Ariba Plans To Acquire FreeMarkets

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January 23, 2004 (1:58 PM EST)

Ariba Inc. on Friday said it has agreed to acquire FreeMarkets Inc. for $493 million in stock and cash, saying the merger will dramatically extend the capabilities of its software for helping companies negotiate better prices for supplies and services.

Under the deal, FreeMarkets stockholders will each receive 2.25 shares of Ariba and $2 in cash for each outstanding FreeMarkets common share. Based on the Jan. 22 closing price of Ariba stock, the deal is valued at $493 million.

The combined company would have $360 million in annual revenues and a product portfolio that would enable customers to track and analyze spending on supplies and services, as well as contract compliance by suppliers. The technology's emphasis on cost control enables companies to find ways to lower expenses, experts say.

"Although we'll have to wait to see the specifics, it's fairly clear that you've got two companies with broad geographic reach that are going to focus on global 2000 procurement organizations," Andy Kyte, analyst for market researcher Gartner Inc., said. "They have a broad portfolio of products and services that the ERP (enterprise resource planning) vendors are going to be really challenged to compete against."

Major companies selling ERP software, which are information systems that include applications for manufacturing, accounting, human resources, supply chains, warehousing and transportation, include PeopleSoft Inc., SAP AG, Oracle Corp. and Lawson Software.

The combined company would be led by Ariba President and Chief Executive Officer Bob Calderoni, who would retain his position as board chairman. FreeMarkets President and CEO Dave McCormick would become president of the new company and a board member. FreeMarkets board member Karl Newkirk would also join Ariba's board.

As a result of the merger, Ariba expects to reduce operating expenses by $25 million a year within nine months after the deal closes, which is expected by the end of the second quarter. The acquisition, which has been approved by the boards of both companies, must be approved by stockholders and government regulators.

Ariba plans to continue selling and supporting FreeMarkets software, which would eventually be merged with Ariba products into a single platform.

"Combining Ariba and FreeMarkets adds to each of our individual strengths and brings some efficiencies as well," Calderoni said in a statement. "It is all about delivering more savings to our customers."

The merger is expected to strengthen both vendors within the crowded market for spend management software, Kyte said.

"This is very good news for Ariba customers because it clearly signals the strength of one of their key suppliers," he said. "And it's pretty good news for FreeMarkets's customers, overall, because it removes any lingering doubt there might be going forward about the future direction of their solutions provider."

Pittsburgh, Penn.-based, FreeMarkets started with a strong consulting business, but struggled a bit as it tried to make the transition into the software market, Kyte said.

"That was draining some of their capital and it meant they were slightly less focused on high-value consulting, while they tried to work out how to be both a services organization and a software company," Kyte said.

Ariba, on the other hand, started as a company focused on technology for buying high-volume, low-cost supplies that companies use for maintenance and in the office. The Sunnyvale, Calif., company lost a huge amount of market value in the dot-com bust in 2000, but managed to re-emerge successfully within a different software segment, Kyte said.

"The Ariba that exists today is an entirely different company," he said.