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January 25, 2004

Ariba looks to services with Freemarkets buy

Procurement software vendor Ariba Inc is transforming itself into a procurement services firm through a $493m takeover of rival Freemarkets Inc.

By CBR Staff Writer

Under the terms of the deal, Ariba will pay FreeMarkets 2.25 shares and $2 in cash for each outstanding share in Ariba, valuing the entire deal at around $493m. This is a premium of almost three and a half times the company’s forecast 2003 revenue of between $140m and $142m, and also a premium of one and a half times the company’s market capitalization of $348m prior to the announcement on January 22.

The newly company will have combined revenue of $360m, and following the deal, Freemarkets president and CEO Dave McCormick will become president of Ariba, and Bob Caldera, president and CEO of Ariba will remain CEO and chairman of the board. The deal is expected to generate savings of $25m annually for the combined company.

Freemarkets operates across offices in Pittsburgh, London and Singapore providing a range of software and services for the procurement industry, including its supply chain analysis tool Freemarkets ES and its request for sourcing information and proposal software tool Freemarkets QS. Yet Freemarkets is more focused on procurement services, where it provides application development, training and education services, IT consulting, benchmarking and procurement outsourcing.

Ariba, meanwhile, has a broader set of software tools for the sourcing and procurement sector including Ariba Analysis, Enterprise Sourcing, contracts, category Management, and supplier network.

The procurement software and services sector is going through a period of rapid consolidation, spurred by anticipated demand for procurement outsourcing. According to a report from Accenture, which surveyed more than more than 200 procurement directors from a wide variety of industries across Europe and the US, the number of organizations considering procurement outsourcing will double during the next two years. It also showed that nearly half of companies in Europe and the US will outsource part of their procurement operations by 2006.

Both Freemarkets and Ariba have suffered from declining sales over recent years. Ariba announced preliminary results for the first quarter ended December 31, with revenue down as much as 16% to $52m, and net profit of $6m. Freemarkets also issued preliminaries anticipating revenue of between $33m and $34m, down from $49m in 2002 and a net loss of between $0.19 and $0.20 per share.

The Freemarkets deal comes hot on the heels of Ariba’s decision to acquire procurement outsourcing firm Alliente Inc earlier this month, which employs about 100 people and provides outsourced indirect procurement services to technology companies such as Lucent and Avaya.

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Indirect procurement is the purchase of goods and services such as supplies that are common to all businesses, and here Alliente offers services such as leasing, document printing and marketing, travel administration, industrial equipment, property services, and energy services.

This article is based on material originally published by ComputerWire

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