Whither Go Ariba and Commerce One?

Ariba and Commerce One continue to be the subject of acquisition rumors. Whether a buyout of either will happen is anyone's guess, but neither seems as viable as a standalone entity as once thought. Ariba hasn't shown it's more than an indirect goods company, while Commerce One's business model remains unproven.

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By Mike Trigg (TMF Tonto)
July 5, 2001

B2B poster children Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC) remain the subject of acquisition rumors, particularly after SAP (NYSE: SAP), a partner of Commerce One, upped its stake in the company to 20% last week in a deal that gave it the right to buy a limited amount of additional shares down the road. While that deal may not presage an outright buyout, the former two companies might both be better served as a part of a larger enterprise.

SAP has a history of partnering with companies until it can either build an equivalent application itself or buy the partner, according to AMR Research. SAP has pooh-poohed talk of an acquisition, and has said it won't buy more than 23% or attempt a hostile takeover. And it may indeed have no interest in acquiring Commerce One: Its $222 million investment may have been intended to cement the cash position of a critical partner. SAP's customers want marketplace platform technology, as they extend back-office systems like procurement, which streamlines purchasing processes. 

Ariba's potential buyers, meanwhile, include IBM (NYSE: IBM), Manugistics (Nasdaq: MANU), and back-office software vendors. The rumors concerning Ariba were given added weight when a recent Gartner report advised potential customers to select the company's e-procurement solution only if they're shielded from a potential Ariba acquisition.

Given an existing partnership between IBM and Ariba, "Big Blue" seems logical, though it has always been more of a hardware and services company than a software provider. Manugistics, meanwhile, might want to beef up its firepower to combat i2 Technologies (Nasdaq: ITWO). The only problem is that Ariba deals mostly with the procurement of indirect goods like office supplies, and supply chain software -- Manugistics' stock in trade -- is thought to be a better fit for direct goods such as raw materials.

Whatever may happen, the swirling rumors that surround both companies will continue to lead to volatility in their stock prices. If investors believe in the companies' long-term value, now might be a good time to buy with Ariba and Commerce One shares down 94% and 89%, respectively, over the past 12 months.

Buying either based on hopes of a potential acquisition is risky: While buyout premiums can make for quick gains, the uncertainty is great -- and even announced deals may not close. Foolish investors should concentrate instead on understanding a company's business and prospects as an independent enterprise.

Still, neither Commerce One nor Ariba seem as viable as a standalone entity as once thought. Ariba hasn't shown that it's more than an indirect goods procurement company, while Commerce One's transaction-based revenue business model remains unproven. As such, I believe both -- each one has strong product offerings in its own right -- would be better served joining a company with a broader product portfolio.

Mike Trigg spends his days offering readers what Gordon Gekko called "the most valuable commodity": information. Mike's holdings can be viewed in his personal profile. The Motley Fool is investors writing for investors.

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