Will Ariba Acquire to Fill Gaps or Accelerate Penetration in Key Sectors? (Part 1)

On Ariba's earning call a couple of weeks back, a financial analyst raised the question about acquisitions, a topic that Ariba has been hinting at for some time. Clearly, Ariba is interested in exploring the possibility of leveraging its market and cash positions as well as their installed base to explore both product extensions and consolidation acquisitive moves -- both have happened in the past (though the distant past, I might emphasize). Bob Calderoni, Ariba's CEO, suggested in fact that Ariba's cash might "get consumed by some of our investments in growth, and obviously, that would be acquisitions." Moreover, this is something that "we are working on, as we have been the past couple of quarters, and I think it will happen when we have a meeting of the minds on a couple" of the candidates that Ariba is talking to. What areas might Ariba be considering? Let's think about it logically.

In the sourcing area, outside of more advanced capabilities from a provider like a CombineNet or Trading Extensions, Ariba would have little to gain from acquisition. I don't think their current solution is as sophisticated as some, but it's close enough for most, and recent optimization enhancements bring it closer to the best of breed level. However, if you migrate one step forward in a seven-or-nine step sourcing process and you look at spend analysis, it's clear that Ariba could potentially improve its market position by making moves in this area. In fact, Ariba's current spend analysis capabilities are only middle of the road, and they could gain much from acquiring an upstart in this area, potentially one that allows for easily "mashing-up" different types of spend, performance, warranty, tax, specification/attribute and other information in a single environment. I also know of legacy spend analysis accounts that Ariba is likely to lose in the coming quarters as more advanced current customers look for an additional level of capability, and an acquisition here could be a smart defense move.

In other areas, it makes complete sense to see Ariba pull the consolidation card in anything having to do with P2P or supplier networks since they're banking much of their future growth on both recurring buyer subscription fees as well as supplier fees via the network. The eProcurement asset of ePlus could be an interesting first play here over a relatively short amount of time because of the time remaining on their patent (which Ariba already paid a settlement on years ago). If Ariba had the ePlus IP in their arsenal, they could blackmail Coupa, Ketera, SciQuest and others into a lower valuation for acquisition, and/or force their investors to sell (this only holds, however, based on the time remaining on the patent as well as whether or not these other vendors have reached a settlement with ePlus).

Even outside of the hybrid patent troll/acquisition strategy mode within P2P, acquisitions make total sense for Ariba, as they'll ultimately enable (if Ariba's network business model holds together) the ability to tax both sides of the transaction where customers using many of these other solutions are only paying once today. Moreover, the less competition Ariba has in this space, the less likely buyers and suppliers are to push back on network fees. OB10, Basware and others might be interesting candidates here, although some providers like Basware would require bet-the-company type moves to pull it off, based on the size of the deal. Still, Basware would also give Ariba strong Nordic penetration as well as a superior invoice automation product compared to what they have now. It's also a relatively inexpensive asset from a valuation standpoint, given the lower multiples given to European-traded tech firms.

In the second installment of this post, I'll examine other areas, some potentially unorthodox, that Ariba might explore from an acquisition front. As important as exploring these options, all practitioners should remember to protect themselves from the dangers of vendor takeover by inserting contract language that protects them.

Jason Busch

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