Ariba Buys FreeMarkets for $493 Million

Ariba has announced plans to acquire FreeMarkets, a provider of supply management solutions. According to Ariba, FreeMarkets shareholders will receive 2.25 Ariba common shares and US$2 in cash for each share of FreeMarkets stock.

In total, the deal is expected to be worth about $493 million. The boards of directors of both companies unanimously approved the agreement. The merged company will keep the Ariba name as it integrates executives from both FreeMarkets and Ariba into the new entity. Ariba CEO Bob Calderoni will retain his role, while FreeMarkets CEO Dave McCormick will become president and join Ariba’s board.

“This deal brings together two companies focused on providing customers with innovative ways to impact their bottom lines,” Calderoni said. “The complementary strengths of Ariba and FreeMarkets will help accelerate this market and set the standard for spend management solutions for years to come.”

Services Strategy

Ariba announced the FreeMarkets purchase a little more than two weeks after agreeing to buy privately held Alliente, a business procurement processing outsourcing provider. Taken together, these moves suggest Ariba is looking to move beyond its software beginnings into a broader role involving both software and services.

Bruce Hudson, program director for enterprise applications at Meta Group, called Ariba’s play for FreeMarkets a gutsy move.

“Becoming a service provider is a big difference from simply just being a software vendor,” Hudson told CRM Buyer. “Ariba’s move to software and procurement outsourcing shows its plans for diversifying risk and expanding its footprint.”

In general, Hudson said, he has seen strong demand for procurement outsourcing because companies increasingly are paying professionals to handle their purchasing needs, rather than relying on “the procurement trolls in the basement.”

Complementary Deal

Hudson noted that he does not think Ariba is buying FreeMarkets for its customer base. Ariba has a pretty good roster of customers in its own right, he said, adding that he believes the FreeMarkets purchase is a purely strategic move intended to transform Ariba into a full-service provider of software and outsourcing solutions.

However, Ariba spokesperson Kevin Brooks emphasized that Ariba’s and FreeMarkets’ divergent customer sets are highly complementary. He told CRM Buyer that Ariba has a strong presence in pharmaceuticals, financial services and retail, while FreeMarkets’ presence is in manufacturing, oil and gas, with a greater global reach.

“We’re blending strengths, going after similar customers,” he said. “Ariba can be seen as software with a little services, while FreeMarkets has services with a little software.”

The ‘Spend Management’ Message

According to Hudson, Ariba is an interesting company that “has looked death in the face and then managed to [survive].” Having barely survived the tech bust, the company held on to its good client base, shed many employees and concentrated on its core procurement functionality.

Then the company transitioned from e-procurement to “spend management,” which is more expansive in scope. In addition to providing organizations with the ability to create a requisition and purchase indirect materials — such as toilet paper, paper clips and office chairs — spend management software incorporates analytics to monitor departmental spending, supply performance and category management solutions.

FreeMarkets provides Ariba with knowledge workers who are experts in different categories and can provide Ariba’s clients with outsourcing capabilities in procuring needed supplies. For example, Hudson said, FreeMarkets can help a company make its screws, nuts and bolts procurements by choosing the best options and running auctions to obtain these items.

Fundamental Evolution

The move is a timely one for FreeMarkets, which Hudson said has been in trouble for some time, losing money hand over fist.

Meanwhile, Brooks said, the deal is about knowledge-based people joining together to both parties’ advantage.

“We’re just accelerating the evolution of where both of us were going to begin with,” he noted. “Fundamentally, that is what it’s about.”