The procurement-themed events held at SAP’s SAPPHIRE in Orlando last Monday night were abuzz with the rumor that SAP was going to make a huge cloud procurement announcement the next day. This buzzing seemed to confirm the conclusion I’d drawn from several conversations with different well-placed industry insiders the preceding week – that SAP was actively “hunting in the cloud” and that procurement was a top priority. So, when Lars Dalgaard, Founder and CEO of recently acquired SuccessFactors and Member of the SAP Executive Board began his Tuesday morning keynote presentation that introduced SAP’s new Cloud Strategy, I sat on the edge of my seat ready to pounce on the big news.

Lars delivered an impassioned, albeit somewhat salesy, message that SAP was now fully in the cloud and that it was going to be huge in the cloud going forward. Certainly Lars’ passion was impressive, as was his ability to share 30+ slides, deliver several demos, and show at least 4 videos in 30 minutes; but as a long-time industry veteran and industry analyst, what was most striking to me was the simple fact that procurement was being discussed on the main stage at SAPPHIRE. For a company, whose initial lack of focus on the sourcing and procurement space (SAP’s $500 million investment in the now defunct Commerce One, notwithstanding) helped enable the entire supply management technology market to spring to life, now talking about procurement as a key pillar in its go-forward Cloud strategy (described by Lars as providing “loosely coupled, end-to-end integration” that would support people, customer, money, and supplier initiatives) was promising. It was exciting, but, it was not a huge announcement. Many questions remained unanswered.

Those questions were answered Tuesday afternoon when SAP announced that its subsidiary, SAP America, Inc. had entered into an agreement to acquire Ariba for $45 per share or $4.3 billion. According to the press release and the information shared on the analyst call earlier today –

• Ariba is a leader in cloud-based spend management solutions and “runs the largest global trading network, driving more than $319 billion in commerce transactions”
• Ariba reported revenues of $444 million in FY 2011 and currently has 2,600 employees
• Ariba has more than 1,100 buyer customers, 59,000 supplier customers, and more than 730,000 companies in the Ariba network.
• SAP’s global customer base of more than 190,000 companies includes many of the largest buyers and sellers in the world
• 63% of the world’s transaction revenues touch an SAP system
• The companies describe Ariba’s cloud procurement and invoicing solutions as complementary to SAP’s existing portfolio of on-demand solutions.
• The transaction is expected to close in the third quarter of calendar year 2012 and is expected to be accretive to SAP’s Non-IFRS earnings per share in 2013
• Ariba will operate as a stand-alone entity (just like SuccessFactors) – “Ariba, an SAP Company” – and will be managed by Ariba’s CEO, Bob Calderoni and his executive team

What follows is my “instant analysis” on the deal (Ardent Partners will publish a full analysis of this announcement and its implications for customers and the larger marketplace in the near term. The report will be available in Ardent Partners’ Research Library and will be provided for free to all registrants of the Ardent Partners Research Newsletter – sign up is located on the right-hand nav. bar or here.):

• Ariba has been and continues to be an industry leader in this space. It is, by a significant margin, the largest pure-play company in the spend/supply management marketplace
• Almost every solution provider in the space, including SAP and Oracle, views Ariba as a primary competitor
• While Oracle and SAP are mortal enemies, the number of sourcing/procurement deals that boil down to a head-to-head match between the two is relatively small
• Therefore, with this announcement, SAP is really buying its biggest competitor in the space
• The pricing of this deal validates Ariba’s strategy to move to the cloud that was started in 2003
• The pricing of this deal validates the early vision of the Ariba Supplier Network, since recrafted and reformed as the cloud-based Business Commerce network
• The pricing of this deal also validates the strategy of many other cloud and network solution providers
• The disposition of the Ariba Sourcing Services team and the subsequent acquisition of Quadrem and b-Process (see our deal analysis here) were critical enablers to this deal
• The “SAP Procurement portfolio” team is the group that has introduced the most progressive and innovative solution improvements and expansions in this space over the past 18-24 months
• A combined SAP and Ariba solution footprint will be the broadest and deepest in the industry
• The combined solution footprint is largely but not fully complementary. Certain solutions compete directly and offer similar functionality (i.e. installed eProcurement and both eSourcing installed and on-Demand)
• The large number of users of all of the different solutions, the length of time customers have been using these solutions, and the complexity of the customizations and integrations (particularly the eProcurement solutions) will make product rationalization a complex and time-consuming process. We expect the combined group will not rush to sunset products and will support the core solutions for many, many years
• While there will be synergies gained in the deal, the biggest opportunity will be the ability to up-sell the complementary Ariba solutions like cloud P2P (eProcurement and ePayables) and network connectivity into the huge SAP customer base
• The Ariba Commerce Network is the largest and most profitable of its kind and has been successful in driving transactional efficiencies. Other collaborative or value-added services (like Ariba Discovery) are emerging and offer great promise, but Ariba’s network is still the early stages of development and will benefit from the “new set of eyes” that SAP will provide as well as a significant uptick in engineering horsepower
• The combined organizations will be able to follow the post-merger integration structure and strategy blueprint used with SuccessFactors
• Oracle, IBM, SciQuest, Basware, Hubwoo, Cap Gemini, and Zycus, among many other solution providers in the space, will be directly impacted by this deal
• Current customers and prospects will be directly impacted by this deal
• Procurement outsourcing providers and other cloud providers will be directly impacted by this deal
• We believe that there is a greater than 50% chance that another company will make a counter-offer for Ariba

As noted above, Ardent Partners will publish a full analysis of this announcement and the larger implications for customers and competitors in the near term in Ardent Partners’ research library. Sign up for our newsletter in the right hand navigation bar or click here.

Andrew Bartolini is the Chief Research Officer at Ardent Partners, an industry analyst firm focused on supply management (i.e. sourcing, procurement, accounts payable).

Disclosures: SAP, Ariba, and most of the other companies mentioned in this article are clients of Ardent Partners. The author holds no financial investments in any company mentioned in this article.

Tagged in: Ardent Partners Research, Solution Providers, Technology