Ariba: After the Gulp

By Baselinemag  |  Posted 2006-01-14 Email Print this article Print

Ariba is stronger after a difficult merger with erstwhile rival FreeMarkets, say customers. But was it late to the hosted services party?

Over the past two years, according to customers, Ariba had a rough time ingesting FreeMarkets, formerly a bitter rival in the online sourcing market. But now that the combined company's indigestion is subsiding, they say, Ariba has become stronger.

The merger was hard because the two companies had very different cultures and business models, says Jim Polak, director of general purchasing at paint, glass and chemical manufacturer PPG Industries. FreeMarkets offered hosted services, while Ariba was a traditional software company. Since then, in Polak's view, Ariba "has absolutely done the things we needed them to do." For example, he says, the company tightly integrated the pieces of software from FreeMarkets and four smaller spend-management firms Ariba recently acquired.

John Zagata, Cendant's director of e-procurement, says combining Ariba and FreeMarkets "wasn't quick, but it was a natural fit," because Ariba gained expertise in helping customers buy a wide range of commodity products, like office supplies.

Lou Unkeless, Ariba's chief marketing officer, calls the FreeMarkets merger "a very significant process," and says ultimately "the vast majority of the people in the company" saw that the two complemented each other and had only a 6% overlap in customers.

Meanwhile, Ariba is still drenched in red ink. It posted a $349.6 million net loss on sales of $323.0 million for the fiscal year ended Sept. 30, 2005. Even without special charges—including $247.8 million related to acquisitions—Ariba was $11.5 million in the hole for the fiscal year.

Unkeless points out that Ariba has no debt and maintains a stable of large customers, including American Express and Exxon Mobil. And, he says, the company's growth will come from a broader base of customers: In November 2005, Ariba launched hosted spend-management services geared to small and midsize businesses. "All our efforts are about driving [our products] to the mass market," he says.

But Ariba took longer than some rivals to tap growing demand for hosted services and should have diversified its offerings sooner, says Sarmento Silva, director of purchasing systems at pharmaceutical company AstraZeneca, which uses Ariba's procurement and sourcing software in the U.S. "To me as a customer," he says, "if you're looking at the financial viability of a supplier, eventually they're going to have to find new markets."

Spend Management and Analysis

807 11th Ave.
Sunnyvale, CA 94089
(650) 390-1000

Ticker: Arba (Nasdaq)
Employees: 1,506

Bob Calderoni
Chairman & CEO
Joined Ariba in 2000 as CFO; appointed CEO a year later. Previously, he was CFO at office-supplies company Avery Dennison; corporate controller at Apple Computer; and CFO of IBM's storage systems unit. He's a certified public accountant.

Craig Federighi
Before joining Ariba in 1999, he was director of Web application server technology at Apple. Also worked at NeXT, a now-defunct maker of high-performance computers, and Oracle.

Ariba Spend Management software provides tools to analyze spending, buy products and services from suppliers via a Web browser, host online auctions, and manage the bid process for prospective suppliers. The company also provides hosted versions of some of its software.

Reference Checks

Sarmento Silva
Dir., Purchasing Systems
Project: Pharma-ceutical company uses Ariba software to let U.S. employees buy goods from 500 vendors, and uses Ariba auction and sourcing tools to negotiate contracts worth $500 million per year.

PPG Industries
Jim Polak
Dir., General Purchasing
Project: Paint, glass and chemicals manufacturer lets 150 buyers use Ariba's spend-analysis software and hosted auction and sourcing tools.

Wayne Evans
Dir., Procurement
Project: Express delivery firm used Ariba Sourcing services to negotiate contracts with 10 suppliers, for goods including uniforms and drop-boxes, in the last two years.

Limited Brands
Chuck Dahlman
Dir., Procurement
Project: In 2005 the clothing retailer used Ariba software to manage about 70 auctions and requests for proposal, and to procure more than $180 million in products (like hangers) for its 3,700 stores.

Nestlé North America
Peter Koehler
Mgr., E-Sourcing
Project: Food company uses Ariba's sourcing software globally to manage about 400 auctions and contract negotiations per year.

William J. Northup
Dir., Sourcing
Project: The $2 billion maker of electrical products, a former FreeMarkets customer, runs about 100 auctions per year hosted by Ariba for materials and services worth about $100 million.

Executives listed here are all users of Ariba's products or services. Their willingness to talk has been confirmed by Baseline.

2005FY 2004FY 2003FY
Revenue $323.04M $245.80M $236.70M
Gross margin 46.3% 59.3% 71.4%
Operating loss -$348.46M -$28.74M -$108.69M
Net loss -$349.63M -$25.23M -$106.33M
Net margin -108.2% -10.3% -44.9%
Earnings per share -$5.49 -$0.51 -$2.40
R&D expenditure $47.21M $54.09M $54.01M
Restructuring & integration costs $41.25M $16.80M $5.35M
Fiscal year ends sept. 30; 2005fy results include $247.8m goodwill
Impairment charge; 2003fy results include $113.5m amortization charge

Total assets - $590.64M
Stockholders' equity - $329.53M
Cash and equivalents - $60.91M
Short-term investments - $50.52M
Long-term debt - None
Shares outstanding - 63.66M
Market value, 1/5 - $550.31M
** as of sept. 30, 2005, except as noted


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