Will Recent Acquisition Catalyze Catalyst’s Strategy? Part One: Event Summary

Event Summary

The long predicted consolidation within the warehouse management systems/supply chain execution (WMS)/ (SCE) market seems finally to be happening, albeit behind schedule. Yet, the pathway to consolidation has proceeded along a somewhat unexpected route, and the key players have not always been the usual suspects. Namely, instead of a direct intra-market consolidation, some public SCE/WMS vendors —or smaller, even profitable but undercapitalized and undervalued WMS/SCE vendors—have been acquired by wealthy, more visible parents that may or may not have their own complementary products. An example of the a struggling public WMS/SCE vendor is seen in the recent acquisition of former EXE Technologies by SSA Global (see SSA GT To EXE-cute [Yet] Another Acquisition). Examples of the latter is the agreement by 3M to acquire HighJump Software, the acquisition of OMI International by Retalix (see 3M Wraps Up HighJump, While Retalix Shops OMI International); Investcorp's recent acquisition of Viewlocity (which originates from the three-way merger between former publicly-held supply chain planning [SCP] provider SynQuest with two privately held supply chain event management [SCEM] providers, Viewlocity and Tilion in 2002, see Merger Mania At Its Extremes). Also included in this category is Provia Software's recent alignment with its parent Viastore (see Provia Tackles RFID in a Twofold Manner; Part Three: Provia and Viastore Systems Alignment), as well as the acquisitions of TRW by QAD and TDC Solutions by Epicor.

The best examples of an intra-market merger is Manhattan Associates' acquisition of Logistics.com in 2002 (see Logistics.com Becomes the Newest of Manhattan Associates), and the recent merger between RedPrairie Corporation and its European counterpart and former competitor LIS (see RedPrairie to Spread Across Europe through LIS Acquisition).

The most recent example of a public company in this space that has turned to an outside investor for growth capital would be Catalyst International, Inc. (OTC: CLYS.OB), a global provider of SCE applications. Catalyst finalized the sale of all its outstanding shares to ComVest Investment Partners (www.comvest.com), an institutional private investment firm. As a result of the acquisition, a company formed by ComVest was merged into Catalyst, while the shareholders of Catalyst received $2.50 (USD) per share in cash. The Catalyst Board and the special committee received a fairness opinion with respect to the transaction from CIBC World Markets Corp., which acted as the exclusive financial advisor of the special committee in this transaction.

This is Part One of a four-part note.

Part Two will discuss the current strategy.

Part Three will cover Catalyst and SAP.

Part Four will provide market analysis, challenges, and user recommendations.

Part Three and Four will be published October 28 to 29.

Market Impact

Against the backdrop of the aforementioned moves of some marquee SCE players, this "going private" deal should benefit Catalyst and its existing customers. It should provide these customers with a more financially viable and secure vendor with access to the capital it will need to expedite progress on its recently espoused "Best-for-Business" strategy. The Best-for-Business strategy addresses the industry's need for platform independence and open integration across any infrastructure. Although the SCE market has not been as hard hit as some other enterprise applications markets (by severely depressed software investments during the economic downturn), the same could not be said for Catalyst. Despite its combination of twenty-five years of industry leadership in warehouse and logistics software development with an in-depth understanding of enterprise resource planning (ERP) systems—and despite its impressive array of high-profile customers like Boeing, Brown-Forman, Maybelline, Office Max, Sacks, Sony Music, Osram Sylvania, Panasonic, Rayovac, Subaru, Abbott Laboratories, Castle Metals, Illinois Power, Reebok, The Home Depot, and other global leaders—the Milwaukee, Wisconsin, US-based company was floundering when the new management team took over in 2001.

Catalyst International began in 1979 as a custom development firm specializing in building warehouse management systems, with its first customer being Chrysler Corporation. During its first twenty-plus years, the company deviated only slightly from its original charter, although by the early 1990s it began to move towards becoming a provider of packaged-engineered solutions. For a long time, Catalyst fit comfortably into its niche as a WMS provider, focusing on high volume, complex industries in the top enterprise tier (companies over $1 billion (USD) in revenue). Its principal product during 1990s was Catalyst WMS, a table and parameter-driven system that manages the functional requirements of a warehouse/distribution center (DC). Most of its revenues still derive from sales of its core WMS, customization work (modifications), support, and hardware.

Within SCE, Catalyst's former management remained focused squarely—and for quite a while, successfully—on WMS to the exclusion of complementary functionality such as transportation management systems (TMS) and labor management systems (LMS). Although limiting itself to WMS, Catalyst did explore growth opportunities afforded by porting its WMS to other platforms. In the late 1990s, the company made two attempts to port its UNIX-based software to the Microsoft Windows NT platform, including a scaled down version of its WMS for the mid-market, but neither generate significant new sales and both were subsequently discontinued.

