Business Week e.biz -- Upstarts
How Ariba Got Airborne
Timely acquisitions have made the upstart a leader in B2B e-commerce
Rarely does a company's fate turn so decisively in a single day. It was last Nov. 15, and Keith Krach, the former auto executive who pilots Internet startup Ariba Inc., had just made the riskiest move of his professional life. He paid $400 million in stock to acquire TradingDynamics Inc., a company with coveted technology for online business auctions and a paltry $4 million in sales. Ariba desperately needed the tiny company's technology to pass rivals in just-emerging e-marketplaces--Web sites that allow corporate buyers and sellers of goods and services to trade online. Now, Krach had the perfect occasion for spreading the news. TradingDynamics Chief Executive Kirk Cruikshank was to speak that afternoon at a high-profile e-commerce conference. They could storm the stage together.
There was just one problem: how to get there in time. The two CEOs had been delayed by last-minute details of the merger. They were stuck in an office park in Mountain View, Calif., in the heart of gridlocked Silicon Valley. The conference was 30 miles away, at the Claremont Resort & Spa, nestled in the hills above Berkeley. By car, it would take two hours. But Krach wasn't about to let the crucial moment pass. Ariba's investment banker, Morgan Stanley Dean Witter, chartered a helicopter. In half an hour, the two execs arrived at the stately 90-year-old resort, and minutes later, Krach and Cruikshank were onstage. "They stole the show," says Andrew T. Duncan, CEO of The EC Company, which makes software for exchanges.Perfectly poised. Krach wasn't done yet. While buzzing over the Bay, he wondered aloud what his next deal would be. "Tradex," suggested Cruikshank. The company was a maker of software for building online communities of buyers and sellers--another piece Ariba was missing. Later that afternoon, Krach started negotiations with Tradex execs in a Claremont conference room. Within a month, he bought the company for $1.4 billion in stock.
In one incredible day, Krach added the ingredients that have turned his upstart into one of the kings of business-to-business e-commerce software. Indeed, Ariba is just about perfectly positioned for success in the next phase of the Internet revolution. After four years in the market, its e-procurement software package is complete. And now, thanks to acquisitions, it's a player in the hottest new market--e-marketplaces. The two pieces fit together like Tracy and Hepburn. Most companies that want to be in an e-marketplace also are putting their internal-procurement systems online at the same time.
Krach's deft moves are starting to pay dividends. For the quarter ending June 30--the first period that sales from both acquisitions were counted--Ariba's revenues shot up 101% from the previous quarter, to $80.7 million, and 578% from the same quarter a year ago. Losses for the quarter were $11.3 million, about half what analysts expected. Analyst Robert Schwartz of Thomas Weisel Partners calls the company's financial performance "the best I've ever seen."
It may get better yet. The procurement market is expected to swell to $3.1 billion in 2002, up from $540 million in 1999, according to AMR Research Inc. E-marketplace programs will be in great demand, too, growing to $1.4 billion, from $124 million in 1999. Besides providing software for others, Ariba runs its own online-procurement network, mostly for small businesses. Overall, the four-year-old company has bagged 300 customers, including such blue chips as Volkswagen, Kaiser Permanente, and Lucent Technologies.
Next year promises to be another whopper. Analysts expect Ariba to rack up more than $550 million in sales, and some believe it will turn a profit by the end of 2001--a year earlier than expectations prior to the breakout quarter. Ariba's stock has shot up nearly 200% over the past two months, to $150 a share, producing a market cap of $36 billion.
Still, dominating the Web-software market will be anything but a lay-up for Ariba. It faces fearsome competitors. Chief among them is Commerce One, which also had a big quarter, with $62.7 million in revenue, up 1,392%, and Oracle Corp., the database-software giant that has plunged into the e-marketplace fray. Late last year, the duo shut Ariba out of the massive exchange created by the Big Three auto makers called Covisint. Ariba responded by forging an alliance with IBM and i2 Technologies, which makes software for linking supply chains. But holding that alliance together will be a challenge: The three companies have a lot of work to do to integrate their software and services--and there's overlap between their product lineups.
