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June 30, 2000 02:00 AM

Ariba-SupplierMarket deal valued at $550 million plus

Joseph Pryweller
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    BURLINGTON, MASS. (June 30, 5:20 p.m. EDT) — Electronic commerce technology provider Ariba Inc. has agreed to buy SupplierMarket.com Inc., placing the yearling dot-com in loftier company and possibly heralding a new era of online consolidation.

    The stock transaction, valued at between $550 million and $581 million, should put Burlington-based SupplierMarket in good stead to rival market leader FreeMarkets Inc. for dominance in reverse auctions, according to several analysts.

    Both companies sell bundled contracts for plastic parts and other goods over their auction-based Web sites. Processors bid anonymously for those contracts. While FreeMarkets has gone after large original equipment manufacturers, SupplierMarket until now has been more content to focus on midtier companies.

    That could change, as SupplierMarket taps the database of Ariba software users among Fortune 1000 companies, said Steve Heutlinger, director of supplier management for SupplierMarket.

    "We can go up and down the supply chain with greater ease than ever before," Heutlinger said in a June 28 telephone interview. "I think this eclipses what FreeMarkets is doing. If I were them, I´d feel a little scared right now."

    The deal reaffirms e-commerce business models that focus on direct materials sourcing for industrial purchases, said FreeMarkets spokeswoman Kimberly Booth.

    "It also underlines the importance of combining technology and sourcing expertise to achieve tangible results," she said.

    SupplierMarket only began offering auctions in October. The company has grown from 13 employees when it started in July 1999 to 155 people today. About a quarter of its database of 13,000 companies comes from the plastics industry.

    SupplierMarket has experienced the cash-poor growing pains of many dot-coms. The company has lost about $19.9 million since its inception. It recorded sales of $216,791 for the first three months of 2000.

    But Ariba´s size and depth gives SupplierMarket a burst of confidence. Ariba, based in Mountain View, Calif., has moved from providing software for in-house computer systems to establishing a network of online buyers for transactions.

    "One of our roles is to provide a central directory to connect buyers, suppliers and the marketplace," said Jon Corshen, vice president of product marketing at Ariba. "Our second role is providing a central source of shared commerce services for payment, logistics and sourcing.

    "The way we see it, buyers and supplies are demanding network service as they move to an Internet production system."

    That vision spurred the SupplierMarket buy, Corshen said. While Ariba offers indirect products — such items as light bulbs and paper goods — over its Web site, SupplierMarket sells direct, critical products used for production, he said.

    Ariba can tap SupplierMarket´s expertise at planning auction events, while SupplierMarket can benefit from Ariba´s technology, said equity analyst David Hilal of Arlington, Va.-based Friedman, Billings, Ramsey Group Inc., which covers publicly held Ariba.

    "Ariba wants to swim downstream and penetrate smaller companies, while SupplierMarket wants to move upstream," Hilal said. "This makes the combined entity more competitive to FreeMarkets. It´s been tough for SupplierMarket to go up against the entrenched players, and this evens the battle."

    Ariba has money to spend. The company recorded annual sales of $45.3 million for its 1999 fiscal year, ending Sept. 30. Since then, Ariba paid more than $2.7 billion to buy two companies providing software for online transactions.

    Ariba agreed to issue 6.3 million shares of stock, or about 3 percent of its shares outstanding, to buy SupplierMarket at Ariba´s average trading price. The deal is scheduled to close by the third quarter.

    Ariba´s stock fluttered this week after the transaction was announced. On June 28, a day after the deal was publicized, Ariba stock rose by more than three points to $93.75 after falling two points the day before.

    FreeMarkets´ stock also swung, falling by close to two points on June 27 before rebounding the next day, closing up four points to trade at $48.38.

    SupplierMarket executives had planned to take that company public, registering for an initial public offering in March. The IPO plans will be off the table once the transaction is final, said spokeswoman Holly Allison.

    Instead, the company will become a business unit of Ariba. SupplierMarket co-founders Asif Satchu and Jon Burgstone will move to Mountain View, and Chief Operating Officer Rick Feldt will run the company in Burlington, Allison said.

    Ariba plans to expand SupplierMarket, Corshen said. The company wants to add functions to help suppliers and buyers collaborate on design and order forecasting, he said.

    The companies have forged a commercial agreement to begin offering combined network service immediately, Corshen said. That way, SupplierMarket can connect with the "hundreds of thousands" of suppliers on Ariba´s network.

    That network includes 100 of the largest 1,000 companies in the world, Corshen added.

    "We definitely can help to accelerate expansion to a more complex and complete online model," Corshen said. "I think we´ll be the furthest ahead of all our competitors at doing this."

    Other technology providers, including Commerce One Inc. and Oracle Corp., also want to speed activity in online transactions. The purchase could spur more acquisitions by those companies, said Ben Rose, analyst with Boston-based Adams, Harkness & Hill.

    But Ariba will be challenged to make SupplierMarket more profitable. Ariba itself recorded $126 million in losses last year.

    "Of 400 public (dot-com) companies, only 12 are forecast to be profitable in the year 2000," Rose said. "This doesn´t justify losses but puts it in perspective. They have to be able to fine-tune their operating plans and become more efficient."

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