3M Wraps Up HighJump, While Retalix Shops OMI International Part Two: Market Impact

Market Impact

Instead of a direct intra-market consolidation, some tormented public supply chain execution and warehouse management system (SCE/WMS) vendors or smaller, but profitable, undercapitalized, and undervalued WMS/SCE vendors have found a shelter under wealthy, more visible parents, with complementary products. The example of the first would be the recent acquisition of former EXE Technologies by SSA Global (see SSA GT To EXE-cute (Yet) Another Acquisition).

Two examples of the latter would be the agreement by 3M also know as Minnesota Mining and Manufacturing (NYSE:MMM) to acquire HighJump Software Inc., and the acquisition of OMI International, Inc. by Retalix Ltd. (NASDAQ: RTLX).

It might be interesting to dissect the differences between the merger and acquisitions phenomena within the enterprise resource planning (ERP) and SCE markets. One possible similarity is in the economic environment. Even if the global economy bounces back with a vengeance, there will still likely be more solution providers than a real abundance of sales opportunities. Consequently, larger predators are going to use their huge resources (such as market capitalization, credit lines, and cash) to buy the smaller competitors' install base, intellectual property, sales channels, and so on, right? Well, not this scenario may not happen across the board.

While the outright intra-market consolidation within the ERP market has been both apparent and logical, the SCE/WMS market remains modestly growing but also highly fragmented with fewer pure-play vendors, some of which are still growing organically, such as HighJump, Manhattan Associates, Provia, RedPrairie, HK Systems, etc. There are several reasons why SCE/WMS vendor consolidation has not followed the all too common path of strong vendors gobbling up weaker competitors, has been the case in the ERP space.

Typical dynamics driving ERP vendors' mergers such as acquiring an install base and increasing market share, filling certain product gaps, acquiring more advanced product and technology and so forth are not that applicable in the WMS market, since few vendors have large install bases (for examples of these typical dynamics, see Frantic Merger-Mania Spiced Up With Vendettas Leaves Customers Anxious). Moreover the leading vendors have been embroiled in upgrading their own technologies, and, by and large, most are at similar functionality and product technology plateaus. Thus, it is more likely that leading vendors would buy products that would expand their SCM footprints (such as Manhattan Associates' acquisition of Logistics.com in 2002, see Logistics.com Becomes The Newest Of Manhattan Associates or the three-way merger between former publicly-held supply chain planning provider SynQuest with two privately held supply chain event management providers, Viewlocity, and Tilion into nowadays' Viewlocity, see Merger Mania At Its Extremes). Nonetheless, at this stage, there seem to be little inclination and rationale to buy a direct competitor and further burden itself with legacy product maintenance and support issues.

However, this is not to imply that the SCE vendors are off the hook, given most of them face certain challenges notwithstanding. First is the fact that the sluggish economy has lately caught up with this resilient market, while, the competition has intensified from many ERP vendors, particularly from the Tier 1 companies like SAP, Oracle, PeopleSoft and SSA Global. Another challenge for SCE pure players has been the dreaded word "commoditization" and subsequent price erosion. Namely, at least within the WMS market, which is still the main breadwinning offering for most of the SCE vendors, if one considers the "within the four walls" functionality, most products are functionally on par, with mere nuances in ease of configuration or industry focus to differentiate the winner. The above ERP vendors have taken advantage of this unfavorable perception for WMS specialists to at least shore up their huge install bases, if not even compete for some "green-field" opportunities.

Thus, the size of the vendor begins to matter in the market, which favors the near $200 million (USD) undisputed leader Manhattan Associates and partly the near $75 million (USD) second best RedPrairie, while a slew of vendors with less than $40 million (USD) in revenues will have to scramble to decide on their best strategies going forward. The prospects have lately increasingly started paying attention to the perceived stability and viability of the vendor, in addition to the typical price, quality of service and customer references decision-making factors in the industry segment. A good proof of concept could be the January 23 announcement by RedPrairie that it has appointed Jerry Rau to the newly created position of Strategic Acquisitions Leader in order to drive RedPrairie's aggressive plans for global expansion through strategic acquisitions. In this capacity, Rau will be responsible for identifying potential acquisition targets that would support RedPrairie's geographic growth and global supply chain solutions strategy; evaluating the fit and value of each target; and initiating acquisition discussions. Rau will report directly to John Jazwiec, RedPrairie company leader. Prior to this new role, Rau was responsible for RedPrairie's channels and alliances programs, where he has been instrumental in inaugurating exclusive partnerships, reseller agreements, and acquisition strategies that have helped fuel RedPrairie's growth. He previously led operations for RedPrairie's transportation management business unit. Before joining RedPrairie, Rau was Vice President of Operations for i2 Technologies, (a company that was once the supply chain planning market leader), and held similar positions with other transportation management and global trade logistics firms in the US and Canada.

