Ariba and Beyond — Are Valuations in the Spend Management Sector Increasing?

I'm not one to follow stock prices. Because of this blog -- not to mention my time commitments trying to build multiple businesses -- I've pretty much placed my personal accounts at the mercy of of broad stock and related indices, not to mention the relative insecurity of the US dollar (but don't get me started on that this early in the week). Still, despite the fact that I don't get hung up on the market like I used to, some recent M&A analysis and work in the sector has compelled me to follow stock price trends, market capitalization, and multiples more closely. I'll admit that even these efforts represent but a specter of my former time in a corporate development role where I practically memorized all the multiples of the companies in the enterprise software market, not to mention recent transactions. But despite my relative inattention to capital markets today compared with the past, Ariba's recent upward price moves in the market have caught my eye (as did Aravo's recent funding round).

In short, based on a lot of the chatter I'm hearing in the market as well as the anecdotal and concrete evidence I'm seeing, it would appear that vendor and solution provider valuations in the sector are increasing, climbing from the lows of 2008 and 2009. In the case of Ariba, to which many companies and investors turn -- not entirely fairly, I might add -- as a proxy for valuations in the Spend Management sector and related areas, there appears to be some momentum behind a recent stock price gain. While I'm not sure what's driving it, I will say that there are a few things I would look at to gauge the overall health and outlook of the business relative to expectations of its performance in 2010.

I plan to tackle these in more detail in an upcoming post, but the areas I'd look at to gauge Ariba's performance and growth prospects include both backlog and deferred revenue (software, primarily); the growth of consulting revenue (non-technology implementation, i.e., sourcing/supply management); net new customer wins; potential acquisitions (e.g., a services procurement/contingent workforce pure-play); and the overall number and manner of buyer-customer upgrades and conversions (e.g., from legacy license to more recent releases or On- Demand versions).

Ariba is only one gauge of the overall Spend Management market, however. It's important to watch its progress, but if I were looking to place bets in the sector from either an investment or acquisition perspective, I'd look more closely at where customer dollars are most likely to flow into the market in 2010. Here, I'd argue that we're going to see a resurgence of interest not only in sourcing and supply chain professional services, but also spend visibility, P2P (with a greater emphasis on working capital management and downstream activities), and supplier management, including -- but not limited to -- the risk arena. Curious about more specifics? Stay tuned.

Jason Busch

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