We've received many queries lately about Spend Matters PRO content: What is it? How is it different from regular Spend Matters coverage? For the next couple weeks, every Thursday, we'll feature a full article that has appeared on Spend Matters PRO. Keep in mind: this is the stuff that appears on Spend Matters PRO every single day. This content is bigger, more in-depth, and juicier than anything you've seen before on a regular publishing schedule. So enjoy the freebies...but for maximum impact, it's best to become a Spend Matters PRO subscriber!
It's been almost two months since the seismic event of the procurement year so far: SAP's acquisition of Ariba. Whilst many of the questions we raised at the time have yet to be answered, such as the way any product integration might develop or how the two firms' sales efforts may or may not mesh, we thought it might be an appropriate time to look at the effect on a number of SAP and Ariba's key competitors.
We commented on Spend Matters UK/Europe about the apparent enthusiastic reaction from a number of competitors. Coupa, for one, seemed genuinely delighted, and not just because of the valuation of Ariba. They, and others such as Proactis, saw this as effectively one less competitor, and perhaps taking Ariba out of contention in certain "anti-SAP" accounts.
But rather than rely on qualitative and subjective comments, we thought we'd look at something a little more factual. While many of the major players in the procurement technology market are privately owned, some have publically quoted stocks and shares. So how has the market evaluated them since the SAP deal? Do investors – who have to put their money where their mouth is – reckon that it has been positive or negative for these other firms?
We've taken a look at three firms, listed in three countries, and with three somewhat different competitive positions against SAP and Ariba.
First, let's look at SciQuest. The firm floated in September 2010, and after an immediate rise in value, the stock was trading fairly steadily at around $15 in late May. The US market has risen around 3% since then, but SciQuest has way outperformed the market, now trading at over $18.
There was an immediate increase after May 22nd (the Ariba/SAP deal) and clearly the market sentiment seems to be positive in terms SciQuest. Why is that? SciQuest provides a broad suite of products, including supplier information management, P2P and sourcing. They have particular strengths in science and related markets (universities, etc.) – similar to Science Warehouse in the UK. Both firms place a lot of emphasis on their ability to catalogue highly complex technical and scientific products. So while they have that differentiator, one might think that SAP/Ariba together would be an even stronger competitor.
So why the valuation jump? We suspect there are two factors at play. Firstly, the price SAP is paying for Ariba is generous, to say the least: 10X revenue. So that must have a positive knock-on effect on the valuation of broadly similar firms. The market now values SciQuest at around 6X revenue – still well short of Ariba's valuation, not surprising given the market leadership position of the Ariba network, but up from the pre-Ariba deal level.
Secondly, while SAP/Ariba are both competitors, investors may perceive that SciQuest are now more likely to make it onto buyer short-lists. If I'm looking for three or four firms to bid to supply an e-procurement suite, I may well have included both SAP AND Ariba, who would take two of those available slots. Now, they will only take one in all likelihood. So the chances of SciQuest (or Iasta, or Zycus) getting onto my list has grown.
Let's move on now to France and Hubwoo. The immediate dynamic here was very dramatic – the day after the SAP deal was announced, Hubwoo shares fell by over a third from 0.18 Euros to 0.11! Hubwoo are close partners with SAP, forming part of an ecosystem and offering products and services that complement the SAP e-procurement product range, such as a supplier network and other cloud-based services. SAP also holds a small equity stake in Hubwoo themselves.
The immediate market judgement was that with the Ariba network coming into the SAP family, the need for SAP clients to work with Hubwoo had declined greatly. It's interesting, however, that since then, on the back of a French stock market that has risen around 3% since the end of May, Hubwoo shares have recovered somewhat and have risen to 0.13. But that still values the firm at less than 1X revenue.
Hubwoo issued a reassuring press release recently confirming their arrangements with SAP:
"Through the renewal of the BPO agreement, Hubwoo will offer outsourcing and on-demand services 'powered by SAP® software,' providing customers rapid value across their source-to-pay business processes. The agreement is now extended for an incremental minimum of three years beyond the five year term of the initial agreement."
Clearly, Hubwoo wants to suggest that the initial response was an overreaction. And if I'm a happy Hubwoo customer, will I really switch to Ariba just because they're now part of SAP? There may be pricing pressure to come, but on the positive side (for the share price), as well as their shareholding, there is still the chance that SAP will buy them as they did Crossgate, another player in that SAP eco-system, last year. So there might be a more positive outlook ahead than perhaps the market expects – but clearly there are risks as well.
Finally, moving north to Helsinki and Basware. The largest of the three firms we've featured here, with revenues of over 100M Euros, we might have expected a major reaction. The Basware supplier network is one of the very largest competitors to the Ariba network, and generally the firm is – with Oracle – the most direct competitor to the new entity (in the P2P space particularly). The Finnish stock market is trading almost exactly where it was on May 22nd (as of July 5th), and we see that the Basware stock price has hardly reacted since May 22nd, currently around 5% up having traded in a pretty tight range.
Surprising? Perhaps a little. But founders and staff hold the stock quite tightly. It is not the most liquid of markets. And it may be that the two factors we discussed under the SciQuest section are cancelling each other out here. On one hand, we would expect Basware to come under some competitive pressure. They are particularly strong in Europe, whereas the Ariba network is more US-centric. So SAP, with their German origins, will be looking to push that option amongst their own strong European customer base.
On the other hand, the market valuation of Basware is still only around 3X revenue – a huge difference to the Ariba valuation for a company that may be culturally very different but shares many characteristics. That suggests the Ariba deal may have emphasised some of the inherent value in Basware – even if the immediate competitive prospect is more challenging. So the two factors may have cancelled each other out, leaving Basware stock pretty unchanged.
Does any of this matter to procurement practitioners? It does if your chosen supplier suddenly gets acquired, or makes major acquisitions, or indeed gets into financial trouble. So while you don't need to study the financial pages quite as closely as the typical bond trader, it is sensible to keep an eye on key suppliers (of any kind, not just procurement technology) from a corporate finance and market perspective.
(Peter Smith and Jason Busch do not hold any stock in any of the firms mentioned here. Most of the firms have, however, been clients or are current clients of the Spend Matters group of companies in some form. None have provided any input to this article).