Anti-Network Trust or Anti-Network Bust? The DOJ Review of SAP's Proposed Acquisition of Ariba

Anti-Network Trust or Anti-Network Bust? The DOJ Review of SAP's Proposed Acquisition of Ariba
Spend Matters PRO is two-thirds of the way through our three-part, 4,000 word coverage of the DOJ's second information request analysis of the SAP/Ariba transaction (the second part went live this morning). If you're not a PRO subscriber, you're missing out key research and analysis that provides a view into what the investigation may hinge on -- and even potential remedies that could be proposed (if the second request for information results in any actions). We even do a full detailed review of second requests and subsequent DOJ/FTC actions by the numbers.

Spend Matters PRO Core subscribers can gain immediate access to our commentary. Here are some excerpts from the initial two parts of our analysis:

"What is more interesting, however, is what types of transactions typically receive a second request for information. Here, the data is overwhelming weighted toward ... the total number of second request investigations for the DOJ that fall into this bracket represent 29.3% of all requests (this percentage comes to 41.4% adding in the FTC numbers). Within this $1B+ range, 159 deals could have qualified for a second request for information. In total, 24 actually were (factoring in both DOJ and FTC requests). Ultimately at all transaction levels, the FTC challenged 17 during the same time frame. Now go back to the actual number of second requests for information..."

"Given these numbers, where is the Ariba and SAP deal likely to fall and how would we handicap the odds? We would argue that given the two providers compete in similar markets, there are three key product areas and relative market share the DOJ will be examining closely ... Of these ... only two of the three really matters."

"... As part of their analysis, the DOJ will undoubtedly consider industry analyst market share analysis from the quantitative practices of Gartner, IDC and Forrester. Yet as any analyst relations professional knows, the numbers that these firms report are not terribly useful in these types of detailed analyses for three key reasons. First, the information on market share for vendor specific levels is typically rolled-up into broader buckets (e.g., "procurement software" rather than "eProcurement" specifically). Second, this information is also self-reported vendor information and is not audited by any third party ..."

"It's critical to note, and it's not clear the DOJ will immediately see this point, that network volume and eProcurement volume are, depending on the provider, fungible. If I lower prices (as Ariba has done for eProcurement) that buyers pay and raise network fees, I've essentially moved revenue from one bucket to another (or arbitraged it in the case of the valuations that investors are assigning to network revenue of late). Further, to describe SAP and Oracle as having the most eProcurement revenue (as most of the industry analyst reports do for eProcurement) is potentially misleading, as Ariba prices its solution (for buyers) below the market because they make up the delta (and then some, depending on the transaction volume/supplier mix) on the network side. Hence it's not an apples-to-apples comparison."

"One factor the DOJ and FTC consider in the case of horizontal industry mergers is the impact on competitors of a potential combination. We are quite certain that if the DOJ interviews P2P providers such as Coupa (e-Procurement), TradeShift (e-invoicing), Ivalua, b-pack, Proactis, Basware and others that the majority of competitors would say that in the case of P2P, the acquisition will actually help them when it comes to selling products (except if SAP decides to further reduce Ariba's already cut-rate buyer-side pricing and further escalate a price war). But if you ask the same questions of Ariba's network competitors ..."


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