Will Recent Acquisition Catalyze Catalyst's Strategy? Part Four: Market Analysis, Challenges, and User Recommendations

Market Analysis

Catalyst International, Inc. (OTC: CLYS.OB), a global provider of supply chain execution (SCE) applications, announced that it has signed an agreement with ComVest Investment Partners (www.comvest.com), an institutional private investment firm, which will result in the acquisition of all outstanding shares of Catalyst. In the proposed transaction, a company formed by ComVest would merge into Catalyst, while the shareholders of Catalyst would receive $2.50 (USD) per share in cash in the proposed transaction.

While the outright intra-market consolidation within the enterprise resource planning (ERP) market has been both apparent and logical, the SCE/WMS (warehouse management systems) market continues to grow modestly but it is 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. 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 over the $100 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 to pay 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.

Thus, instead of consolidation, we may rather witness the stratification of the big getting bigger and the small recoiling to a survival mode in the shadow of the giants by focusing on some "safe heavens". Others, like Catalyst, will strategically fill unique market needs in order to gain growth and scale. To that end, given its diminished profile in the market, and smaller installed base compared to the above-mentioned competitors, Catalyst is better off avoiding a direct heads-on competition with the likes of Manhattan Associates.

However, this is not to imply that the SCE vendors, even the largest ones, are off the hook, given that most of them face certain challenges notwithstanding. First one is the fact that the sluggish economy has lately caught up with this otherwise resilient market as well, while, on the other hand, the competition has been intensified from many ERP vendors, particularly from the tier 1 ones 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 lately 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 (see ERP Vendors Intrude on SCE/WMS Safe Haven). Hence, the Catalyst/SAP combination has a much better chance of competing with stalwart pure-play SCE vendors, in terms of both functionality, experience, install base/references and, especially, viability.

Additionally, by being acquired by ComVest, rather than by a direct competitor, Catalyst stands a better chance toward a broader supply chain management (SCM) "roll-up" strategy, in which Catalyst would use ComVest's funds to buy smaller, complementary vendors to increase its install base, revenue, and market share. As stated earlier on, this business model of going private, getting the house in order, 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. Moreover, it seems to be working even for smaller vendors like Made2Manage, which, after a period of even seemingly drastic purges by the new owner (see Battery Power Shakes Up Made2Manage), seems to be back with a recent acquisition of DTR Software International, a provider of manufacturing, distribution, and financial management software designed for the industry-specific needs of plastics processors.

This is Part Four of a four-part note.

Part One presented the event summary.

Part Two presented the current strategy.

Part Three discussed Catalyst and SAP.

Challenges

Yet, although the acquisition may accentuate a new level of interest in the SCE market by the financial community, Catalyst will have to continue to demonstrate their recently much improved execution in order to satisfy its investors and to entice them to open their purse strings and support its aforementioned strategy. Also, Catalyst will have to convince SCE prospects that it is a viable option, by more successfully winning or acquiring new strategic customers. To that end, throughout 2003, the vendor has released a slew of first-time products, such as CatalystCommand Transportation, CatalystCommand Labor Management, CatalystConnect Supplier Link, CatalystConnect Carrier Link, CatalystConnect Inventory Optimization, CatalystConnect Demand Management, CatalystConnect International Trade Logistics, CatalystCompass Alerts 1.0, CatalystCompass Reports 1.0, and CatalystCompass Reports 1.0.

Further, even more recently, mid-2004 saw the release of CatalystCommand Slotting 1.0 and CatalystCommand iRFID 1.0, both with impending SAP integrations. Both were also the initial releases of the products, while A1.1 releases are planned for late 2004. While this footprint enlargement is impressive, it will require continued serious investment, while the likely immaturity of newly introduced modules might deter the prospective customers to deploy them in the near term.

The ongoing relationship with SAP too remains both a blessing and a curse. Namely, while potential for this growth is good, Catalyst must balance carefully its partnership with SAP and its ability to execute as an individual company to avoid conflicts in strategy that could damage its business in the longer term. Catalyst needs to maintain the ability to sell its products independently of SAP to be viable in the long run. Thus, it must continue to seek business that supports its non-SAP goals, while still paying due "tribute" in the form of implementation services to its long time partner. These goals should include further expanding its product offering to cover more of the SCE space by adding transportation management or advanced order management products.

Further Catalyst faces an immense task in educating SAP's sales force about its new SCE products, which is critical for enabling SAP to sell its products efficiently without placing an unmanageable burden on Catalyst's limited resources. Ironically, there might always be a conflict of interest, as SAP product managers may complain to SAP senior management that the partnership and the componentsNOW site is causing them to loose revenues in their equivalent application areas, although the rationale behind the partnership was SAP's initial inadequacy in certain SCE niches.

User Recommendations

Current Catalyst customers should not feel any increased sense of urgency from these events. If anything, existing customers should be comforted by the backing of a financially stable parent company with money to invest. Although this acquisition sounds like a very positive event, and ComVest and Catalyst appear to have strategic growth intentions, look for future proof in the actions they take in the coming months. Additional acquisitions that provide strategic value and synergy with CatalystCommand should be welcomed, while any severe cost-cutting, restructuring, and management turnover should be looked at cautiously. Typically successful software acquisitions have been those where the acquirer valued the acquisition of "brains" rather than only a code base.

For companies in retail, consumer packaged goods, or industrial technology, Catalyst WMS products offer a rich set of features and can be customized according to specific customer requirements. We encourage users to include Catalyst on a short list for UNIX-based WMS selections. SAP users who are unsatisfied with mySAP Enterprise's WMS/SCE capabilities will certainly wish to evaluate Catalyst's support and product extensions. As times goes on and Catalyst further refines its ability to execute alongside SAP, SAP users should find the alliance to be a low risk alternative to other SAP WMS combinations. Alternatively, where ease-of-interface is important, SAP users may want to consider Provia Software's WMS, which offers a standard interface to connect to SAP R/3.

Prospective customers in the above-mentioned high volume industries with complicated warehousing requirements should consider Catalyst WMS as a promising candidate. Also, users that have special requirements or those that wish to duplicate their existing best practices should place Catalyst WMS on their shortlists for its proven customization capability. Still, existing and prospective customers should evaluate and buy from Catalyst the already proven solutions, while the upcoming or very recent solutions for new requirements might be postponed until they have more market acceptance.