Ariba, Inc. announced yesterday that it has signed a definitive agreement to acquire Quadrem, a privately-held purchase-to-pay marketplace provider. This announcement, I believe will provide some future implications for both supply chain teams and technology providers.
First, a quick summary of the particulars. According to both the press release and conference call briefing, the deal is valued at $150 million, and consists of an upfront payment of $75 million in cash, $50 million in Ariba stock, and a holdback payment of $25 million payable in 36 months, subject to certain performance objectives, Ariba notes that Quadrem had $58 million in revenues in 2009, and anticipates 15-22 percent revenue growth in 2010. The deal is expected to close in Ariba’s second fiscal quarter, which ends in March 2011. At face value, it would appear that Ariba is paying about 2.5 times earnings for this acquisition.
The Quadrem business model provides a shared service, B2B network, connecting buyers and suppliers. The network is positioned between individual buyer systems and suppliers, and allows customers the ability to integrate internal ERP systems with supplier processes. Quadrem provides services to support processes related to catalog management, buyer directory, RFQ, sales order management, logistics, and electronic invoice presentment. Industry concentration is weighted toward natural resource and energy sectors, with larger customers noted as Alcoa, Anglo American, BHP Billiton, Nestle, Rio Tinto and others. The vendor first established its presence in mining, and has since extended its network to other verticals. The briefing noted 65 buying organizations connecting over 70,000 suppliers involving about $30 billion in overall spend. The majority of Quadrem’s revenues originate from suppliers. What is most interesting is the geographic footprint of Quadrem’s network, which was described as predominantly emerging geographies, including 50% Latin America and 15% Asia Pacific presence.
Since a significant portion of buyer customers exist in an SAP backbone, Quadrem has partnered with SAP’s Supplier Relationship Management (SRM) sector to provide a broad range of source-to-payment transaction processing, spend analysis, master and vendor data management. This provider notes that it can seamlessly support on site SAP EBP to Quadrem, SaaS SRM, and return information flows to SAP SRM located behind firewalls.
Rather than the hype of the announcement, we believe it is important for teams to ponder the various implications of this announcement, and plan accordingly in the coming months.
First, Ariba has clearly signaled its intention to stake its presence as an important player in B2B commerce and industry marketplaces. Ariba is betting that software as a service (SaaS) networks will be the predominant platform of supply chain activities, and in some sense, validating the business models of other industry networks such as E2Open in high tech, Elemica in chemicals or Exostar in aerospace. This Ariba announcement in itself may cause other vendor or marketplace responses.
Second, since Quadrem’s existing buyer base is so SAP centric, there are indications that Ariba’s ultimate plan is to have these customers eventually opting for a more Ariba-centric network, reaping the benefits of an annuity revenue model. I agree with others such as Jason Busch, that this could well be an interesting denial play against SAP, Emptoris and other vendors. Over time, existing Quadrem customers will have to observe how this strategy unfolds, and determine what impact it will have, if any. Ariba already integrates its network customers with SAP backbones and the issue may not be as much as technical, but rather account control. Quadrem customers have also been handed a new bargaining chip for future negotiations with SAP.
Another important after-effect, in my view, will be how SAP responds to a potential threat to its upside growth in SRM technology. It is not likely that SAP will stand idle with this surround strategy, and even more important, lock-out any potential for upside growth among smaller suppliers in providing future SAP Supply Network Collaboration or Business By Design applications to buyers and suppliers. Similarly, other enterprise vendors like Oracle will be inclined to neutralize a surround strategy.