About 45 minutes ago, Ariba announced it was acquiring Quadrem, in what many believe will be the first of a series of potential acquisitions for the "cloud commerce" vendor as it is now describing itself. Quadrem was one of the few successful marketplaces to emerge from the early B2B era in the 2000-2002 timeframe. Focusing on the minerals and mining business (although with some metals exposure as well), Quadrem built out a broad set of capabilties in the sourcing, spend analysis, purchase-to-pay and supplier enablement/network/invoice/connectivity areas. Many of these capabilities were essentially basic or enhanced third-party solutions (e.g., SAP SRM, Emptoris, JCatalog, etc.) that Quadrem customized and built out for the basic targeted industries it served. Quadrem did, however, maintain its own software R&D capabilities as well.
The terms of the deal suggest Ariba "will pay a total of $150 million, comprised of an upfront payment of $75 million in cash and $50 million in stock, and a holdback payment of $25 million, subject to performance conditions, payable 36 months after the close in either cash or stock." In addition, "the transaction, which is subject to customary closing conditions and regulatory approvals, has been approved by both companies' board of directors and is expected to close in the second quarter of Ariba's fiscal year 2011, ending March 3."
Spend Matters believes the deal is being done at somewhere in the neighborhood of a 2X+ valuation with additional upside based on earn-out potential. Earlier this year, we thought Quadrem might be a prime IPO candidate following SciQuest's S1 filing. In this post, we wrote that "there are larger vendors in the sector that have opted to sit on the IPO sidelines, including Quadrem, Emptoris and ICG Commerce. If SciQuest is successful in its IPO efforts, you can be sure that these providers and other vendors may decide to quickly follow in their footsteps." Obviously Quadrem, however, decided to go down a different path.
Given the fact Quadrem is largely a shared service -- and does not own all of its underlying technology -- the valuation number is lower than it would otherwise be for a pureplay software/SaaS/cloud provider (this might have proved a challenge on the IPO front as well).
A few interesting tidbits about Quadrem we think are relevant in this acquisition and analysis are:
- Quadrem's close working relationship with SAP (and SAP's interest in building out a supplier network capability of its own) as an SAP BPO partner for SRM and related areas; this could be an interesting denial play against SAP and other potential vendors
- Ariba's challenges penetrating the minerals/mining customer base in the past given the success/entrenchment of Quadrem (this is also true within a handful of other sectors including A&D (Exostar), high tech (E2open), chemicals/process (Elemica); Quadrem brings immediate access and up-sell potential into: Alcoa, Anglo American, BHP Billiton, Nestlé, Vale and Rio Tinto and others)
- Quadrem's network volume and scale (which will add considerably to Ariba) spans 70,000 suppliers in 65 countries (although a small percentage of these make up the majority of network activity/volume)
- Quadrem's network fees (which represent a larger percentage of overall revenue relative to software applications compared with Ariba)
- Quadrem's footprint in emerging markets (e.g., Latin America, Africa) as well as Australia given the location of mining facilities
- Given that many of Quadrem's investors were its customers, it is not a certainty whether or not they will stick with Ariba over the long haul -- versus SAP and others -- given that Ariba is likely to provide less of a shared services experience; moreover, Quadrem's customers will now have no further upside (most likely) from an equity play perspective
We believe that while Ariba will continue to operate Quadrem independently following deal close to not rock the boat with the mining/minerals giants, the long-term play here will consist of an eventual migration onto Ariba technology and closer integration into the Ariba supplier network (despite likely initial claims made to support the technology in perpetuity). As the mining dust settles, this is a deal about scale and industry penetration, not product innovation or solution expansion. And scale, as all network providers know in different industries and markets, is essential to win in the connectivity marketplace.