CDC Software Wins the Pivotal Auction. Now What? Part Two: Market Impact

Market Impact

On December 8, Pivotal Corporation (NASDAQ: PVTL; TSX: PVT), a Vancouver, British Columbia, Canada-based mid-market CRM provider, announced that it proposed a strategic combination with CDC Software. CDC Software is a wholly owned subsidiary of chinadotcom (NASDAQ: CHINA), a global enterprise software and mobile applications provider. This will position Pivotal to re-establish a more esteemed position in the mid-enterprise CRM market. Subject to the approval of Pivotal's shareholders, the Supreme Court of British Columbia, and customary closing conditions, this transaction is expected to close before the end of February 2004. Following the closing of the transaction, Pivotal also announced that it expects to accelerate investments in its growth including increasing technical support its research and development headcount by up to 40 percent, resuming the expansion of its research and development headcount, resuming its acquisition program, expanding distribution capabilities in Asia through CDC Software, and increasing marketing spending by up to 200 percent.

Pivotal will operate as a distinct business unit within CDC Software. The Pivotal strategy, brand, product architecture, cross industry applications, vertical applications, partners, people and management team will reportedly form the foundation of this business unit. Pivotal will reportedly be the cornerstone of CDC Software's CRM strategy, and CDC anticipates that the acquisition will prove accretive for the combined entity. As Pivotal has in the past, CDC will from now on focus on mid-sized enterprises around the world across multiple industries.

In a nutshell, Pivotal's management deserves kudos for a textbook example of conducting due diligence (if not reprimands for leading the company to the current difficult state of affairs), and for seemingly opting for the lesser of three evils. Thus, it can be particularly educating to examine the current state of the CRM mid-market through the rivalry between Onyx and Pivotal ever since their inceptions in the 1995 and 1994 respectively (See Onyx/Pivotal Rivalry Through Thin Rather Than Thick).

The overall CRM market remains the land of opportunity but one with many treacherous quicksand patches for those uncertain about the breadth of their footprints in the field of either install base or product scope. It is a no-brainer that the 2000s have been adverse years in the entire enterprise applications market. Following the whopping growth rates of the late 1990s, and the spending surge on sexy e-business-related technology in 2000, hard times worldwide in almost all sectors have subsequently morphed into harrowing times for all enterprise systems providers. While the biggest or the richest vendors have been able to hang onto flat new sales, modest declines, or in some cases, modest growth, only a lucky and the most apt few with true differentiation in a selected number of markets (such as warehouse management and supply chain execution [SCE] or supplier relationship management [SRM]) have bucked the trend and shown some enviable growth of late (see The Hidden Gems of the Enterprise Application Space).

It might be of further interest to analyze the recent years of the ERP and CRM markets to discern how fortunes may often fluctuate and go in different directions at certain phases of their life cycles. The term ERP, if not necessarily coming back into fashion, certainly is no longer the bad, pass term of a few years ago, when almost all vendors were distancing themselves from the association like it was a plague because ERP was perceived as off-putting (i.e., intra-enterprise versus entire external supply chain and collaboration focus). At the same time, anything associated with customer or front-office interaction was all the rage, attracting both venture capitalists who poured their capital into new startup companies with brave ideas, while the customers were (over)buying these applications owing to then buoyant economy and the apparent need to better manage seemingly mushrooming customer bases. (For additional information, see Comparison of ERP and CRM Markets' Lifecycle Snapshots).

Over the last few years, all significant enterprise applications players have been actively partnering or finding other ways to provide solutions that allow businesses to collaborate more effectively. Consequently, the boundaries between ERP, CRM, e-commerce, and SCM have meanwhile blurred so much that any attempt to functionally separate them becomes ever more pointless (see SCP and SCE Need to Collaborate for Better Fulfillment). If the ultimate objective is to win and retain customers, one must consider the entire chain, which includes traditional ERP and SCM functions as well as the once considered more remarkable and supposedly more relevant CRM and e-commerce activity.

This is Part Two of a three-part note.

Part One detailed the events.

Part Three will discuss challenges and make user recommendations.

Competitive Pressures

Thus, Pivotal, had been feeling competitive pressures coming from many directions. Despite many mid-market and niche CRM vendors' attempts to overcome these challenges, many will continue to struggle to avoid insolvency, while the luckier ones with attractive point solutions (such as partner relationship management [PRM] or portal solutions) will become the acquisition targets of large enterprise vendors gladly seeking to incorporate them. As an example, marketing automation and PRM point solution providers have particularly fallen prey to pessimistic investors and diminishing global corporations' appetites for technology (Who Alleges The PRM Market Consolidation?). Thus, the need for providing a full, comprehensive CRM suite rather than an individual solution or a bundle of point solutions for each distinct CRM area remains firm, and will urge further CRM (and overall enterprise applications for that matter) market consolidation. The recent merger of the PRM vendor ChannelWave with the e-commerce service provider Aqueduct confirms the need for a broader functional footprint as a way of extending the vendors' life expectancy.

