SAP/Ariba to Buy Fieldglass: Initial Analysis

Earlier this morning, SAP announced plans to acquire Fieldglass, the largest vendor management system (VMS) provider. The terms of the agreement were not announced, but Spend Matters research suggests that Fieldglass had grown considerably at a double-digit CAGR (both contingent / SOW spend volume and revenue) since the Chicago-based private equity firm Madison Dearborn acquired it four years ago. It remains a healthy, thriving vendor – the leader in VMS market volume by both contingent spending and SOW market share.

This transaction is not a surprise to us. As we commented on in the research brief: M&A Watch: Which Top VMS Will Be Acquired in The Next 12 Months: “We believe with near certainty (90% probability) that at least one transaction will happen in the next 12 months.”

Further, as observed in this research brief:

“Many vendors were rumored to be bidding for Fieldglass [previously], including Ariba (Spend Matters has argued for some time that Ariba needed Fieldglass’ technology and MSP relationships to assume a services procurement leadership position, especially in the contingent area).”

“We continue to believe that A VMS provider extension continues to represent a strong fit for Ariba/SAP to expand category coverage and spend capture and is still a natural plug-in to the Ariba network business model (i.e., supplier-centric fees). Like Ariba network fees, which continue to form high margin business streams for SAP, VMS providers earn the majority of their revenue from supplier fees (with some exceptions, in the case of individually negotiated contracts and SOW/project-based spending areas).”

“Besides product and revenue synergies with Ariba and the Ariba network, an SAP acquisition of a top VMS would provide global upsell capabilities for the ERP giant and the potential to embed a VMS “app” on top of the narrow services procurement capability within ECC and SRM.”

When Fieldglass was previously acquired, Spend Matters reported that “by our estimates based on Fieldglass’ rumored top-line, we believe the transaction was done at a 6.5X+ top-line multiple, which represents a very healthy valuation. The deal follows fellow Chicago private equity firm 2008 GTCR’s buyout of rival VMS/MSP IQNavigator.”

Many of the points we suggested in 2010 following the Madison Dearborn buyout are still relevant today as we consider the implications for SAP/Ariba and the broader market.

  • “VMS providers typically — but not always — price on a percentage of volume basis (and this fee is paid by the supplier, except in certain SOW and other complex services cases); in theory, this should lead to faster uptick and adoption (but as you’ll read in the next bullet point, this is not always the case).” 2014 update: the volume-based pricing is a strong fit with the existing Ariba network revenue model.
  • In nearly all situations even where an organization has a strong VMS platform in place, there is often minimal (<25%) spend penetration in potential categories across the enterprise. The captive “up-sell” capability internally represents significant opportunity (clearly Madison Dearborn saw this). 2014 update: the up-sell opportunity remains in the great majority of VMS customers, many of whom still have limited adoption – moreover, the upsell for SAP/Ariba customers should not be difficult, as procurement has increasingly taken over the buying of VMS and statement of work (SOW) technology and solutions from HR and IT.
  • Aside from IQNavigator, which appears headed more down a software path at the moment, managed services providers (MSPs) have continually proven their inability to maintain innovation within their solution set once they acquire a VMS. The path Fieldglass took in the post-Chimes world of truly embracing the MSP ecosystem (while maintaining an ability to sell direct) is attractive from both a current go-to-market perspective as well as a longer-term growth point of view. 2014 update: Fieldglass had successfully continued to sell through managed services provider (MSP) channels after the 2010 acquisitions, but realized success selling directly as well.

We suspect that in-line with SaaS multiples today for a company that could have gone the IPO route, that the valuation was in excess of 10X trailing revenue – potentially materially higher. While Fieldglass does not disclose revenue, Spend Matters estimates that 2013 numbers were materially in excess of $50MM. But more important, our analysis suggests the venture was highly profitable with a gross margin placing in the top quartile of SaaS companies.

Stay tuned for additional coverage and analysis throughout the day. Of course, there is plenty of coverage of Fieldglass and services procurement on Spend Matters here. We also have a ton of formal research coverage on our site that can be downloaded for additional insight:

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