SciQuest Acquires AECSoft — P2P and Supplier Management Consolidation Accelerates

After market close today, SciQuest announced it was acquiring privately held software vendor, AECSoft. According to the announcement, "SciQuest, a leading provider of on-demand strategic procurement and supplier enablement solutions, today announced that it has signed a definitive agreement to acquire AECsoft USA, Inc. and its affiliate AEC Global (Shanghai) Co., Ltd. ... for total consideration of approximately $13 million, consisting of approximately $9 million in cash and stock having a current value of approximately $4 million." Providing further detail on the valuation factoring in an "earn-out" provision, SciQuest also suggests in the press release that they, "may also pay additional shares of stock having a current value of up to approximately $4 million based on successful achievement of certain performance targets over the next three fiscal years."

Our sources suggest the deal is expected to close in the New Year and an integrated product road map will be announced at the SciQuest Next Level event in February. The transaction should prove accretive, owning to AECSoft's profitability and the terms of the deal (our unofficial sources suggest the transaction could add materially to SciQuest's 2011 full year cash flow estimates). In addition, the acquisition will add approximately 30 employees to SciQuest.

This announcement should not be a surprise to Spend Matters readers, as we have suggested in recent months that "there's a good chance that two of the key players in the supplier information management/supply base management market will be snapped up this quarter, given the current M&A buzz in the market." Plus, at least one more provider I'm aware of is either attempting to raise its next round of funding and/or investigating its strategic options.

Run by a successful husband and wife team (sales/client management and software development, respectively), AECSoft had grown in recent years from being a niche supplier diversity software and content vendor competing largely on price into a broader supplier management suite provider that still gained traction in part through aggressive discounting. Rumors in the industry suggest AECSoft was extremely profitable, owning in part to software development efforts based in Houston and China as well as management running a tight ship. However, profitability did not come at the expense of clients, who enjoyed software and content at the bottom of the market in the diversity, broader spend enrichment and supplier management areas when considering cost perspective.

With AECSoft, SciQuest is gaining an organization that in percentage growth terms, probably represents the healthier of the two remaining independent supplier diversity vendors (our estimates suggest ~35% EBITDA, double-digit percentage growth). AECSoft's focused strengths in this area and low-cost supplier information management platforms contrast with its rudimentary capabilities in sourcing compared with industry leaders in this market (AECSoft also lacks a complete spend analysis capability that is competitive with the leaders in the market). Still, we believe SciQuest is getting AECSoft for a bargain and the company is a very logical fit with its own solutions.

Supplier diversity is an important focus in procurement organizations, especially in higher education. We believe AECSoft will provide SciQuest with a strong means of up-sell capability in this market. Historically, the stickiness of supplier diversity content has not been as strong as other procurement areas as companies have changed out providers based on price and service, and we suspect that coming from SciQuest, many university procurement organizations will make the shift provided the price is right. This last point is important to emphasize, however. Since AECSoft has priced its solutions at under market value in the past, it is possible that SciQuest will raise its prices as a result, one source aware of the deal suggested to Spend Matters.

Look for continuing coverage of this deal in the coming days and weeks. In short, SciQuest has gained:

- One of the top two independent supplier diversity content providers (and independent supplier diversity tools providers)
- A general data enrichment provider in the spend analysis area (but not competitive) spend analysis tools themselves
- A basic supplier management/supplier information management platform from which to potentially build vertical/industry specific solutions based on different operating and vendor management requirements

As a result of the deal, Spend Matters recommends that AECSoft customers:

- Investigate the potential for any price increases in the applications area and tidy up contracts if complete agreements/paperwork did not previously exist or was substandard
- Investigate CVM Solutions, D&B and Equifax for supplier diversity data preemptively to see if these providers will offer preemptive price concessions, potentially in exchange for broader enrichment and platform deals
- Consider SciQuest in other solution areas outside of diversity/supplier management (for those in the life sciences, higher education or public sectors)

As a final note, the deal highlights what appears to be an increasing strategy gap between SciQuest and Ariba, among others. While Ariba appears to be focusing its M&A efforts, in part, on buying network transactional volume and scale, SciQuest is expanding by going deep on new solution/content areas.

Jason Busch

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