Both a large customer base (i.e., recurring revenue) and incremental product enhancements have favored ERP vendors' longevity in the market. On the other hand, many CRM weaklings have not gathered a large enough client base to find an interested suitor that could help them recuperate the immense investment involved in using cutting-edge technologies to develop these products from scratch using cutting-edge, as seen in Xchange's case (see Xchange Adds To The List Of CRM Point Solutions' Casualties). With that in mind, Pivotal should be flattered by the attention it has managed to gather from three prospective buyers, while Talisma and Onyx, having failed in their merger bids, will have to rethink their survival alternatives,.

Like its market automation counterparts, Talisma will struggle to remain competitive within the highly isolated market, even as its narrow niche is further taken over by full-fledged and all-round CRM providers. The merger with Pivotal would have been more beneficial for Talisma's customers, but Pivotal's customer base would likely have not seen major functional improvements since they already have had e-mail management and Internet self-service capabilities.

In 2002, Pivotal acquired the struggling market automation vendor MarketFirst, which has hardly improved Pivotal's viability and the market reach, if it had not even sped up Pivotal's hardships. Our belief is that the Talisma deal would not have been much more different, although one should never overlook the potential benefit of going private via a strong financial backer, thus allowing focus on product strategy without the prying eyes of the public investors, which Pivotal would have had with Oak Partners. On the other hand, Onyx has likely had an ulterior motive given its view of Pivotal's customers as the biggest asset, and given it promised to support only Pivotal customers' current implementations. It was more than apparent that many Pivotal's customers could have then expected a forced migration to Onyx from Pivotal's platform, while nobody could know for how long that combined entity would have lasted as an independent entity. Namely, Onyx remains a potential takeover target itself as its cash position has fallen to a risky low $11.8 million and its stock has plummeted over 20 percent in the past year. The company pre-announced disappointing quarterly results on January 12, and CEO and co-founder Brent Frei said he would step aside when a successor is found.

Now What?

Consequently, the deal with CDC is seemingly the best choice for lifting Pivotal's confidence levels in the market, which should in turn result in operational improvements and expanded market presence. The acquisition also comes at a time when many companies are purchasing distressed software vendors in order to acquire their customer base. These so-called "roll-up" acquisitions are typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. CDC Software claims the exact opposite intention in Pivotal's case. Instead of reducing the investment in Pivotal products, CDC has committed to increasing Pivotal's marketing budget by 200 percent and increasing its technical support staff by 40 percent--areas that Pivotal would have had to painfully reduce, indicating just how dire its situation was prior to the acquisition. CDC also intends to increase the level of investment through complementary acquisitions and access to Chinese systems development resources at lower, offshore rates.

Furthermore, the company of late has been busy making several acquisitions, possibly reaching the prodigal levels of expansion. In addition to the process ERP vendor Ross Systems, it has acquired the SCM vendor IMI, a business information and financial performance software developer CIP-Global ApS. Clearly, CDC has been rounding out its portfolio of business applications into a full suite through a series of acquisitions, with an idea of moving from a services-based company to a product-based company.

CDC Software integrates a series of chinadotcom's self-developed products engineered in two software development centers in China, which include PowerBooks, PowerHRP (human resources and payroll), PowerATS (attendance tracking system), Power-eHR, PowerPay+, PowerCRM, and Power eDM (a double-byte e-mail marketing technology). In addition, the company also broadened its offerings in software arenas by establishing strategic partnerships with leading international software vendors to localize and resell their software products throughout the Asia Pacific region. As a result of acquiring chinadotcom's software arm, CDC Software currently has over 1,000 customer site installations and 600 enterprise customers located throughout the Asia Pacific region.

chinadotcom also established CDC Outsourcing, which allows for elements of workflow such as client and project management to be provided in the contracted country (i.e. UK, US or Australia), with technology and applications sourced from either of the company's low-cost, CMM-certified (capability maturity model) outsourcing centers in China or India. In its mobile and portals unit, the company operates popular news, email, and consumer service portal web sites in China, Hong Kong, and Taiwan. Through the recent acquisition of Newpalm (China) Information Technology Co., Ltd. (Newpalm), the company now offers consumer-based and enterprise-based SMS (short message service) and mobile application software development services.

Hence, the low product overlap, along with complementary geographical focus, should result in a low level of disruption to current operations of these recently acquired vendors. The company reports to have no plans for changes in their management teams, which also points to a "business-as-usual-and-even-more-of-it" approach from a daily operations viewpoint. The acquisition will also enable Pivotal to more aggressively pursue the Asia market, cross-sell its product to Ross, IMI and CIP users, and exploit CDC's outsourcing operations, all in tune with the above on-demand discussion.

This concludes Part Two of a three-part note.

Part One detailed the events.

Part Three will discuss challenges and make user recommendations.

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