Just wanted to post the text since links eventually expire. Then again SI won't be around much longer either.
One Correction for the article is the high. ARBA hit a high of $183.35 on March 8th, 2000. Pretty staggering decline eh? I wonder when it will hit zero.
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ARIBA STRUGGLING:
BY ELISE ACKERMAN
Mercury News
Last year, a Sunnyvale software company called Ariba entranced customers and investors with a promise to transform commerce by using the Web to create a seamless network for businesses to conduct transactions between themselves.
``We didn't even have a product and we had customers,'' marveled Bobby Lent, an Ariba founder. ``They came along, they paid money, they were convinced we could do it.''
But the collapse of the dot-coms dispelled the magic, revealing that Ariba's business-to-business revolution, which inspired a host of copycats, was mostly hype.
Customers said Ariba's products were buggy and fell short of expectations. Online marketplaces, once a centerpiece of the company's strategy, failed to attract users. And most of the company's top executives resigned, though not before cashing out more than $1 billion of stock options.
Today, Ariba is struggling to build a viable business, even as sales have collapsed and 30 percent of the staff has been laid off. Ariba's stock-market value, once higher than General Motors', has evaporated, with shares now trading at about $3, down from an intraday peak of $173.50 last September. Keith Krach, the only co-founder still with the company, has stepped back in as interim chief executive following the sudden resignation of Larry Mueller last month.
A famously inspirational speaker, Krach, 44, is talking up the company's prospects, highlighting aggressive cost-cutting and lauding a product update that will be released next month.
But observers are skeptical. ``It's over,'' said Doug Augenthaler, an analyst at CIBC World Markets, who believes Ariba's most attractive asset is the $340 million remaining in the company bank account.
``Ariba was unlucky and wrong,'' added Greg Combs of Waschka Capital Investments, an institutional shareholder that continues to hold Ariba stock. ``The best thing for them to do would be to sell out to somebody.''
Initial product
Web purchasing system envisioned
Ariba was founded in 1996 by seven men, most of them veterans of both technology and traditional businesses. The initial idea was to create an application to let employees at a company order office supplies -- computers, calendars, pens and paper -- through a Web page, just like they might order a book from Amazon.com.
The application seemed guaranteed to save companies money by eliminating much of the time-consuming paperwork associated with corporate purchasing and by forcing employees to buy from approved suppliers that offered better prices.
Ariba originally planned to sell software licenses for about $100,000, but it turned out customers were willing to pay 20 times that amount. By June 1999, the month of the IPO, Ariba had signed licensing deals with more than 30 customers, including General Motors, Cisco Systems, Chevron, Hewlett-Packard, Merck and Motorola.
As Ariba's customer list grew, so did its aspirations. Rather than market their
product as a humdrum procurement application, Krach and others began describing Ariba's business as a ``global business-to-business electronic-commerce network.''
The prospectus for the company's June 1999 initial public offering described the market for Internet-based business purchases as growing to $1.3 trillion by 2003, or more than four times the current U.S. defense budget.
The numbers meant little, though, because Internet-based business-to-business e-commerce barely existed in 1999. Indeed, most of Ariba's customers were not yet using the software. In the fine print, the prospectus noted that the global network had only one participant.
But that sobering reality was brushed aside in Wall Street's rush to find the next Microsoft.
On June 23, 1999, Ariba went public at $23 a share, or $5.75 adjusted for later splits, then almost quadrupled. At the company's Sunnyvale headquarters, someone dropped off a case of Cristal, and champagne corks started popping in the cubicles.
Stakes raised
Rivals introduce `e-marketplaces'
The celebration didn't last long. Within months, Ariba was upstaged by competitors whose marketing concept was even more appealing. Rather than simple procurement, Commerce One, FreeMarkets and PurchasePro touted``B-to-B e-marketplaces.'' Their software attempted to automate aspects of corporate purchasing through customized corporate auction sites rather than Ariba's approach of online stores linked to suppliers' catalogs. If Ariba was a
businessman's Amazon, these were his eBay.
Along with the sale of one-time software licenses, the e-marketplace makers promised investors they would take a percentage of every transaction, providing a seemingly limitless revenue stream as the majority of corporate purchasing moved to the Internet. Their stocks soared.
Anxious not to be left behind, Krach spent $3.4 billion of Ariba's stock to buy three companies that made e-marketplace software. The biggest, Tradex, cost $2.3 billion, a figure that stunned Oracle Chairman and CEO Larry Ellison, who told analysts that Oracle engineers wrote similar software in 90 days. ``Is it really worth billions?'' he asked.
Looking back, Krach is unapologetic. ``We just really jammed on the gas,'' he recalled in a recent interview. ``We saw a tremendous opportunity to go out there and grab market share.''
For almost a year, the strategy paid off. During Ariba's 2000 fiscal year, which ended in September, revenue increased sixfold, to $279 million, as more than 150 companies bought Ariba's e-marketplace software. The stock zoomed, reaching its all-time high of $173.50 Sept. 5.
With its stock so high, Ariba seriously explored a merger with i2 Technologies, a Dallas-based maker of supply-chain software, but the two companies failed to agree to terms and broke off talks last fall.
Meanwhile, the business-to-business boom was ending. Leading companies were declining fast, dragged down by the collapse of their dot-com customers and their own faulty business models. Fighting the undertow, Krach lectured journalists and Wall Street analysts about the strength of Ariba's business model and the benefits of its software. HP expected to save $70 million in 2000 using Ariba's purchasing products, he said, and Bristol-Myers Squibb had saved $100 million in just a few weeks.
