Ariba to Buy Procuri — A Smart Acquisition Bargain

I just got word that Ariba confirmed it was acquiring Procuri. Perhaps most important, this deal might be a signal that Ariba is going to start to make a serious play as a consolidator in this market -- as they should. According to the announcement, the terms of the deal are "$93 million in consideration at closing, consisting of equal amounts of cash and stock, of which $14M of the cash will be placed in escrow to secure indemnity obligations of Procuri stockholders. Ariba will also pay off approximately $8 million of Procuri's debt. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close in the first quarter of Ariba's fiscal year 2008, ending December 31, 2007."

While the specifics of the acquisition are still emerging, I'm guessing that they acquired Procuri for a number of reasons.

To begin, Procuri had material On Demand revenue, and I suspect this will contribute directly to Ariba's story for Wall Street. But as important, the combination of Procuri and Ariba will create a dominant market leader in the e-sourcing market from a customer share perspective (Emptoris is still a rival from a mindshare perspective). Ariba is picking up Procuri for what I would consider to be a low multiple relative for a strictly SaaS vendor relative to their deferred and forward-booked -- but not yet realized -- revenue. I'm guessing the deal was done at between a 4-5x multiple on trailing revenue, yet I estimate Procuri has well over $75 million (perhaps more) in deferred revenue which they've yet to realize.

Personally, this deal is further proof in my book that the On Demand revenue model is good for customers but bad for private-company shareholders. Until Wall Street values deferred On Demand revenue at a higher premium, it will be a buyers market out there for companies like Ariba who are in the drivers seat when it comes to making smart consolidation moves like this.

I look forward to sharing more information later in the day as this story unfolds. Check back often for further analysis and discussion. In the meantime, you can check out some previous thoughts on this rumored deal (and a good number of reader comments) by clicking here.

Jason Busch

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