Further, on February 11, immediately before this article was published, RedPrairie announced the acquisition of LIS, a leading SCE provider in Europe. The combined companies will operate under the RedPrairie name with projected 2004 revenues of $130 million (USD) and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $23 million (USD). The company will also employ over 600 associates from offices in the US, UK, mainland Europe, and China. RedPrairie solutions are also offered by partners in eleven countries, including Latin America, Russia, and South Africa.

Hence, while only a year or so ago these venture capital-backed SCE vendors would complacently shrug off any merger or acquisition solicitation, the case may be quite different now. Investors having grown impatient, are exerting pressures on vendors to either somehow accelerate growth (by, for example finding a defendable niche) or preserve profits even, if need be, through downsizing. Admist these demands, investors meanwhile are , also eyeing sell-off opportunities to at least recuperate their investment if it is not possible to make treble or double return on their investment any longer. Thus, instead of consolidation, we may rather witness the stratification of the big getting bigger and the small recoiling into mere survival mode, wandering in the shadow of giants and focusing on acquiring some "safe heavens".

This is Part Two of a three-part note.

Part One discussed recent events.

Part Three will cover challenges and make user Recommendations.

How 3M and Retalix View Their Acquisitions

The above two acquisition also come at a time when many companies are acquiring distressed software vendors in order to acquire a new customer base. These so called "roll-up" acquisitions are typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. Conversely, however, 3M and Retalix claim the exact opposite intentions in their respective purchases. Instead of reducing the investment in HighJump products, for example, 3M views HighJump as a natural extension to its Industrial Services and Solutions Division's existing and envisioned services and software. Indeed, the above acquisitions do not seem to be opportunistic bargain buys of technologies. Neither have the acquired vendors been examples of desperation, as indicated by their decent price tags, which were well above their respective revenue levels (such as not only have HighJump's original investors recouped their investment, but also in truth they have achieved a nearly treble return).

Quite the contrary, throughout 2003, HighJump, for instance, continued to further its aggressive international expansion with ongoing partner initiatives, new customer wins, and product enhancements geared toward a global audience, which it had successfully initiated in 2000. Namely, for last two fiscal years, the company realized over 30 percent year-over-year revenue growths including an over 50 percent increase in license revenues, as well as profitability, which has moved it into the top echelon of not only WMS, but also of SCE vendors. The vendor also notched successful installations in South America, France, Netherlands, and China, achieving about 10 percent of our sales internationally in fiscal 2003, as compared to mere a dash of international business in the past.

This growth,despite the sluggish economy and a highly fragmented and mature market, is not only admirable, but it is also attributable to more than offering the right set of features and functions. Namely, much of HighJump's growth should be attributed to the malleability of its software, due to HighJump's early adoption of a rules-based product architecture that enables customization without modifying source code. Thus, minimizing the costs and traditional negative ramifications of source code-level customizations.

Although a combination of other factors too bodes well for HighJump's success, a key differentiating word at its camp is "adaptability". Its solutions are designed to embrace change throughout their life cycles, since, from the base platform and initial implementation to ongoing changes and upgrades, the architecture of a HighJump system ensures agility in today's dynamic business environment. HighJump's approach to adaptability starts with an application platform designed to manage change. The combination of a set of adaptability tools and the ability to embed business logic into reusable Lego-like "building blocks" brings a level of system configurability that is relatively rare in application software today. These adaptability tools empower customers to tailor the system to their exact requirements quickly, easily, and cost-effectively without the use of custom code, but rather by configuring (or adding new) pieces of business logic.

To that end, HighJump's Advantage Platform, the toolset foundation that enables it to deliver flexible SCE applications, is based on the Microsoft technology stack (i.e., C, C++, SQL Server 2000, and Microsoft's Internet Information Services [IIS]). HighJump's products are modular but integrated, and all share the same user interface (UI), database, and methodologies for making changes with an analogy to the Microsoft Office suite. This combination should also allow HighJump to provide the adaptability critical to delivering RFID-enabled solutions to the marketplace and allow customers to configure the behavior of their solutions as their business needs change.

