Connect the Dots

The signals are good in the flurry of mergers and acquisitions among dot coms. Companies are snapping up complementary businesses in order to add features to their products, beef up internal operations and expand their product lines. Merger and acquisition activity has been accelerating in the procurement automation industry. Here's a sampling of some of the recent deals.

Agile Software Corporation, maker of applications that help manufacturers automate tasks such as the ECO (engineering change order) process, acquired Digital Market, designer of RFQ software, for $89 million in stock and $20 million in cash.

VerticalNet, parent company of 55+ vertical online markeplaces, acquired NECX, a well-known Internet electronic components and computer products distributor, for $95 million in stock and $10 million in cash.

Commerce One, an MRO requisition software and online marketplace provider, acquired CommerceBid.com for its online auction software. The deal was valued at $180 million, of which $4.5 million was in cash.

I2, a leader in supply chain management systems, announced its intention to purchase Aspect Development, maker of component management systems for manufacturers, and Supplybase Inc., a sourcing Web site that lists more than 100,000 suppliers for custom parts and assemblies. The Aspect Development all-stock deal was valued at $9.3 billion when it was announced in March.

SBC Communications, the No. 1 local phone company in the United States and parent of Southwestern Bell, Pacific Bell and Ameritech, unveiled plans to acquire Sterling Commerce, a leading company in EDI software systems, for $3.9 billion in cash.

Partminer, an online components supplier, bought Accurate Components, a brick-and-mortar distributor in Bohemia, New York, for an undisclosed amount.

Good News
Mergers and acquisitions are usually unwelcome events for business executives and purchasing and supply management professionals. When the supplier base for a particular product or service narrows, prices can typically be expected to rise for those products or services because of reduced competition.

These procurement automation mergers and acquisitions, however, are birds of a different color. Companies are snapping up complementary businesses in order to add features to their products, beef up internal operations and expand their product lines. And there¹s more good news. Smaller, more financially risky start-ups are being absorbed into larger, more stable firms, and buying companies are finally getting procurement automation suppliers that can streamline more than one purchasing process.

Take another look at the list of mergers and acquisitions. Note that not a single deal is between direct competitors. The procurement automation market is still very youthful, and the focus is on finding the right feature sets and product mixes to offer. Solutions providers frequently lack the resources, bandwidth, time or expertise needed to build the things they need. Companies often solve this problem by purchasing businesses that have already developed the desired technology, product or service.

The second, less-obvious benefit of this type of merger and acquisition activity is that the resulting combinations are more likely to thrive together than they would as independent companies. Take, for example, the Digital Market/Agile deal. I¹ve seen an in-depth demonstration of Digital Market¹s RFQ application, and it was absolutely terrific. But Digital Market is a small start-up.

An interested purchaser who works for a company that thrives on technology from the bleeding edge may have no trouble getting approval to buy software from a company like Digital Market. Those of us who work for more conservative companies, however, may have a great deal more difficulty convincing our IS departments and executive management to spend hundreds of thousands of dollars on software from a small, unproven supplier.

Buying from a start-up isn't bad, it's just riskier. A new company may not have the resources or infrastructure in place to adequately service customers or continue enhancing products. Businesses that offer more than one product, like the Digital Market/Agile combo, are inherently more stable, because strong sales for one application can compensate for slow sales from another. Or, as in the case with SBC buying Sterling, the acquirer may be larger, have more cash or simply be able to keep the smaller partner afloat longer if problems arise.

Another positive result of mergers and acquisitions is that they help buying companies reduce the number of procurement automation suppliers they have to deal with. This issue isn't as big of a concern for buying companies in service industries, whose scope of purchases is more limited, but it is a big problem for manufacturers.

Take, for example, a Fortune 100 manufacturer that I have spoken with on several occasions. This company has parts-management software from Aspect Development, ERP software from SAP and a purchase requisitioning package from a separate MRO company. That's already three systems to maintain and three suppliers to manage for the purchasing function alone. If the purchasers at this company push to buy an online team-collaboration package or participate in an online marketplace, I bet their first choice will be an offering from a supplier they already deal with. When your current solutions providers are one-product companies, it's a problem.

Will the Frenetic M&A Activity Continue?
The fuel for most of the recent mergers and acquisitions has been the high-flying stock market for B2B technology issues. Note that the majority of the deals going on are primarily denominated in stock.

Now that the market valuations of the procurement automation companies have cooled off, there will probably be a lot fewer acquisitions made by dot coms. Instead, look for more deals like the I2/Supplybase Inc. and SBC/Sterling combinations, in which established brick-and-mortar companies grab online start-ups while they are cheap.

Whether new companies snap up complementary businesses or established companies prowl, these mergers and acquisitions are still good news for business executives and purchasers. I predict that deals that result in reduced competition in the procurement automation industry are still a long way off.

Deborah R. Wilson, C.P.M., is an analyst and consultant who specializes in purchasing automation strategies. Her Web site is www.purchasingautomation.com. Prior to striking out on her own, Wilson worked in senior procurement positions at Bay Networks.

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