During the halcyon days of the early and mid-1990s, Catalyst enjoyed positive compound annual revenue growth of 20 percent. Later that decade, however, its results were more often disappointing than upbeat, with Catalyst citing Y2K or other convenient scapegoats for poor earnings. Several factors contributed to its losses, including

1) an unsuccessful attempt at utilizing purchased development of ISI (Information Strategies, Inc.) for a Windows NT version of its Catalyst WMS product,

2) premature expansion of its service and maintenance staff in the US and overseas, and

3) massive turnover of its direct sales force in 1997.

Further, in spite of its deep expertise and functionality in WMS, in the 1990s, Catalyst would often lose deals to competitors offering broader functionality to clients who anticipated future IT needs that extend well beyond mere WMS. A good example of this was Provia's win over Catalyst at Owens Corning, who signed for warehouse and yard management—two systems also offered by Catalyst—but chose Provia in part because Corning foresaw a future need for Provia's existing transportation management capabilities.

However, under the helm of the current CEO and president James B. Treleaven, Catalyst began in late 2001 and early 2002 to execute its turnaround strategy by focusing on two important goals. First, it carefully managed its cash resources, focused on existing customers, re-architected and expanded its core product, expanded its services business, and leveraged key partner relationships. Second, as this foundation took hold, Catalyst would position itself as a long-term player in the consolidating SCE arena by building a platform to support steady growth, which is where ComVest comes into the picture. As indicated earlier, through its acquisition by ComVest, Catalyst is now better positioned to execute a broader supply chain management (SCM) "roll-up" strategy. Catalyst can now use ComVest's funds to buy complementary vendors to increase its install base, revenue, and market share. This business model—i.e., getting the house in order, raising capital and then coming back through acquisitions—has lately been proven to work in some other enterprise applications markets, most notably in the case of now acclaimed SSA Global or still less vocal Infor Global Solutions (formerly Agilisys, see Examples Of How Some Mid-Market Vendors Might Remain Within The Future Three (Dozen)?).

Alliance With SAP

Probably the most significant and defining event since Catalyst's founding was its alliance with the ERP giant SAP (see Catalyst International Ties Fate to SAP). Signed in late 1999, the deal named Catalyst as the preferred provider of WMS for SAP's LES (Logistics Execution System), a component of the mySAP Supply Chain Management (mySAP SCM) suite. SAP LES provides some core WMS functionality but has been criticized for its inadequate depth of offering for certain high volume industries, where Catalyst WMS has preferential status to fill this void and provide support for WMS installations in SAP's customer base.

Hence, in return for an insignificant portion of its capital (SAP thereby took a 9.7 percent equity stake in Catalyst), SAP gained an experienced consulting partner. The alliance has certainly helped SAP expand its already huge market footprint into the warehouse management execution, by leveraging certified interface partner Catalyst. Further, the alliance offered Catalyst the potential for tremendous growth provided it would receive support from SAP sales representatives, who would have to screen leads so as not to overburden Catalyst's small direct sales organization. SAP then designated Catalyst as its preferred high-end WMS provider and agreed to sell the Catalyst WMS product through its huge sales force. Although Catalyst had high expectations for this partnership, the anticipated double-digit growth in revenues never materialized. In addition, Catalyst had to spend $3.6 million (USD) as part of a general corporate restructuring to accommodate the SAP alliance. These costs and an insignificant increase in revenues contributed to Catalyst's eroding profit base. All these factors, among others, resulted in the departure of its former CEO in mid 2001 (see SAPped Catalyst Warns in Wake of CEO Departure).

In recent years, Catalyst has made efforts to significantly strengthen and leverage its SAP alliance and extend offerings to a wider swath of the enormous SAP customer base. The two firms have set a new standard for integration by jointly developing the SAP advanced interface for integrating the Catalyst WMS and SAP's LES with R/3 and mySAP Enterprise. Under the alliance with SAP, Catalyst deploys its service organization to implement and provide support for customer and TeamSAP partner requests, including a support hot line, implementation services, and on-site support for SAP LES in North America. Following its mid 2003 acquisition of Philadelphia, Pennsylvania, US-based Catalyst Consulting Services, Inc., an independent provider of consulting, implementation, and support services for SAP LES, Catalyst strengthened its position as a principal service provider for implementation and modification of SAP's LES as well as for wireless data collection solutions that incorporate SAPConsole.

This concludes Part One of a four-part note.

Part Two will discuss the current strategy.

Part Three will cover Catalyst and SAP.

Part Four will provide market analysis, challenges, and user recommendations.

Part Three and Four will be published October 28 to 29.