Ariba Inc., a purveyor of spend management software, last week announced that it would buy Procuri Inc., an on-demand supplier of supply chain management solutions, in a move intended to strengthen Ariba's foothold in the mid-market as well as its software-as-a-service (SaaS) model.
Ariba will pay $101 million for Procuri — $93 million in equal amounts of cash and stock, and a payoff of $8 million of Procuri's debt. Ariba executives expect the deal — which is expected to close in December — to be accretive by the end of the company's 2008 fiscal year.
Spend management software tracks every dollar spent on services, direct materials, and indirect cost. Manufacturers are increasingly interested in controlling costs due to inflation, regulations, and global competition. As a result, Ariba officials are bullish on the prospects for the sector, pegging the growth rate at 20% over the next several years.
Last year, Ariba shifted its business model toward SaaS subscriptions, a move that has contributed significantly to its revenue. In its third quarter, ended June 30, 2007, Ariba reported revenue of $75.6 million and a net loss of $2 million. That compared with a year-earlier net loss of $31.5 million on $73.6 million in revenue. Subscription revenue accounted for $18 million in the 2007 third quarter, compared with $14 million in the prior-year period. The company closed deals with 79 subscription-based customers this past quarter, officials said.
Many of Ariba's customers are large enterprises with revenue of $5 billion-plus — not typical buyers of on-demand services. For those customers, Ariba will continue to provide behind-the-firewall licensed software. Procuri, on the other hand, caters to the under-$2-billion in revenue, mid-market crowd, which is more receptive to the on-demand model. Adding Procuri's customer base of more than 300 companies will help build revenue, but it is the technology expertise that will attract new customers and really strengthen Ariba's financial model, officials said.
"This acquisition is complementary," said AMR Research Director Mickey North Rizza in an online analysis of the deal. "This is a prime opportunity for Ariba to grab the mid-market share it has diligently been pursuing for the past year. With more than 60% of Procuri's customer base under $2B and an impressive European customer base, this is a solid acquisition for Ariba, which has been struggling to increase mid-market sales."
Even before the acquisition, however, Ariba had big plans for its SaaS growth. "We expect to grow our subscription revenue organically by 40%," Bob Calderoni, Ariba's CEO, said in a briefing last week with financial analysts. "This acquisition will accelerate the penetration in the mid-market. And given the size of R&D, the global infrastructure, and back-office requirements, we'll recognize substantial efficiencies from combining the two businesses. Once the integration is complete, we expect the transaction to be highly accretive," he said.
Less than a year ago, Procuri had built out its own technology portfolio with its acquisition of spend analysis firm TrueSource.
Few details were provided on Ariba's integration strategy going forward. Officials noted that the plan will be outlined in full before the end of the year. "We'll have all of the integration details laid out in next 30 to 45 days," Calderoni said. "We are confident about how we will pull this off ...We'll put the two solutions side-by-side, look at the best features from both, and build it into a super solution ...We'll work with customers to ensure there's an orderly transition on account coverage, etc. Our focus is to give [customers] something of greater value than they have today."
Overall, the acquisition is an opportunity for Ariba to strengthen its on-demand story and better penetrate the mid-market. The company predicts the acquisition will have a run rate of $.10 per share in fiscal 2009.