December 23, 1998 11:50 AM PST

Manugistics seeks a suitor

Manugistics is willing to sell its soul for a profitable quarter.

The Rockville, Maryland-based maker of supply chain management software said this week it is looking for a suitor, preferably one with a fat wallet, after reporting a massive $10.4 million loss, or 34 cents per share, for the third quarter ended November 30. Wall Street was predicting a loss of 6 cents per share.

"We have experienced problems this year because of our issues with execution, new competitive forces, and some market factors affecting our clients and prospects," said William Gibson, Manugistics' chairman and chief executive. "The concern with these market factors has caused our clients and prospects to make decisions more slowly than in the past and accordingly, adversely affected our performance.

"However, we are beginning to notice that clients and prospects that previously delayed decisions have recently been reengaging with us," he added.

It marks the first time that Manugistics has publicly admitted that competition and the market are playing a role in its financial problems. Until now, the company has blamed its troubles on its own internal sales execution problems.

Analysts spread the blame for Manugistics' poor first- and second-quarter earning across the spectrum from execution problems to increasing competition in the market. They have also predicted that the entire supply chain market is ripe for mergers and acquisitions.

Most of the new competitors in the market are transaction software firms such as SAP, Oracle, and PeopleSoft, which built or are building products to compete directly with Manugistics and other supply chain product makers.

Because many firms like to get as much of their software from a single source as possible, many potential Manugistics customers put their orders on hold to see what SAP and others would deliver. Now that most of the enterprise application vendors have products on the market, the supply chain customers are starting to buy again.

But the increased competition is forcing the niche players like Manugistics to seek help to survive. Gibson admitted that his company is now talking to other firms about merging.

"We are continuing preliminary discussions with other companies concerning a potential business combination," Gibson said in a prepared statement. "We are analyzing all of our options and expect to make our decisions in January, taking into account the best interests of our shareholders, our employees, and our clients."

Rumors have swirled for months that Manugistics was on the auction block. Gibson's remarks are the first admission by the firm that it is the case.

"This is the third quarter in a row where they had extremely disappointing results," said Chris Mortenson, financial analyst at BT Alex. Brown in New York. "Their feeling initially was they could get things on track quickly. They are now looking for further options at this point. If you believe that the supply chain planning market is a solid market opportunity and Manugistics has a good product, which I do, it should be a good catch."

Among the possible suitors rumored to be courting Manugistics: SAP, PeopleSoft, IBM, Oracle, and J.D Edwards.

However, SAP wouldn't necessarily be interested in Manugistics' product as much as its sales pipeline and marketing staff. Larry Lapide, analyst at AMR Research in Boston, said SAP is so far along in the development of its supply chain product that it would not likely scrap the effort to resell Manugistics' products.

As for PeopleSoft, the Pleasanton, California-based firm earlier this month bought Distinction Software. While much smaller than Manugistics, Distinction competes in the same market as Manugistics by making products for process manufacturers, those that make products from raw materials. Lapide said the Distinction acquisition and PeopleSoft's reluctance to make any large purchases indicate it is not likely to be a top candidate.

Big Blue's name has also been tossed around as a possible buyer. But Lapide said IBM has never done well in the packaged application market and is also heavily involved with Manugistics' nemesis i2 Technology, including running its own operations on i2's products.

That leaves Oracle and J.D. Edwards as the two strongest possibilities. Oracle is strongly tied to Manugistics and has a staff dedicated to integrating Oracle products with those of Manugistics. Manugistics plays a key role in Oracle's application package for the consumer packaged goods industry and Manugistics uses Oracle products for its internal operations.

While J.D. Edwards has not been a name running in the rumor mill, Lapide said it would be a nice match with Manugistics because J.D. Edwards could use a finished, proven supply chain product. J.D. Edwards currently has partnerships with a number of supply chain software suppliers including Manugistics and i2. The Denver-based firm has also been developing its own supply chain product. Buying Manugistics would let it get to market much more quickly and pick up about 800 customers along the way.

"The 'gotcha' on all of this is that the executives at Manugistics own a fair amount of Manugistics--about 30 percent, I am told," Lapide said. "The real issue is whether they will want to sell" and if so, at what price.

Manugistics' total revenues for the third quarter increased 2 percent to $43 million from $42.2 million the like quarter last year. Software license revenue fell 33 percent to $15.4 million from $23 million in last year's third quarter. The current quarter loss included a charge of $701,000 from the restructuring announced in September.

The loss for the nine months was $22.4 million, or 85 cents per share.

 

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