A star is falling: the plight of Ariba

Once seen as the brightest star in the business-to-business constellation, Ariba is now locked in a battle for survival. Even more demoralizing the company last week saw its market capitalization fall below that of rival Commerce One.

Ay, Caramba! Former high-flyer Ariba may need to add a few new Spanish phrases to its vocabulary. Once seen as the brightest star in the business-to-business constellation, Ariba is now locked in a battle for survival.

The company announced a $1.84 billion quarterly loss last week, laid off 700 employees, wrote off growth in the public marketplace business it has long prized, and gave up plans for its biggest strategic acquisition — a $2.5 billion stock deal to acquire Agile Software.

Sales are expected to level off at $90 million or even sag during the next quarter, leaving Ariba $15 million to $20 million short of its breakeven point. Perhaps even more demoralizing, the Mountain View, Calif., company saw its market capitalization fall below that of cross-Valley rival Commerce One last week — the first time investors have valued Ariba at less than its chief competitor.

Is Ariba down for the count? YES

Company officials maintain Ariba will pull out of its troubles, but are vague about when. As it prepares to host its annual users conference in Las Vegas this week, questions remain about how the business-to-business stalwart will make its "value chain" strategy work and expand in the one true growth area of B2B e-commerce — private trading exchanges for mission-critical goods. That's seen as an area Ariba is only beginning to enter.

Thwarted so far in its plans to make the transition by merger, Ariba is stepping up efforts to work with chosen marketplace customers to move them toward private exchanges.

Robert Calderoni, Ariba's chief financial officer, tried to make that clear to analysts during the company's recent earnings call, saying: "We're phasing that [public marketplace business] out over time."

Public exchanges are large marketplaces that act like hubs for multiple buyers and suppliers in an industry. Private exchanges refer to electronic links between one dominant company and its customers and suppliers.

"We're looking at a different strategy," Calderoni said, a strategy that involves more customization of Ariba's software to the different needs of individual clients.

Ariba officials remain tight-lipped about details of phasin g out the public marketplace business and the shift to private exchanges. Ariba got into the public marketplace business in a big way when it acquired Tradex Technologies in early 2000. However, it was forced to write off $1.4 billion in goodwill when the market collapsed, accounting for most of its recent quarterly loss.

One option it may pursue is selling source code to exchange customers. At least two exchanges, Transora and Omnexus, say they are negotiating with Ariba on such deals. "Source code is part of what they're looking at doing," confirms Jonathan Greenspahn, vice president of supplier relations at Omnexus, a plastics exchange. "They're trying to meet needs better."

Rick Herbst, chief business officer at Transora, says Transora has been speaking with Ariba about source code for some time, and he believes Ariba was discussing the issue with other customers as well. Ariba officials could not be reached for comment.

Working through customers to get customers is a shortcut to market and could help Ariba get around some of the technical challenges in this transition. But there are dangers. If it mishandles this tactic, it could lose its grip on getting a share of the transactions taking place through the industry exchanges, and begin to look more like a pure-play software company, with only license and maintenance fees, says Pawan Malhotra, an analyst at SG Cowen.

Ariba got its start by providing software that enabled companies to purchase office supplies and other non-critical, or "indirect," goods over the Internet. It has a solid business there, but companies want to do more with e-commerce than buy pencils, analysts say. They want to use the Internet to buy direct goods — the supplies and raw materials that go into making products. "The focus is now back to supply chain and automation around the customer," says Eric Upin, an analyst at Robertson Stephens. "Companies are looking for vendors with flexible, one-stop shopping."

Handling transactions of direct goods requires more sophistication than procuring simple things like envelopes or cleaning supplies. So Ariba partnered last year with IBM and supply chain software vendor i2 Technologies to go after industrywide exchanges, seen then as the next big e-commerce opportunity. But i2 also harbored ambitions of powering the electronic trade of mission-critical goods, so the two quickly began moving apart.

"I don't know if you can pin the blame on one party," says John Ederer, an analyst at Pacific Growth Equities. "As things evolved, i2 and Ariba found themselves competing more on a head-to-head basis."

When Ariba said in January that it would buy Agile Software, analysts took it as a declaration of independence from i2. They cautiously praised the expensive, $2.5 billion stock deal as Ariba's first solid move into supply chain software. Two months later, i2 sealed the fate of the alliance when it said it would buy RightWorks, an e-procurement vendor, one year to the day after the IBM-Ariba-i2 alliance was announced.

But timing was not in Ariba's favor. The economic downturn forced most firms in the B2B sector to issue earnings warnings, including Oracle, i2 and Commerce One. The impact on Ariba was more severe, and it was forced to call off the merger with Agile. Now it is nine months late to the mating dance at which companies pair off in mergers for their competitive future. "It is strategically isolated now," says Richard Williams, an analyst at Jefferies & Co.

Ariba itself has been mentioned as an acquisition target, primarily because of its reduced stock price. How ever, analysts say there's little substance to the rumors that the company, valued at about $1.5 billion, would be sold.

"There's only a few companies out there that could swallow them," Pacific Growth's Ederer says. This leaves Ariba to weather the software downturn alone, while it seeks a secure way into the private marketplace business.

With about $400 million in the bank, Ariba is confident it can survive the slowdown. Time will tell.

Ariba's timeline mirrors e-commerce's rise and fall

September 1996: Ariba is founded. It later wins $6 million in a first round of funding.

May 1997: Ariba signs up Advanced Micro Devices, its first customer, for its e-procurement software. This helps companies buy office supplies and maintenance and catalog items, things that often aren't mission-critical.

June 1999: Ariba goes public with initial offering price of $23 per share.

Dec. 16: Ariba says it will buy Tradex Technologies for $1.86 billion in stock, an acquisition that brings Ariba into the marketplace business. It lets Ariba power aggregated selling and buying for the first time.

March 8, 2000: The Alliance is announced. Ariba, i2 Technologies and IBM agree to work together for public marketplace business. Ariba stock shoots up to $355 per share.

Sept. 11: Ariba introduces software to help companies source, or find suppliers for needed goods.

Jan. 29, 2001: Ariba says it will buy Agile Software for $2.55 billion in stock. Analysts question whether the long-troubled Alliance will survive.

Feb. 28: Ariba announces new value chain strategy designed to use its acquisition of Agile to take Ariba beyond e-procurement, squarely into the private exchange business and mission- critical goods.

March 8: A year to the day after announcing the Alliance, Ariba rival i2 says it will buy e-procurement vendor RightWorks, its first direct challenge to Ariba's core business.

April 2: Ariba warns that second-quarter earnings will be $90 million, about half of what analysts had predicted. It announces 700 layoffs and cancels its merger with Agile.