Friday Rant: M&A Watch — Getting More From Ariba's Underlying Assets (Part 1)

I recently watched an interesting discussion arise among the Enteprise Irregulars about the potential benefits of breaking up large technology and services companies. Historically, few companies, without the prodding of outside activist investors or private equity funds -- or at least at the urging of their strategic advisers, be they an investment bank or McKinsey -- undergo a splitting apart of assets to maximize value for shareholders. But such moves can be precisely what the shareholder value doctor ordered when it comes to having assets valued more inline with market norms -- and potentially taking of or making up for other challenges tied to to the business.

This discussion made me think for a minute about the potential benefits of splitting of Ariba. It most likely won't happen under the current management, but if acquired, a splitting up of Ariba might make sense for new shareholders. Given the chatter of investment professionals and some PE firms I've spoken with recently -- not to mention Ariba's slight retrenchment in share price and continued solid financial results -- this scenario appears seems at least mildly probable.

Outside of acquisition potential, consider today how Ariba still trails the SaaS valuations of many of its general peers in the software market, such as SalesForce.com, Concur, SuccessFactors, etc. Despite a growing, healthy SaaS business model that has significant strategic intent behind it (e.g., charge buyers up-front and annually (with up-sell potential) while generating additional, high margin revenue from suppliers down the road), Ariba will continue to face a market that will unfairly discount its SaaS valuation because of the headaches and career ending moves the stock rewarded fund managers with when the original .com B2B sector exploded almost a decade ago when Ariba was a poster child for the downturn. The only way to ascribe the valuation to this revenue it should have would be to split it out and potentially even change the name of the business.

As a second argument in favor of splitting up the business either as part of another company (or buyout), I'll toss out the difficulty Ariba continues to have building the type of traction it should with channel partners – SIs, consultancies, BPOs, etc. If Ariba got out of the implementation services business entirely (except for minimal configuration) and only touched on limited elements of related process change, they could finally convince existing and potential partners to do business with them from a position of support and excitement versus fear of client theft. Despite the recent overtures by Ariba with channels, nearly all partners (and former partners) still comment behind the scenes that they won't trust Ariba's services business to work with them on a level like competitors (e.g., Emptoris, SAP) until there's new leadership with a history of channel embracement versus alienation.

Why? The legacy behavior of the original Arthur Andersen consulting team that came over to form the foundation of Ariba's services organization combined with the FreeMarkets GSO sourcing delivery resources, continue to scare channels away. Without an internal services organization, I know that in a short time period, over half a dozen large service providers would flock to Ariba as a SaaS/software partner of choice, suggesting their solutions over others to clients. But until this happens, I have been told by large services providers in the market that as long as the current structure and leadership remains in place, there is no way that they will provide anything more than lip service to building meaningful partnerships.

Continuing on the services front, I continue to believe that Ariba does less than a stellar job selling and positioning the deep, expert services that it's capable of delivering on the sourcing and supply markets intelligence side. The positioning of these services "in the cloud" marks the latest installment of the type of BS marketing that obfuscates Ariba's failure to take even 50% advantage of the FreeMarkets asset that it acquired. Ariba has been flanked, for example, when it comes to building a market intelligence business by providers such as Beroe, Smart Cube, Procurement Intelligence Unit, etc. This is a shame, because I honestly believe Ariba has a better foundation to create a superior offering in this area. And from a sourcing services delivery perspective, this group has continued to stagnate from a revenue perspective, showing only minimal growth, while direct competitors such as AT Kearney Procurement solutions have thrived and new upstarts like Denali Sourcing Services have done more than just get off the ground.

I continue to believe Ariba has tremendous opportunity in this area given the talent, operational efficiency, commodity expertise and overall management of this organization. Even though I'm biased given my roots, I think the underlying "sourcing factory" that FreeMarkets created and Ariba owns remains second to none in its ability to deliver value, yet the ability of the Ariba organization to sell this value alongside software -- not to mention creating logical services and content extensions from it -- has failed to materialize based on the original strategy behind the deal (which, in full disclosure, I played a limited role in creating and positioning). Ariba is now relying on "The cloud" as an umbrella its latest attempt to position its services. But there is so much greater potential than this given the capabilities of the underlying assets compared with having to fall back on marketing lingo.

I'm almost 100% certain Ariba will never split itself apart in its current form. But regardless, it's a useful exercise to investigate the potential benefits of such a move, given both the probability that they'll be acquired at some point and the individual strengths and what I believe are the advantages of Ariba's underlying businesses compared with the competition in certain areas. In the second installment of this rant, I'll discuss how I would tackle splitting apart the business to maximize returns for different stakeholders, including customers, shareholders and partners, especially under an acquisition scenario.

Jason Busch

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