Ariba Shells Out Almost $500 Million For FreeMarkets

Ariba Inc. said Friday it's acquiring FreeMarkets Inc.

The newly created company, estimated at $360 million in annualized revenue as of Dec. 31, 2003, will operate as Ariba Inc. under the direction of Bob Calderoni, who retains his role as CEO and chairman of the board. FreeMarkets president and CEO Dave McCormick will become president of Ariba and will also join Ariba's board of directors.

"The benefit for customers is a complete offering in procurement and sourcing from one company," Calderoni says. "These are two companies with complementary strengths. Ariba and FreeMarkets have always been strong in software and services. Both companies are unmatched in the enterprise spend-management space."

The transaction, which is expected to close in the mid- to late second calendar quarter 2004, is subject to customary closing conditions, including regulatory review and approval by the stockholders of each company.

The deal is expected to combine Ariba's strength in E-procurement, transaction processing, and analytics with FreeMarkets' sourcing services, which help companies improve supply-chain expertise. It comes just a few weeks after FreeMarkets agreed to acquire the auction services and customer base of Covisint, the once high-flying online marketplace for the auto industry.

IDC analyst Albert Pang believes the deal is positive for both Ariba and FreeMarkets, but he does have some concerns. "The all-encompassing-service approach leaves little room for Ariba's, and to a lesser extent, FreeMarkets', partners to participate in sales opportunities," Pang says.

The agreement between Ariba and FreeMarkets, for example, could make the combined company rethink the working relationship Ariba has with partners like IBM's services group, he says. "Ariba and IBM have had an on-again and off-again relationship with about a dozen or so engagements in the past," Pang says. "They were trying to strike a better relationship moving forward, and now those things just have to be worked out."

Upon the closing, FreeMarkets stockholders will receive 2.25 Ariba common shares and $2 cash for each outstanding FreeMarkets common share. Based on the $3.70 closing price of Ariba common stock on Jan. 22, the transaction is valued at approximately $493 million, the company said. The stock price slid to $3.42 by midafternoon the following day.

Ariba is expected to report on Jan. 28 approximately $52 million in revenue for the first quarter of 2004, ended Dec. 31. Net income for the quarter is estimated at $6 million, or 2 cents per share, including certain onetime cost benefits of approximately $5 million.

The combination is expected to be accretive to Ariba's earnings immediately following closing, on an adjusted basis, excluding transaction-related charges, restructuring costs, and amortization associated with acquired intangibles and other purchase accounting adjustments. The merged companies also expect to obtain improved operating efficiencies of approximately $25 million on an annualized basis within nine months after closing.

Upon completion of the transaction, FreeMarkets stockholders will own approximately 28% of the outstanding capital stock of the combined company. The stock portion to FreeMarkets stockholders is expected to be tax-free. The boards of directors at both FreeMarkets and Ariba have unanimously approved the agreement, and the directors and executive officers of the companies have entered into agreements to vote the shares they own of their respective companies in favor of the transaction.

Separately, Ariba will seek stockholder approval for a one-for-five or one-for-six reverse stock split, which would take place upon completion of the merger.