FISH OR CUT BAIT: B2B merger mania!
The heads of business-to-business (B2B) software companies
must be avid fans of Survivor. With all the alliances,
partnerships, and mergers going on the sector lately, B2B is
turning out to be the stock market's version of the hit
reality show, with a large cast of characters whose true
motivations aren't exactly clear.
In case you haven't been tuning in, here's an update. Ariba
(Nasdaq: ARBA), the leading online procurement company, has
an alliance with i2 Technologies (Nasdaq: ITWO), the top
supply-chain management software company. But the future of
that alliance is very uncertain. To wit, last month Ariba
agreed to acquire Agile Software (Nasdaq: AGIL), another
supply-chain management software producer.
Agile recently formed an alliance with Manugistics (Nasdaq:
MANU), which is widely viewed as i2's top competitor. In
turn, Manugistics announced last week that it is partnering
with Microsoft (Nasdaq: MSFT) and the recently public KPMG
Consulting (Nasdaq: KCIN) to strengthen further its position
against i2. Confused yet?
Let's continue. In another part of the great B2B outback,
Ariba rival Commerce One (Nasdaq: CMRC) has joined hands
with German software giant SAP (NYSE: SAP). Commerce One had
an alliance with privately held Adexa, which pretty much
dissolved once Commerce One struck its alliance with SAP in
June. So Adexa agreed to sell out to yet another B2B
company, online auctioneer Freemarkets (Nasdaq: FMKT). Got
all that? Whew. Pass me some ibuprofen. My head is killing
me.
B2B IS TOPS IN M&A
As confusing as this may all seem, what this high-stakes
game of B2B musical chairs boils down to is a primo
opportunity for investors. Most B2B stocks have taken a
pummeling in the past few months. I actually recommended Ariba, Commerce One, Freemarkets, and another company,
PurchasePro.com (Nasdaq: PPRO), in August, and the four
stocks are down a blood-curdling 50 percent on average since
then, compared with the Nasdaq's 34 percent drop. But,
somewhat paradoxically, B2B is arguably the hottest sector
in technology from a mergers and acquisitions standpoint.
Companies like Ariba, which also bought privately held
Suppliermarket.com last summer, and Commerce One, which
scooped up the formerly publicly traded Appnet in September
for a 57 percent premium, are said to be scouring the market
still for more acquisition opportunities. To that end,
sources say that both companies had also bid for Adexa. And
analysts say there are several other public companies that
are potential takeover targets for the likes of Ariba,
Commerce One, and i2, and even larger software companies
like Microsoft and Oracle (Nasdaq: ORCL).
In fact, Microsoft can be credited with firing the opening
salvo in the B2B M&A game. On December 21, the company
announced that it was acquiring Great Plains Software
(Nasdaq: GPSI) for $1.1 billion in stock. At the time, the
deal valued Great Plains at a 29 percent premium to its
December 20 closing price. But since then, Microsoft's stock
has gained 41 percent, so the transaction now values Great
Plains at an 82 percent premium to its December 20 closing
price. Talk about great gains for Great Plains shareholders.
THE MATING DANCE
The Microsoft/Great Plains deal set the stage for the
marriage of Ariba and Agile (that acquisition valued Agile
at a 26 percent premium), as well as Freemarkets's purchase
of Adexa. But the deal-making is far from over. "The mating
dance has begun," says Richard Williams, an analyst with
Jefferies & Company. "Ariba, Commerce One, PurchasePro, and
Freemarkets need to fill out their solution, and they know
it."
Mr. Williams mentions three public companies as prime
takeover targets: Aspen Technology (Nasdaq: AZPN), Retek
(Nasdaq: RETK), and Manugistics. Aspen, a supply-chain
management software company with a strong emphasis on the
petroleum and chemical industries, is a top candidate. Mr.
Williams says that the company's relationship with customers
like Chevron (NYSE: CHV), Dow Chemical (NYSE: DOW), Exxon
Mobil (NYSE: XOM), and DuPont (NYSE: DD) will be tough for
other B2B companies to replicate and that Aspen could be a
good fit for i2.
Retek is also a niche player, a B2B software company that
focuses primarily on the retail industry. Manugistics, which
experienced a miraculous recovery in the past year (see:
redherring.com,
would be a perfect complement to Ariba or Commerce One, but
it might be too pricey now. The stock has soared more than
110 percent in the past 12 months, and, as a result, its
market valuation is now $3.2 billion, just $2 billion less
than Commerce One's market value and $3 billion below
Ariba's market capitalization. Mark Verbeck, an analyst with
Epoch Partners, says that Ariba probably should have
acquired Manugistics last year. Not only was Manugistics
cheaper, Ariba's market valuation was over $30 billion. |
