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Who’s the Boss?

The automotive retail industry is grappling with the news of the pending deal between UCS and Reynolds and Reynolds.

There is much still to sort out regarding the pending $2.8 billion acquisition of publicly held Reynolds and Reynolds Co. by privately owned Universal Computer Systems Inc., but one thing is clear – in the end, shareholders are boss.

The questions primarily center on future product strategy and leadership for the two dealer-management system providers that would merge into one. The answers leave one wondering how this deal will affect the industry.

But there is no question what it means for Reynolds’ shareholders, who would receive $40 a share once the deal is complete. That is great news, and for them CEO Fin O’Neill should be a hero.

While UCS’s founder and CEO Bob Brockman engineered the deal, it is happening on O’Neill’s watch and means he is doing exactly what the Reynolds’ board and shareholders were hoping he would – create value for the company.

The deal represents a considerable gain for shareholders who held stock valued at approximately $26-$28 per share prior to the announcement.

For years, Reynolds’ stock price has been stuck in that mid- to high-$20 range. There was little reason for optimism it would grow. Reynolds was not going to add significant numbers to its DMS base – nearly 80% of the market is controlled by both Reynolds and competitor Automatic Data Processing Inc., with at least 20 other players (including UCS) scrapping for the other 20%.

Any growth was going to come in the form of new applications such as websites, customer-relationship management tools and others that could be added onto the DMS. However, in recent years the market has opened up in the application space and has become so competitive that driving significant profits is difficult.

So the shareholders are big winners – what about the dealers and vendor partners? Reynolds aggressively has marketed that its customers – car dealers – are the “boss.” But there are indications the deal with UCS could stand that idea on its head.

A quick recap: On Aug. 8, Reynolds announced it was going private in a $2.8 billion merger with UCS.

There was some confusion, however, as to the real nature of the deal. Both companies positioned the deal as a “merger.” However, an 8-K document, filed the day after the announcement, makes it clear UCS is leading a private investment group consisting of Goldman Sachs Capital Partners and San Francisco-based Vista Equity Partners in acquiring Reynolds.

A Reynolds employee says, “I went to bed thinking we had bought UCS only to wake up and find out it was the other way around.”

What led to the confusion, in part, is the UCS brand name is going away while the “merged” company will maintain the Reynolds brand. According to the most recent filing, a preliminary proxy statement, Reynolds will merge with UCS, forming a subsidiary called Reynolds and Reynolds, that will be controlled by a parent company called Universal Computer Systems Holdings.

Which leads to questions regarding product strategy and leadership.

While product plans still are being worked out, both companies’ products will be supported for “years to come,” protecting their dealers’ technology investments, O’Neill tells Ward’s.

Meanwhile, dealers are saying their UCS sales representatives are indicating Reynolds’ ERA XT DMS platform will be marketed to smaller and mid-level stores with UCS’s POWER system being sold as a higher line and more sophisticated product.

It makes sense that at some point, marketing and strategies will be aligned. Does that mean, however, larger dealers, such as the United Auto Group or the Hendrick Automotive Group, that use ERA, will be told they have to switch to the UCS platform?

Several dealers who are Reynolds’ customers tell Ward’s they are sitting tight and watching how this plays out.

It is not just product strategy that concerns dealers. Future leadership is a big question. And that may determine what culture ends up dominating the new company.

Reynolds, for the most part is easy to deal with, say OEMs, dealers and vendor partners – at least compared with UCS. Sources from at least two OEMs admit they are trying to get a handle on what the deal means for them.

Dealers appear to either love or hate UCS. Many customers say its DMS and the reporting capabilities are superior to what either Reynolds or competitor ADP offer. Many dealers swear by their UCS systems.

But in the next breath, several of those same customers complain about how difficult it is working with UCS. UCS is notorious for requiring its dealers to sign long-term contracts – up to 12 to 15 years. Reynolds and ADP typically maintain 5-year contracts with their dealers.

Application providers complain UCS makes it difficult to integrate their products into its DMS – a claim UCS officials admit is true in situations where other firms offer similar applications.

On one level, UCS’s response makes sense – “Why should we make it easy for competitors to compete with us?” But is it best for dealers? Reynolds, on the other hand, has adopted a more open strategy, allowing dealers to choose which applications they use.

Dealers will be watching whether they have the same level of choice once the deal fully materializes. If not, competitors such as ADP, Arkona and AutoSoft stand to gain significant market share.

While UCS may be difficult to deal with, Brockman has built a profit-generating machine in Houston. According to some estimates, UCS saw profits of approximately $100 million in 2005. UCS generated $530 million in revenue in 2004, According to the Gale Group Inc.

There is no doubt, UCS’s culture emanates from Brockman, and that is what worries some in the industry. People who do business with him say he is tough and shrewd.

Will Brockman be the one calling the shots in the new company? He is refusing requests for interviews, and there is little word on what his planned involvement is.

Brockman issued a statement late last week, however, saying his role will be “further defined” once the merger is complete. He adds, “it will most likely be in an advisory role in the product development area.”

Word from Dayton, OH-based Reynolds, is that employees from both companies, already working together, admit there are differences.

As in most mergers, for the deal truly to work, Reynolds and UCS have to allay industry concerns and create a new culture that leverages new and superior products and puts the needs of the customer first.

In the press release announcing the deal, Brockman pays homage to Reynolds’ “great tradition of customer focus.” Do not think for one moment those were idle words.

Reynolds moved quickly to address concerns, issuing a press release saying O’Neill would be the CEO of the new company – “as long as they want me,” he tells Ward’s.

On the Reynolds website, a letter from O’Neill to customers answers the questions “Who’s Fin’s new boss?” and “Who’s Reynolds’ new boss?”, saying the dealer is the “boss.”

Sounds good, but chances are Brockman ultimately will be the boss. He likely invested heavily in the new venture, and people who know him say they doubt it is a retirement play. Some reports peg Brockman to be 65. “I’ve been hearing for 15 years that Brockman is in his 60’s,” one observer notes.

Which leads to the question, “What happens to O’Neill?”

Once the deal is done, O’Neill’s contract is good through January 2008. He obviously has an attractive “out” should he leave before that.

More than likely, he is out within a year. If that happens, Reynolds, as we know it today, could become a more powerful UCS.

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TAGS: Dealers Retail
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