The Day Ahead: Ariba pays up for sales-impaired startup

Ariba paid $581m in stock for, a startup with $216,791 in March quarter sales

What's a business-to-business startup to do when it has about $267,000 (£178,350) in sales since inception and doesn't stand much of a chance on the IPO market? Find a well-heeled acquirer such as Ariba to fork over $581m and sell out.

Ariba said after the closing bell Monday it would acquire privately held for roughly 6.6m of its common stock. was planning to offer 10m shares priced between $9 and $11. At $10 a share, would have had a market capitalisation of $412m based on its post IPO shares outstanding.

Ariba was sure to point out that the shares that would be issued were less than 3 percent of its shares outstanding.

There's a good reason Ariba toned down the dilution impact of The Burlington, MA startup has been registered for an initial public offering since March. That means it's relatively easy to find out what Ariba acquired. Shareholders often don't get a lot of details when companies such as Ariba buy privately held firms.

When you look under the hood of you get two realities. First, there's the acquiring company's spin. In this case, Ariba touted's technology that links buyers and sellers and allows them to find new trading partners. Ariba also played up the fact that has 7,700 registered buyers and more than 12,000 registered suppliers.

Sounds great right? And then you read's regulatory filings. The company runs a direct materials marketplace. Direct materials range from bolts, nuts and fasteners to rubber and glass products to corrugated packaging to injection and blow-molded plastic components. The technology may be great and may have plenty of registered users, but sales are light.

Since Feb. 12, 1999 (inception) to December 31, 1999, SupplierMarket reported sales of $51,541. The good news is's sales ballooned to all of $216,791 for the three months ending March 31. The company lost about $19.9m since inception.

Simply put, Ariba issued $2,680 in stock for every dollar of sales brought in by In addition, relied on one customer for 91 percent of its March quarter sales. That customer, Simmons, a leading mattress maker, also had ties to's private shareholders. In its filings, said it expected more customers in the June quarter, but it was unlikely the company would have seen sales of $1m or more.

We recently spoke to a official at a B2B conference and he acknowledged the company could have to wait awhile for an IPO. Part of's wait was related to a volatile IPO market. The other factor was most likely the weak sales. Investors have become increasingly picky about what IPOs they back.

The company had inked sales pacts with Parametric Technology and Agile Software, but the company was green to say the least. An acquisition by Ariba was a great exit strategy for

Why? It wasn't clear that would have been able to compete on its own. The company cited Ariba, FreeMarkets, VerticalNet and Commerce One all as potential competitors. Meanwhile, sold out for about the same market cap as niche B2B players, eMerge Interactive and Neoforma.

Ariba's pitch is that it can take and combine it with its network. When this alleged "network effect" takes off, will ramp up sales dramatically. If you're an Ariba shareholder, you have to wonder if Ariba paid too much. One thing is guaranteed: execs are smiling this morning.

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