When is an acquisition not an acquisition? When two of the world’s largest technology companies are involved…
Earlier today, SAP Ariba and IBM announced a new and unique partnership that bonds the two companies together over new cognitive procurement solutions and the migration of current IBM Emptoris customers to the Ariba solution suite and network. Ardent’s discussion of the announcement made today and a briefing given by executives from both companies can be found here.
Deal Background
For reasons, which we can only assume are financial accounting-related, SAP Ariba is technically not buying IBM Emptoris, but rather, partnering with it. Today’s announcement brings to an end one of the industry’s most heated and intense rivalries that began in the early 2000s when industry upstart, Emptoris rose from the ranks to challenge Ariba for leadership in the sourcing and contract management spaces. Truth be told this fight ended many years earlier when Ariba sued Emptoris for patent infringement and won a significant judgement that rendered Emptoris essentially bankrupt (late 2008). The infringement was relatively small and the court-order payout of $6.6 million was large enough to create trouble for Emptoris. Soon its investors and founders sold out to new investors, Marlin Equity Partners at an extremely low valuation.
(It is worth mentioning here that a few years earlier, somewhat ironically, Emptoris was nearly acquired by SAP in an offer that was worth a reported $150 million. A deal was close to being finalized when the Emptoris founder made a brash, and in hindsight, terribly poor decision and attempted to double the asking price at the last minute. When the new terms were presented, the SAP literally walked out the door and down the street to purchase Frictionless Commerce.)
At the time of the sale to Marlin, Emptoris had a tri-fecta of market-leading solutions: Spend Analysis, eSourcing, and Contract Lifecycle Management. While Emptoris offered three quality applications that stood well on their own, many of the Emptoris tools had been acquired from other companies and resembled more of a hodgepodge of technology than a true strategic sourcing suite. Instead of working to integrate the solutions and build out the core suite capabilities or look for a logical extension of the offering in the P2P realm, the savvy team at Marlin executed a strategy of growth via acquisition. Over the next few years, this group acquired a low-end supplier management solution, an extremely tired VMS offering and a solid, if largely inconsequential, TEM (“Telecom Expense Management”) solution.
In February of 2012, IBM acquired Emptoris and its collection of applications and 750 employees. IBM never officially announced the acquisition price but multiple insiders have told Ardent Partners that the deal was for an astronomical $600 million. In a short few years, the alchemists at Marlin had not only salvaged and turned around a distressed company, they also dressed it up well enough to sell it off a huge revenue multiple and profit.
Emptoris and IBM’s Smarter Commerce
Any assessment of IBM’s acquisition of Emptoris must conclude that the deal did not play out as IBM may have expected given the price it originally paid. The Emptoris solutions (and team) were immediately lumped in with a much larger group at IBM solutions under the umbrella “Smarter Commerce.” In what was a fundamental misread of the Emptoris solutions, Emptoris was immediately hailed as the critical lynchpin that IBM needed to extend several standalone offerings including Sterling Commerce and its supply chain BPO business. We could go into extensive detail explaining why IBM essentially sold off Emptoris today, but the long and short of it is that Emptoris never fully-blossomed within IBM; for the first few years, in fact, it deteriorated. Over the last 2+ years, a new team of IBM insiders joined with the remaining Emptoris leaders to recraft the solutions into the Big Blue mold and reenergize the offering via new partnerships (Coupa and IQNavigator) and via innovative cognitive procurement solutions that leverage IBM Watson. But, it clearly wasn’t enough to move the needle for IBM or stop the larger downward trend of the Emptoris business. It is important to note that while Emptoris had not been winning many new deals over the past few years, its legacy customer base includes many large, prominent global sourcing organizations – we’ve been told that this customer count is greater than 200. This also meant that the current market value of the Emptoris assets (some of which have previously been shuttered) would be considerably lower than the original purchase price.
Deal Analysis
This deal is pretty unique in terms of both its structure and the emphasis of its messaging. Readers of the press release issued by SAP Ariba and IBM will most likely be struck by the headline which focuses on the promise of cognitive procurement technology via a co-development partnership jointly staffed at a “Cognitive Procurement hub” and that is clearly the intent of the announcement. Cognitive procurement offers some very compelling opportunities and IBM Watson and now, SAP Leonardo will clearly be at the forefront of this emerging technology. Cognitive procurement is the “sizzle” in this deal, but the underlying “steak” in this deal is the plan where “IBM will also work with SAP Ariba to bring new and existing IBM customers, including those using IBM Emptoris solutions, to the SAP Ariba platform where they can benefit from this expanded functionality and the comprehensive source-to-settle offerings that SAP Ariba provides.”
Concurrent with the announcement, IBM is notifying its Emptoris customers that IBM will “not release new enhancements or roadmap updates” and plans to end support of the different versions of the product in the 2019-2020 timeframe (IBM says that these final dates will be confirmed and communicated in June). This means that at some point in the next few years, most, if not all, IBM Emptoris customers will want and/or need to move to new solutions. It is implied that the plan to sunset Emptoris is part of the deal with SAP Ariba and not something IBM is doing unilaterally.
Additionally, our discussions with the executives at both companies also confirmed that there is a “commercial commitment from both companies to enter this relationship” and that SAP Ariba will pay IBM a “royalty” for every IBM customer that migrates to SAP Ariba. The companies also expect that IBM’s Global Services team will serve as the lead consultant in driving and managing any migrations or new transitions to SAP Ariba. Terms of the partnership were not made public.
The assumption is that IBM wanted to sell Emptoris but also wanted to avoid a material writedown taken at the time of the sale that would impact quarterly earnings. Rather than focusing on the complex language that is used to explain the partnership an easier way to understand the deal is to consider the economic considerations made by each partner and the overall benefits delivered to each partner.
To start, both companies are committing an undisclosed number of resources to develop new technologies that will improve the SAP Ariba product portfolio. It is assumed that SAP Ariba will be compensating IBM in some way for its work. SAP also gets to position its lesser-known Leonardo offering side-by-side with the ever-present IBM Watson.
Next, IBM is ending its commitment to the Emptoris product line and customers and getting paid to deliver them to SAP Ariba. IBM also has the opportunity to generate consulting fees from systems and planning work needed for customers to make a successful switch. IBM gets paid to deliver customers to Ariba while it unwinds the overall business in a financially desirable way. IBM also gets to introduce its Watson technology into the massive SAP Ariba ecosystem.
Finally, Ariba gains a new sales channel partner while also getting the inside track on the Emptoris customer base (as well as access to IBM Bluefish customers), while also getting an opportunity to combine its SAP Leonardo technology with the very high profile IBM Watson brand. SAP Ariba pays a former competitor to promote, sell, and improve the Ariba solutions. With this partnership, SAP Ariba also confirms its commitment to product innovation.
Final Thoughts
While the announcement, terms, and underlying structure are more opaque and complex than other partnerships and acquisitions, the fundamental news is huge and the impact on the market can and most likely will be significant.
IBM had been shopping Emptoris for months and SAP Ariba was not the only bidder. With this new partnership, SAP Ariba gains preferred access to a good, if somewhat tarnished, customer base. Perhaps more importantly, it keeps the Emptoris products off the market and out of the hands of motivated competitors.
The partnership also positions the duo to take a lead position in driving cognitive procurement and other innovations. Technology partnerships frequently fizzle and the true commitment being made by each partner was not disclosed. But, if the new team’s plans are realized, then the “sizzle” could turn out to be significantly more valuable to both partners than the “steak.”
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