It's Time for M&A Activity to Heat Up This Fall (Part 3)

In the first two posts in this series, we explored the growing acquisition trends in the market and how best to prepare ourselves for managing M&A activity in our supply base in both the general supplier community and with software vendors. In this 3rd post in the series -- which I'm sure many of you have been waiting for, especially if you want to fall asleep at your desk -- I'll provide context around some of the bigger names in the sector in regards to potential M&A activity. And over the next few weeks, we'll get into even greater detail (and probabilities) with a broader section of the Spend Management solution provider market when it comes to acquisition potential. Let's begin.

First, when it comes to the biggest names in the sector -- SAP and Oracle -- I suspect we'll continue to see targeted acquisition activities much along the lines of SAP's recent acquisition of Analytics, Inc. But unless either vendor decides to push the button on a larger deal -- forcing the other to double-down their efforts on the sector -- I'd say we're more likely to see smaller fill-in acquisitions versus middle market-sized ones (e.g., Ariba). At this stage, I don't believe Ariba, in particular, is going to be very aggressive on the software acquisition path simply for the reason that much of the value in their next generation solutions will come from further business process integration between the assets they already have, not to mention building out their network-based partner ecosystem (e.g., the Receivables Exchange that lets suppliers receive early payments financed by third parties).

However, if I were playing the odds on the Blackjack acquisition table, I do suspect that we'll see acquisitions from Ariba in the services arena to make up for lost revenue due to the highly volatile consulting market in 2009. But as many readers of Spend Matters know who have been consultants in the past (or are consultants now), buying services firms versus getting value from such acquisitions are two very different things. Partners often leave as quickly as they can, staff turnover mounts as rivals poach the best talent away and culture shocks are often more frequent than cultural fits (e.g., "You guys don't fly business class to Europe? What did I sign up for here ... "

But I believe the consulting market actually will be a key indicator for Ariba on whether or not they're dining at the table or becoming the main course for SAP, Oracle, HP, Accenture or IBM if they decide to get really serious about the sector. How is this the case? It's simple. 90+% of Ariba's software revenue is basically locked in from long-term SaaS and maintenance deals. Perhaps more. In other words, they know their basic software numbers for the next 12 months -- possibly much longer in some situations. But consulting and services numbers are more variable factors from a revenue and earnings standpoint (as are volume-based network transaction fees from suppliers).

In other words, if Ariba struggles on the consulting front, they're likely to become an extremely attractive acquisition candidate based on the recurring SaaS and network revenue and business model (not to mention the underlying services assets) if their share price drops below a certain point due in large part to near-term services revenue blips. But on the other hand, if the share price remains solid, an acquisition becomes less likely. In other words, if you want to handicap the odds of an Ariba acquisition, look at their services numbers or attempt to forecast them from talking to folks who know the organization (not that I would ever do this mind you, but you can do it yourself ;-).

Now that I'm into the topic and I've said what I want to regarding some of the biggest names in the space but not the others, I see that I'm running out of room. Which means I'll need to revisit this area again in yet another installment of this series next week. Stay tuned for Part 4 of my Q3 M&A analysis.

Jason Busch

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