A Network Bubble We’ll Take — Owing Ariba (Specifically Ariba’s Investors) A Debt of Gratitude

Ariba's stock price has been on a tear of late and our phone has been ringing much more frequently with calls from analysts, investors and potential investors for our opinion on the sector and different vendors within it. Late last week, Ariba's stock topped $34.50. At this price, Ariba is trading at over an 8X revenue multiple. Unbelievable -- it feels like its 2000 again (well, not quite, but for reasons you'll see in a minute, this is ultimately great news for procurement, supply chain and finance organizations). I won't get into the merits of Ariba or its valuation in this column -- I prefer to invest in commodities and basic industries these days anyway -- but I think we all owe the investors that have driven Ariba's stock over 200% in recent quarters a huge debt of gratitude for breathing investment excitement back into the sector.

The fact that institutional and individual investors have propped up Ariba's multiple is having a rapidly cascading effect on investor sentiment in financing a range of different providers in the sector, which will ultimately give customers greater innovation, choice and flexibility in their Spend Management technology and solution options. Consider some of the implications of a domino effect I'm already observing in the market as a result of Ariba's valuation:

  1. Private equity firms are increasingly interested in making different bets and investments in the sector. While many were focused exclusively on examining services procurement -- often VMS plays -- a couple months ago, the interest is now broadening. PE investments are often substantial (tens or hundreds of millions of dollars) and provide both growth capital and stability for those on the receiving end. In addition, PE firms may continue with follow-on acquisitions that are a fit with their initial investments.
  2. Venture funding is opening up again in the sector and early stage companies have more options than just friends and family investment rounds (or rounds from VCs with onerous preferences and other strings attached); this in turn may help drive those sitting on the fence of launching ventures -- including some folks I know inside procurement organizations today with great ideas -- to take the entrepreneurial plunge.
  3. Emptoris, a long-rumored IPO candidate, is likely to gain additional institutional interest if it decides to file its S1 and head on a road show sometime this year. If Emptoris is able to build a war chest by going out -- which would dictate a liquidity event is not just about lining the pockets of its PE investor, Marlin -- it could spark additional consolidation in the sector which, would help create a virtuous investment cycle for earlier stage vendors (see 1 and 2, above), resulting in greater overall technology innovation and customer choice.
  4. A general uptick in valuations and the introduction of more public companies will create more visibility for the sector, especially with CEOs and CFOs in the Global 2000; this in turn may help lead to greater funding for internal procurement initiatives given the general acceptance of providers with increased brand recognition. Indeed, being "public" is not just about floating on exchange; it's a coming out party, a modern day company cotillion if you will, for organizations looking to more easily make their mark.
  5. The more their vendor's fortunes are tied to the capital markets, the greater influence and sway customers have over their vendors if things don't go as planned. When vendors are under the scrutiny of greater numbers of investors and the personal fortunes of management are more closely staked on the stock price, their company's actions (e.g., price increases, poor customer treatment, roll-out/implementation success or failure, etc.) are likely to be welcomed with greater interest in the news and financial headlines. This creates a new level of transparency and places the onus of treating customers right on every single client relationship. Of course some companies may abuse this privilege, but in general, we should welcome our ability as users/customers to have influence that extends beyond just what we pay a supplier. After all, if each dollar of revenue we provide to a supplier increases its market capitalization by a factor of 8X, then such leverage for them should come with better service for us.

Jason Busch

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