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  1. Technology
May 1, 1997updated 05 Sep 2016 12:58pm

WHAT MAKES RED PEPPER SUCH HOT PROPERTY?

By CBR Staff Writer

From M&A Impact, a sister publication.

PeopleSoft Inc’s $225m acquisition of the Red Pepper Software Company has created as many problems for existing users as it has solved. While the move will have strengthened confidence among users of PeopleSoft’s Manufacturing module, which has long incorporated under-license Red Pepper’s state-of-the-art finite scheduling software, it will have left other users feeling miffed. They are users of rival enterprise resource planning, ERP, suites who have also relied in the past on Red Pepper software.

By Krishna Roy

Most notable among the potentially disgruntled user group are big name SAP AG and Oracle Corp sites like 3Com Corp, Western Digital Corp, and Hewlett-Packard Co whose supply chain and manufacturing plans will be part based on Red Pepper-derived schedules. They will have grave concerns about the new parent. The immediate question raised by PeopleSoft’s purchase of Red Pepper Software is why would it pay $225m for a small and so far unprofitable, three-year-old software house with an installed base no greater than 33 and a mere $10m in revenues? It could be for several reasons. The purchase guarantees the future appeal of PeopleSoft programs in the manufacturing sector. The scheduling and proven on-the-fly planning features of Red Pepper’s ResponseAgent program are fast becoming a must-have when selling ERP systems into industry. Where once manufacturers were focused on quality initiatives and just-in-time methods, the new fixation is customer-driven scheduling – exactly the area where ResponseAgent is strong. Supported by the software, staff can quote delivery dates based on live data rather than days old stock information.

Possible shortfalls

It will enable schedules to be constantly revised and redrafted. And, by accurately charting shifts in materials, machinery, delivery and other resources, the software will alert production managers to possible shortfalls in supplies – well before delivery promises are broken. Wall Street investment analysts like Rick Sherlund at Goldman Sachs are bullish about the capabilities of Red Pepper, believing this is increasingly a selling advantage over inflexible and old-style MRP/MRPII, materials requirement and manufacturing resources planning, software. Another reason is that there is more to the acquired ResponseAgent technology than meets the eye. Ostensibly viewed as a supply chain and inventory management application for manufacturing firms, there seems no reason why elements of the constraint-based planning engine at the heart of ResponseAgent should not be sold as add-ons to other PeopleSoft applications already in widespread use. Consider employee scheduling in human resources, or managing shift rosters in healthcare, or student timetables in education – every one a PeopleSoft stronghold. If ResponseAgent is as capable at juggling human resources as it is at scheduling plant and materials availability, the product could be seen as a way of adding value across a substantial slice of the PeopleSoft installed base. Another factor in the purchase is that PeopleSoft’s hand was forced by some rival ERP vendor making a bid of its own for Red Pepper. Red Pepper’s finite scheduling package was being sold under-license by Oracle, SAP, Baan Co NV and a host of other PeopleSoft rivals. PeopleSoft may have viewed the software to be so crucial to its success in developing a competitive manufacturing offering that it simply could not afford to see Red Pepper snapped up by another vendor. As one PeopleSoft insider confirmed to M&A Impact: We had become so dependent on Red Pepper’s technology that we had to buy the company to guard against losing it. But was it under offer? Several analysts have said that PeopleSoft was in a head-to-head bid for the company with arch-rival SAP. Not so, says Jason Greenberg of Deutsche Morgan Grenfell’s Silicon Valley-based Technology Group, PeopleSoft’s advisor on the deal. Anyone who has suggested that PeopleSoft’s move was provoked in any way by SAP’s interest is reading far, far too much into it. The deal was done for sound financial reasons. PeopleSoft’s sound financial reasonings were not heard on Wall Street, however. There were early concerns among PeopleSoft shareholders, who are getting used to seeing healthy profits and regular dividends, that the deal had insufficient value. In fact, it took the market a good few weeks to fully digest that the purchase was a long-term punt. In the days immediately after the announcement PeopleSoft stock went on a short downward slide, losing $10 a share and falling as low as $68, before rallying some four weeks later when it traded as high as $94 – currently it trades around $43, after a 2-for-1 stock split late in 1996. Buying Red Pepper does look to be a good strategic alternative for PeopleSoft on the premise that PeopleSoft could not have continued on the same course of open partnership with Red Pepper, without risk that the scheduling technology might be signed over exclusively to a rival vendor and also it could not have bought a comparable product elsewhere for less.

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In addition, PeopleSoft could not have quickly developed for itself a match for the best-of-breed ResponseAgent. PeopleSoft could also actually have paid a lot more for full control of the company had it delayed, particularly if Red Pepper’s initial public offering prospects mirrored other companies in its sector. The broadly comparable software house of i2 Technology – albeit slightly ahead of the game compared with Red Pepper, with at least twice its installed base and revenues – was floated in April 1996 and realised a market valuation touching $700 million. For PeopleSoft to make best use of its Red Pepper acquisitions users will expect to see cheaper Red Pepper offerings: PeopleSoft can afford to cut the product price tag to make it more appealing: and it will need to. Unlike human resources and finance markets, manufacturing is an extremely price-sensitive sector – as evidenced by the pitifully small installed base achieved by Red Pepper so far. Its products have sold almost exclusively to large corporates and multinationals and has failed to attract the attentions of mid-size manufacturers – despite the caliber of the software and the high interest in advanced planning and supply-chain scheduling. Users will also require more widespread and improved PeopleSoft Manufacturing availability: the product will not become available in Europe until late 1997 at the earliest. Enhancements include hitherto unavailable components such as Configurator, to tailor systems to suit PeopleSoft Manufacturing. Customized versions based on tuned and souped-up versions of the Red Pepper engine to make it suitable for vertical markets will also make the acquisition appear valuable to PeopleSoft users.

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