Wednesday 2 December 2020

What the acquisition of Arbor by The Key means for the sector

My usual disclaimer: I have past, present and (hopefully) future commercial relationships with many of the UK's MIS vendors. Nonetheless I aim to write this blog impartially, from the perspective of a neutral observer. If you have questions about this analysis, or any other blog, contact me on Twitter, LinkedIn or via email. I also now provide MIS market datasets and reports as a service - get in touch for more info.

The Key have just announced the acquisition of Arbor, meaning that the businesses of ScholarPack and Arbor are now under the same roof. So what implications will this have for the sector? Here are my thoughts.

  1. In many ways, it means less than you might imagine. My understanding is that there are no imminent plans to merge the brands. Since both products are already growing nicely independently from each other, it would be a surprise if dramatic changes were made early on. Moreover, I suspect there’s less crossover in customer base than you might think: ScholarPack markets to primaries on its simplicity and ease-of-use, whereas Arbor is increasingly going for all phases and types of schools, and promotes its breadth of modules and workflow improvement features. So I think it would be wrong to assume the deal heralds a dramatic short-term change in strategy for either brand. Of course, deals like this can come with a management reshuffle, but even that may not alter much, as the cultures and management styles of the two organisations seem to me to be quite aligned. It's also a good sign that The Key's press release talked about welcoming "James Weatherill and his team" to the group - that's the kind of language you only use if you're expecting them to stick around.

  2. There’s a decent case that they’re stronger together. Arbor and ScholarPack were both already looking strong individually; together they could be formidable. Between them they’ve accounted for over half of all “MIS switching” schools in each of the past three years (see chart below). That said, they’re not without chinks in the armour: Arbor has been consistently loss-making, and ScholarPack focuses exclusively on primaries, so has a limited addressable market. Together, however, they can serve all phases (including secondary and special, where Arbor is starting to make inroads) within a profitable corporate structure. That’s non-trivial - a recent line of Bromcom marketing has been to point to their robust financials and contrast that with their peers, referring to the government’s Economic and Financial Standing (EFS) guidance. I’m not convinced that it matters as much as some think - give me a fast growing loss-making MIS over a rapidly declining profitable MIS anyday - but still, there may be some people inside of Arbor who are relieved not to have to fend off this line of attack any more.

  3. The sector now has two chunky challengers, each with 8%+ of English state schools. Since 2010, SIMS have been the undisputed sector leader with at least three quarters of English state schools (2010: 82%; 2020: 75%), followed by RM Integris out on its own in second place (2010: 7.2% market share; 2020: 9.6%). In all that time, nobody else has risen above 6%... until now. Combined, ScholarPack and Arbor share 8.9% of the market when measured by schools in Oct 2019 - and it’ll no doubt be more when the Oct 2020 data is released shortly. I think that matters - while nobody can dispute SIMS’s continued dominance; it’s also now impossible to argue “there are no other real choices”. Close to a fifth of schools opt for systems developed by two strong, profitable challenger companies (Arbor-ScholarPack and RM). When you also factor in the continued growth of Bromcom (with 2.3% of the market by number of schools but 3.4% when measured by pupils) and the increased investment being thrown at Pupil Asset by new owners Juniper (2% of schools), it’s clearer than ever that this is no longer a unipolar vendor world.

  4. There is long-term potential to do cool stuff together. While I don’t think the two companies will rush to bash their core products together, I can imagine that they’d start producing joint bolt-on modules fairly early on, perhaps as a first step towards a long-term merged platform. MAT analytics might be a good candidate for this: both have already been investing heavily in this area, but analytics really isn’t the kind of feature you “solve” in a single release. So I’ll be interested to observe whether some crossover modules compatible with both products emerge on the roadmap in the coming months and years. 

  5. Don’t rule out another entrant. One side effect of this closely watched merger (together with the ongoing SIMS sale and recent iSAMS sale to IRIS) is that the profile of UK school MIS has been raised across the board. It’s a cash-generative business with a potentially vulnerable dominant vendor, and that’s an attractive set of fundamentals for private equity in an uncertain business climate. So I wouldn’t rule out a US or Australian vendor making an appearance in the UK market in the next year or two. 

  6. Capita really needs to crack on and sell SIMS. It has been well documented that SIMS is up for sale, with recent reports suggesting that Montagu is now in exclusive talks to acquire ESS (the division of Capita that contains SIMS). Capita has also been open about needing cash to service debts, with the most recent half-yearly results talking about disposal proceeds being used “to strengthen the balance sheet by reducing net debt and pension liabilities”. That makes it seem likely that a sale will proceed. The problem for the eventual buyer though is that the market isn’t standing still while they close the deal; and the fundamentals of the SIMS business are unlikely to be improving in the meantime. So while the challengers are fizzing with ideas and flush with new investment, it’ll be difficult for the current SIMS management to do a lot to address the threat until their own sale goes through. And of course if a deal doesn’t happen, it’s not like the parent company can be relied upon to stump up new investment. So while I’m sure Capita won’t sell at any price, if anything the ScholarPack-Arbor merger adds even more urgency to the deal.