supply chain happens at the point of impact, in the warehouse, in the truck, in the retail store, when things get delivered. JDA wanted to build a cloud company focused on the edge.

Blue Yonder’s IPO Plans And How Panasonic’s Acquisition Of Blue Yonder Impacts Digital Outsourcing

JDA acquisition of Blue Yonder and its transformation from on-premise legacy software to edge cloud platform reaped benefits for its Private Equity owners. Thus Blackstone and New Mountain Capital decided to take Blue Yonder public and made its S-1 filing with the SEC, indicating its intention to go for IPO.

However, Panasonic approached Blue Yonder with an attractive offer. The Private equity firms evaluated Panasonic’s proposal and its strategy to leave Blue Yonder standalone to advance the vision of an autonomous supply chain. As Blue Yonder already had a fruitful relationship with Panasonic for over three years, there was a cultural alignment and mutual trust between the two teams.

As far as synergies, Panasonic brought capabilities in sensors and IoT on the edge that will be part of the integrated ecosystem. Thus, overall when evaluated through the lens of the valuation, customer, and employees, this acquisition makes perfect sense. Post-acquisition, Blue Yonder can be a sales channel for Panasonic hardware at the edge. At the same time, Panasonic can sell Blue Yonder solutions to its supply chain and retail customers with its IoT/edge presence.

How COVID19 Impacted Blue Yonder

Post-COVID, Blue Yonder acquired SaaS commerce and fulfillment microservices provider Yantriks. Blue Yonder added 134 new customers, including Walmart, DHL, Petco, Diageo, and Marks & Spencer. As far as revenue mix, Blue Yonder gets 50% revenues from retail, 40% from manufacturing, and 10% from third-party logistics, with no single customer adding more than 5% of revenues. Its client roster includes 65 of the world’s largest retailers, like Starbucks, Procter & Gamble, and Coca-Cola.

Valuation

Before deciding to value this acquisition, I will share a few metrics that would get incorporated into my numbers:

1. Blue Yonder has 3000 customers, 400 patents, 1000+ AI/ML engineers, and 1600 partners within its ecosystem.
2. The valuation should consider how much Blue Yonder’s AI/ML solutions can get embedded into Panasonic’s IoT devices.
3. Blue Yonder’s $1 billion+ revenues has 67% recurring revenues, 54% ARR growth, 120% SaaS dollar net retention and 24% EBITDA.
4. We need to confirm if this acquisition can build on the vision of realizing the autonomous supply chain.

The deal value is $7.1 billion, acquiring an 80% stake in Blue Yonder and repaying its $1.5 billion existing debt. The majority of the purchase price considers Blue Yonder’s operating cash flow, portfolio optimization, sale of assets, and reduction of lease liabilities through portfolio optimization. This deal should make the transition to the recurring business model and transform the profit structure.

This price will give Blackstone and New Mountain a sizable return on their investment after acquiring Blue Yonder for $575 million in 2016.

My Take On This Deal

In my view, this acquisition would impact the outsourcing pie that Panasonic outsources to the IT industry. This deal signals a trend of hardware companies like Hitachi and Panasonic wanting to get into the software segment. However, hardware companies should realize the difficulties of developing software and the associated competencies that come with it. On the other end, though Blue Yonder is one of the better supply chain software vendors, it has a huge technical debt. The products are old, underfunded by private equity firms, and they lack a lot of advanced capabilities needed for modern software. Thus, Panasonic will need to make R&D investment to revamp Blue Yonder’s software and rebuild all of Blue Yonder’s capabilities into a modern software stack.

In my view, Blue Yonder should have gone with an IPO and continue to make tuck-in acquisitions that add capabilities and talent. Thus, abandoning IPO for acquisition when customer numbers and cloud supply chains are rising is a bold and risky move.