This is no shaky little dot-com, though. In fact, you could call it a not-com. Ariba has $310 million in the bank, a year's worth of capital at the current burn rate of $30 million a month. Since losses are narrowing, it should be enough to tide Ariba over until it starts to make a profit, which is expected late next year. Most importantly, Ariba plays it safe when it comes to counting sales. Instead of logging an entire sale at once, Ariba counts those dollars month by month, until a project is completed. In the last quarter, deferred revenues jumped 82%, to $154 million. That should help smooth out the earnings gyrations that can torpedo Net startups.
At four years old, Ariba is practically a graybeard among the Netsters. It began as a pioneer in making software for companies to purchases supplies and services online. A large company could save upward of 20% per year on supplies by buying them over the Net, according to market researcher Killen & Associates Inc. Ariba landed customers such as Chevron Corp. and DuPont and doubled its revenues in each of its first three years. But late last year, Krach saw that e-marketplace software was emerging as the center of the action. He realized there wouldn't be enough time for Ariba to develop the technology by itself, so he began his buying binge.
It was an uncharacteristically brash move for Krach, who typically sets a conservative tone in the midst of the crazy Internet world. Although only 43 when he and six partners started Ariba, he had nearly two decades in management, stretching back to his days as a night-shift supervisor at a General Motors Corp. factory in Detroit. At 26, he became one of the youngest vice-presidents in GM's history. Krach is a stickler for planning. He created what he calls his "playbook"--a notebook that he refers to constantly to see how Ariba stacks up against his goals.
He has a five-pronged strategy to stay ahead of the competition: Find online buyers, cultivate suppliers, build a network of relationships, expand the marketplace, and align with technology partners. Krach has such faith in that plan that he even appeared on a CNBC talk show--over his advisers' objections--on the April afternoon that the Nasdaq dropped 500 points. "I didn't see how that was related to us," Krach says. "We just had a great quarter, and we had a solid business model." Nevertheless, Ariba's stock lost half its value in two weeks.
Krach's steady-as-she-goes attitude is winning customers' confidence. They see Ariba as a trusted partner that will stick with them no matter which way e-marketplace business models and technologies go. "Let's face it: No one knows how these marketplaces are going to evolve on the Internet," says Roberta Kowalshin, vice-president for technology ventures at CheMatch.com, an online marketplace for the chemical industry. "We need to work with a collaborative firm. And we get a lot of support from this company." Ariba, for example, sends engineers to customers' offices to fix bugs in its software.
Ariba's rapport with customers gives it a short-term advantage over rival Commerce One. From the get-go, Krach has presented Ariba as a neutral software supplier. He sells his software for upward of $2 million a pop instead of taking stakes in exchanges that link buyers and sellers. Suppliers fear getting reamed by colluding buyers; Krach tries to be the Switzerland of e-marketplaces.
Commerce One has a radically different approach. It often forms joint ventures with its customers, becoming a co-owner of marketplaces. Unlike Ariba, it charges a fraction of the initial software cost and expects to take a bigger cut of ongoing revenues. That's why Ariba claims bigger sales now. But if Commerce One's trading network takes off, transaction revenues could power it past Ariba. Typically, Commerce One targets bigger marketplaces than Ariba does--giant sites for entire industries, such as aerospace--and it's willing to give up some of its own stock to land those customers. "We've clearly won the landgrab for mega-exchanges," boasts Commerce One CEO Mark Hoffman.Partnering principle. Oracle is no slouch, either. Its B2B software revenues of $67 million last quarter trailed Ariba's but matched Commerce One's. It boasts a sales-and-service force of 29,000, vs. 866 at Ariba, and thanks to its portfolio of database and operations management software can offer customers the entire array of software needed for e-business. "We bring the complete enchilada," says Edward J. Sanderson, an executive vice-president at Oracle.
Ariba is relying on its partnerships with IBM and i2 to balance the scales. Ultimately, Ariba's biggest challenge may be making sure this partnership pans out. IBM provides the consulting services for e-marketplaces, while i2 is a specialist in software that corporations use to manage inventories and communicate with their suppliers. It's a tricky strategy since Ariba and i2 have overlapping products. The two companies could end up competing.
The duo insists that they're not stepping on each others' toes. "We don't see any strife between these companies," says Thomas Cooper, an executive vice-president at i2. Krach seems anything but cowed by the obstacles ahead. "It takes courage sometimes, but failure is not an option here," he says. There's nothing in Krach's playbook about backing off.By Jim Kerstetter; By Contributing: Spencer E. AnteReturn to top