Versata Buys PurchasingNet — A Spend Management Roll-Up Strategy?

Yesterday afternoon, Versata announced it was acquiring PurchasingNet, a purchase-to-pay solutions provider that's traditionally been focused more on the middle market than large Fortune 500 customers. There's little to speak of in the press release regarding the substance of the deal. So rather than quote verbatim from it, I'll share a bit of history of both companies and then offer my own initial analysis of the deal and what it means for the Spend Management sector. To begin, I'll provide some background on the acquired party. As I see it, what's most interesting about PurchasingNet is that it's been a closely held family business for over twenty-five years.

This is a team that really can say they were some of the early architects of eProcurement. Yet they missed the large-scale commercialization boat at the time Ariba, Commerce One, Metiom and many others were taking off. While they claim over a thousand customers in their marketing, the reality is that they're a provider that only seldom makes it to the final shortlist in large sector deals (even though they have the basic capabilities to do so). Truthfully, I rarely see them competing in enterprise size accounts and when they do get a seat at the table, there's sometimes confusion about what they do. Are they a software provider? Do they train people (for a fee) on inner workings of the P2P process?

Despite some occasional confusion in larger account prospects, PurchasingNet has grown primarily through working with middle market companies. Yet their revenue, which I'm estimating is shy of $10 million (based on Hoovers data and some other sources I've spoken to), suggests they're actually a smaller organization that has in fact stagnated to some degree from a growth perspective in recent years. Still, the underlying technology asset is most certainly solid. I saw the product last year and came away slightly underwhelmed relative to the better known providers in the eProcurement and payables sector, but it did check the functional boxes on a range of areas. At the right price, I would not hesitate to consider it.

So why is Versata acquiring PurchasingNet given this context? It appears, for one, they were for sale, which most likely portends greater M&A activity in the sector. PurchasingNet's founders engaged a small but quality investment bank to sell the company. And Versata, which has done a number of deals of late, seemed a logical fit (Infor would have been another potential suitor). Versata, a former division of Trilogy, is in business to roll-up technology assets in the enterprise applications sector. Versata also knows a thing or two about the Spend Management sector, having acquired Nextance, which was originally a leading contract management vendor that ultimately ceded ground to Emptoris, Upside, Ariba and others, back in 2007 (but more on that acquisition later).

I had the chance to talk to Versata's Mike Williams last night after the deal was announced. Mike has served as CEO of Nextance within Versata for the past six months and comes from an enterprise software background with Trilogy and other consultancies previously. He told me that Versata's goal is to acquire companies and run them as stand alone entities. Moreover, they are looking to leverage Versata's global footprint to help regional/national providers like PurchasingNet expand globally, leveraging the deeper resources of the parent company. Mike told me that Versata plans to keep the management team of PurchasingNet in place (which is not what they did with Nextance, mind you) and focus on accelerating the product release schedule and bringing new innovation into their solutions -- not to mention moving up-market potentially as well.

While Mike would not provide any comments on company size or current customer counts, he did tell me they're around 30 employees at the moment (which is down from their numbers of a couple of years ago based on public data I was able to find on sites and articles referencing the company then). This is not to say PurchasingNet was a distressed asset, but it was clearly one that had fallen out of growth mode and needed a new kick from a partner to get it back on the right trajectory. Hoovers, for example, suggested they had 45 employees in 2007 and revenue of around $7.0 million. Another site suggesting data from a year later had the same number of employees but revenue of $6 million.

From a valuation perspective, I do not have any specifics on the deal itself. However, based on numbers I've been seeing in the market of late, pure-play SaaS vendors are getting between 4-6x revenue (really hot companies are getting more). This assumes nearly all software revenue and solid growth and profitability. Valuations for providers with significant services revenue are often 2X or less. I'm hypothesizing based on similar activity I'm involved with that the PurchasingNet multiple was done at around a 2X-2.5X valuation given that Versata is a financial -- rather than strategic -- deal maker and the current product/services mix of PurchasingNet (any higher valuation would give credit to the investment bank selling them). But since I don't have the exact revenue numbers for 2009, I can't say exactly what the number was. And my multiple estimates could be off as well. I'll dig further on this next week and let readers know what I find. Perhaps what's more important is what Versata plans to do with the acquisition based on their claims relative to their past track record.

In this regard, following Versata's acquisition of Nextance, employee count dropped considerably (well over 50%) in a matter of weeks following layoffs which began just after the deal closed. Nextance was left with a shoe-string staff of primarily customer-facing employees. That deal appeared to have been done simply to milk the maintenance and services revenue streams from customers given the fact that Versata appeared to be almost entirely hands-off following the acquisition. A new GM who Versata brought into run the acquisition lasted for only a handful of quarters. The result is that Nextance practically disappeared from the market. I traded notes with a friend in the contract management sector last night who is privy to much of the dealflow in the sector -- far more than I -- and he suggested that he's not seen them in any new deals in the past 2 years. Moreover, "they're not even on the long list," in the early stages of company contract management vendor investigation.

So if we're to believe Versata that they intend the PurchasingNet deal to signal anything other than a roll-up designed to tap or separate the existing customer base from as much of their cash as possible, then this deal must represent a major change in strategy. Personally, I'm not entirely buying it because in a roll-up model, it's very hard to get the synergies from deals unless you follow the textbook slow-the-innovation and up-sell/cross-sell approach (Oracle is the exception, mind you, but even there, product innovation of acquired companies eventually tends to lag previous levels prior to deal closing).

Still, I'm holding out hope that this deal breaks the mold -- and that Versata does a 180-degree turn from what they originally did with Nextance by keeping the PurchasingNet product and management team to double-down on innovation. Given this, I'll definitely raise my first glass at happy hour tonight to what I hope will ultimately become a stronger, integrated player in the market, given that Mike Williams will now be running both Nextance and PurchasingNet for Versata. If this move does indeed market a change in strategy for Versata, then customers should ultimately have an additional Spend Management choice with broader suite capability as a result of the combination.

Stay tuned for further anal

ysis of this deal as well as what it means for both customers and the broader sector (not to mention Spend Management M&A activity in 2010). In the meantime, PurchasingNet customers should diligently watch that Versata does not increase maintenance, support and professional services rates as a result of the deal. If Versata does raise these rates -- which is par for the course in roll-up situations -- push back and consider other options. Every customer they lose is one more they'll have to gain, which will throw off the deal numbers. Ultimately, customers often have more power than they think in these situations (despite how sales reps often come off).

Jason Busch

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