Ariba boosts services with FreeMarkets and Alliente buys
By David Hannon -- Purchasing, 2/5/2004 2:00:00 AM
The purchasing technology consolidation trend continued as two of the most prominent names in procurement software announced plans to merge. Enterprise spend management software provider Ariba (Sunnyvale, Calif.) on January 23 unveiled plans to acquire reverse auction service and software provider FreeMarkets (Pittsburgh) in a deal valued at $493 million.
FreeMarkets looked to be preparing itself for an acquisition throughout January when it: laid off 45 employees (7% of its total workforce) at its Pittsburgh headquarters; boosted share price with the acquisition of Covisint's auction services; released its version ES 4.0. On Dec. 31, FreeMarkets shares were trading at $6.70 on the Nasdaq exchange, while on Jan. 22 (the day before the Ariba deal was announced), shares closed at $8.41
The move bolsters Ariba's recently beefed up services offering, following the earlier announcement in January that it was acquiring niche business-process services firm Alliente. At press time, that deal was expected to close in late January. AMR Research's Pierre Mitchell said the Alliente acquisition was 'a great move for Ariba, which has struggled to find alternate delivery models beyond the direct sales of perpetual license software deals. It's also a way to bolster services revenues in a market in need of strong professional services based on the amount of shelfware out there.'
Martin Boyd, director marketing at Ariba, told PURCHASING the category management focus that FreeMarkets brings to the table through its commodity experts matches up well with the vision that Ariba has been moving toward.
'This isn't necessarily a deliberate effort to focus on services, but more of a move to meet customers' needs,' says Boyd. 'Customers are becoming more vocal about their need for services. Everyone's been burned by large software implementations where they don't get what they want. We're pushing the expertise we have down to a deeper level of category expertise. We have found that companies move rapidly through the levels of support they need. If you don't have that broad range of offerings, you may lose that customer to someone else.'
Ariba will be pushing its category-specific offerings through the first quarter, more aggressively after the FreeMarkets deal closes. FreeMarkets' commodity experts will be available to Ariba customers after the deal closes. The technology platforms will run separately for a period of time until they can be integrated into one application.
'Our vision is to have a single technology stack in the future and we will merge those two technology streams, but we don't plan on killing off anything and leaving any customers behind,' says Boyd. He added that both hosted and self-serve tools from FreeMarkets will have places in the Ariba offerings going forward.
There is an estimated 20-30% customer overlap between the two, which is a 'relatively low percentage,' according to Boyd.
'There is an obvious co-sell/up-sell opportunity there,' says Boyd. 'But more often than not we coexist easily. FreeMarkets tends to sell to a divisional manufacturing level while we tend to sell to the highest level possible. We often coexist at different levels of an organization. Historically, FreeMarkets might be used for more direct materials in an organization, for example, while Ariba is typically used more for indirect materials.'
Boyd says as both companies began broadening their capabilities, they began overlapping in more areas, which made the merger more sensible to combine the two company's efforts.
'We had not totally duplicated each other, but we were sharing the same vision in a lot of areas,' says Boyd. 'We are both heading toward the goal of enterprise spend management with a combination of software and services.'
Ariba's timing may also have to do with the changing attitude toward e-auctions. Where once the technology had clear proponents and opponents in the purchasing world, buyers today have a more practical view on the use of auctions, a fact that has not been lost on Ariba.
'Now there are so many more forms of collaborative negotiation bundled into the same infrastructure, that I think today it is the case that reverse auctions are just one tool in the toolbox,' says Boyd. 'E-auction is only one of the negotiation techniques.'
Boyd says another driver for this acquisition was the lack of identity that Ariba suffered, noting that the market continued to identify Ariba as a catalog provider and not enough as a sourcing technology provider.
The merged company will retain the Ariba name, with an estimated $360 million in revenues and will be based in Sunnyvale with a 'large presence' in Pittsburgh going forward, according to a statement. Ariba chief Bob Calderoni will become CEO of the combined firm, while FreeMarkets President and CEO Dave McCormick will become president of the new company and join Ariba's board of directors.
'This acquisition has to have a big effect on the market, although I would not want to hazard a guess as to what that effect will be right now,' says Boyd. 'If I were one of the smaller players in this market, I would be very worried.' Ariba also hopes the deal will bring more awareness of spend management as a category in its own right, making smaller narrower applications less viable.
Other players in the market were eager to offer their thoughts on the deal's effect on the market. Mark Morel is president and CEO of Procuri, an e-auction technology provider that shares some customers with Ariba. Morel says he sees the deal as a positive move that will drive awareness and attention to the market and its solutions.
Morel says Ariba's move to bolster its services is contrary to industry trends. 'Ultimately, customers want to be in a self-sufficient mode and we drive that from day one,' Morel says, adding that integrating the two companies and technologies may turn some customers away from the new Ariba.
Stephen Savignano, CEO of Ketera Technologies says customers are causing a fundamental change in how solutions providers behave.
'Customers want comprehensive solutions that provide rapid value at a price model that doesn't penalize them upfront,' he says. 'To meet this demand, vendors must acquire and integrate other companies or partner with best-of-breed providers.'
Ariba finalizes acquisition of Procuri
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