Nevertheless, the vendor has had certain challenges, since a downside of simplicity and adaptability, however, lies in a likely lack of a very sharp vertical focus. To be fair, HighJump has shown some focus for the retail sector and the product also supports a number of Environmental Protection Agency (EPA) and Food and Drug Administration (FDA) regulatory compliances such as FDA 21 CFR Part 11 rule. It should be a springboard for other vertical initiatives, but which other rigid competitive products will have long exhibited as well. Further, the vendor has been plagued with the perception of its poor amenability to the upper-end of the market with highly complex requirements, which might additionally be aggravated by not a great number of deployments on upper-range OS and database platforms. Nonetheless, over last couple of years, HighJump has acquired a number of customers running on an Oracle database and some of these are even on the Unix platform, and all of which have complex, high volume environments with over 200 RF users, 150,000 shipping lines a day, and complex integration to other systems and material handling equipment.

Also, although HighJump has a transportation management system (TMS) capability, it has not been its strongest spot, and the vendor has not achieved a significant presence in the TMS market. Consequently, HighJump will have to bolster capabilities in TMS, distributed order management and international trade logistics (ITL) to become a stalwart vendor offering a complete SCE suite. It will be interesting to watch whether the 3M's deep pockets will help HighJump opt for acquisitions in some of these areas.

Further, despite the current broad functional scope, HighJump has been looking to the future with the view of further addressing some shortcomings of current SCE systems that still mainly automate and not necessarily optimize operations within the short-term optimization timeframe, and, consequently, full savings are often not yet realized. For example, mostly within the recently released Collaborative Advantage the vendor has every intention to offer the modules that would further enable supplier managed inventory (SMI), supplier execution, WIP tracking on the plant floor, remote inventory management, and vendor managed inventory (VMI). In other words, it would provide visibility to aggregated inventory planning and execution information spanning multiple enterprises (see SCP and SCE Need to Collaborate for Better Fulfillment). As an example, as soon as the part would be used in the field or in the plant, consumption information would be sent to the supplier or warehouse and vice versa in case of necessary replenishment.

Thus, both HighJump's and OMI's customers should be pleased because these acquisitions should center their vendors' SCE products inside a larger suite of complementary offerings and increase their vendors' financial viability and market visibility. In both acquisitions a stable partner enables the acquired vendor to exit from its VC backing arrangement, and to thereby differentiate from a number of remaining undercapitalized WMS/SCE vendors. Further, HighJump's management team is to reportedly remain in place, as will all of its employees, which should preserve the autonomy, focus, and culture of HighJump Software. The new subsidiary will retain its own profit and loss (P&L) responsibility, maintain control over its product development roadmap, and continue to manage a separate sales force and partners.

3M claims to want to run HighJump as a business unit with the only objective of continued selling of SCE software, whereby, in the long run, 3M might become the biggest SCE software vendor in the world. While the cross-selling opportunities exist and are tempting (a l General Electric's approach of selling software to industrial clients, thereby complementing products with services, during Jack Welch's tenure), 3M has not yet set requirements for HighJump to cross-sell with other business units. These potential synergies will have to be handled carefully, though, given that imposing too demanding requirements of sort have traditionally disrupted the acquisition of an enterprise applications vendor by large industrial organizations like 3M. Further, the autonomous model has worked well before within 3M, as experienced with the decade ago acquired company that has meanwhile became 3M Health Information Systems, which has remained a successful and still autonomous operating unit of the company ever since. HighJump is also the 3M's first acquisition since buying the medical coding software assets of UK-based Vantage Health mid-2003.

One could even give a strategic merit to this acquisition, since in the long run, this could be 3M's first shot at developing integrated systems for the RFID-enabled supply chain. The corporation already has several projects in progress that relate to RFID and auto-identification technologies in general. Bundling these with the proven data collection and SCE application savvy of HighJump, could result with an integrated system that could capitalize on the RFID market eventual onset in earnest. This is not to neglect the pain of figuring out the synergies and complementary or overlapping functionality of the separate products that are to be blended, though.

While not that autonomous like HighJump within 3M, the promise of few immediate changes to its day-to-day operations seems to hold for OMI too within Retalix. Most of its staff will supposedly remain on board, which should help the combined company's competitive positioning. The synergy is apparent here too, given Retalix focuses first and foremost on grocery and convenience retail stores, and it will likely continue to focus on these verticals by leveraging the OMI product's complementary technologies.

This concludes Part Two of a three-part note.

Part One discussed recent events.

Part Three will cover challenges and make user recommendations.