``I see this as being the biggest marketplace in the world,'' Krach told the Mercury News in a September interview about Ariba's market prospects. ``And in this marketplace, we have a tremendous opportunity to be the Cisco or the Intel of this space.''
Krach's vision played well on Wall Street, but the effort to execute it almost crippled the company, former executives said. As the strategic focus shifted to e-marketplaces, programmers were pulled away from the core procurement software. Customers had trouble getting new releases of the product to work properly.
``It was combination of actual bugs, code that didn't work and performance issues'' with third-party middleware, said Jonathan Wood of Litton PRC, a unit of Northrop Grumman that offers information-technology services to public-sector organizations.
``We stumbled a couple of times on the software front, and it really hurt some of our better customers,'' acknowledged Paul Touw, a founder who was then Ariba's vice president of corporate strategy.
E-marketplace customers were also disappointed when the online exchanges failed to attract participants. Dell Computer pulled the plug on its Ariba-built e-marketplace after only four months of operation. Citing ``a lack of maturity in that market,'' a Dell spokesman said that only three suppliers had agreed to sell goods in the electronic mall.
Tap runs dry
Executives report plunge in sales
In April, Krach and Chief Financial Officer Bob Calderoni finally admitted that Ariba was in bad shape. In a conference call with analysts and reporters, they said revenue from e-marketplaces had evaporated. During the quarter that ended in March, Ariba's sales were half what the company had expected. Thanks to the collapse of Ariba's stock -- down 97 percent in six months -- a much anticipated merger with Agile Software had been canceled, limiting Ariba's ability to easily expand its technology in another direction.
``This fundamental change in our near-term prospects means some very tough decisions,'' Krach said as he announced sweeping layoffs and hefty restructuring charges.
During the next few months, 700 people were laid off. Ariba wrote off $1.4 billion in ``impairment costs'' -- a charge that adjusted the book value of the Tradex acquisition to reflect ``the significant underperformance'' of the acquired software, according to the company's financial statements.
Wall Street's reaction was immediate and harsh. The day after Krach revealed the shortfall, Ariba's shares dropped 20 percent, and at least eight Wall Street firms downgraded the stock. In the following weeks, analysts at the Gartner advisory firm described e-procurement software -- Ariba's main product -- as ``an offering of questionable value'' and recommended that Ariba's existing customers ``should minimize investments'' in the software.
Krach resigned as CEO at the end of April, calling employees together at a Las Vegas casino where they were holding a customer conference. As gamblers took a turn at nearby slot machines and blackjack tables, employees gave him a standing ovation.
They had good reason to cheer -- many of them had made a fortune on Ariba stock. Since the IPO, Krach had sold shares worth $167 million. Nine other co-founders and former vice presidents had sold another $895 million in stock, enough to fund Silicon Valley's largest food bank until 2090. Low-level employees also became millionaires. During 2000, Ariba's insider sales totaled more than any other U.S. public company except Microsoft and Dell.
Krach, who remained chairman, defended his stock sales in a mid-July interview. ``If you look at it percentage-wise, I really haven't sold that much,'' he said. ``I still have about 17 million shares.
``When you get criticism, it's the penalty of leadership,'' he continued. ``You've got to be able to weather that storm.''
Days later, Krach stepped into the eye of the storm, reassuming the CEO post after his replacement, Mueller, suddenly resigned. Though the company would not officially comment on Mueller's departure, several former executives said that the hard-driving salesman, who had served as Ariba's president and chief operating officer for a year and a half, had clashed with other company officers over sales targets and other issues.
Krach is technically an interim CEO. The board of directors has retained an executive search firm,but a company spokeswoman said there's no rush to hire someone new.
Krach admits no immediate turnaround is in sight. Revenue, which has fallen sharply all year, is expected to fall 50 percent in the current quarter, which ends Sept. 30, compared with the same quarter a year ago.
The company, which has never been profitable, is bleeding red ink. Ariba lost $273.5 million during the last quarter, ended June 30, and analysts expect large losses to continue through next year.
Competition has intensified as giant software vendors like Oracle and SAP offer heavily discounted procurement applications as part of larger technology packages. ``Some vendors are making it very attractive by offering discounts well in excess of 85 percent,'' said David Hope-Ross, an analyst at Gartner.
But Krach and CFO Calderoni insist that Ariba is holding its own, claiming on a recent conference call that Ariba won 49 new customers, including several from Oracle and SAP, without offering significant price concessions.
Brent Thill, an analyst at Credit Suisse First Boston, said he believes Ariba can make a comeback. One of the key challenges, he said, will be Ariba's ability to expand its software to better reflect the complex ways that companies purchase goods and services -- areas where other software companies are early leaders.
Ariba said it is addressing this problem by updating some procurement software, scheduled for a September release, that will let customers buy goods from each other directly, rather than through electronic catalogs. In addition, the company plans an improved version of its catalog-based procurement product.
The company has also slashed expenses by 20 percent, including major layoffs in sales and marketing. And executives promise to keep cutting if necessary.
Krach remains the company's master marketer. Though he asked board members and former executives not to discuss the company with a Mercury News reporter, Krach himself carefully responded to questions, confidently repeating that Ariba's ``long-term market opportunity remains strong, and that our customers will continue to appreciate the value of Ariba's products to save money.''
But his words ring hollow with investors who were once his biggest believers. ``Ariba was fool's gold,'' said Jim Cramer, a former hedge-fund manager who championed Ariba in his column on TheStreet.com. ``This one killed more mutual-fund managers than any other stock I know, with the possible exception of Amazon.'' |
