Dynamic Ariba Trades Up

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Event Summary

Ariba Inc (Nasdaq: ARBA) announced its acquisition of privately held Trading Dynamics for stock valued at approximately $400 million. The acquisition will enable Ariba to offer such dynamic pricing models as auctions, reverse auctions, and exchanges. The six current customers of Trading Dynamics will be folded into Ariba's current customer network and will therefore have access to all other buyers and sellers on the network. The acquisition is expected to complete in the first quarter of the new millennium.

According to Ariba spokespeople, Trading Dynamics was chosen for three reasons. First, the early adoption of the Trading Dynamics technology by key Market Maker companies. Second, the quality of the product itself, and its on-time delivery. Third, "their team of economists, computer scientists and experienced managers is unmatched."

Market Impact

Ariba is both strengthening its current offerings and entering a new market, which is to provide infrastructure to the so-called Net Market Makers. Companies counted as Net Market Makers bring together a scattered population of buyers and sellers and enable them to take advantage of the resulting volume. Such companies may create horizontal or vertical markets. With thousands of such Market Makers expected in the next few years, it was imperative for Ariba to gain a piece of this business, as it was for rival Commerce One (Nasdaq: CMRC) whose $227 million acquisition of CommerceBid was announced a few days earlier.

While we believe that there is enough customer base in this area to make both Ariba and Commerce One happy, we see some differences between the two moves. Where both Ariba and Commerce One currently manage their own trading hubs, we think that Commerce One is more likely to create its own trading markets than is Ariba. We predict (probability 60%) that Ariba will shy away from creating markets itself, and will be content to take its toll fees from those who do.

However, we believe that Ariba has another market in mind, as well. The huge government procurement markets, both domestic and international, play by different rules than most companies. From the smallest township to international organizations like the U.N. and NATO, there are requirements for competitive bidding, offering a slate of "approved" products, and supporting minority and small businesses that are fixed in law. We believe the acquisition of Trading Dynamics will provide an important link in Ariba's ability to sell to government organizations, and we predict (probability 85%) the launch of an enhanced marketing effort to that sector before mid-year.

User Recommendations

Current and prospective Ariba customers who have eyed the trading model will now have a smoother path to try it. Given that, once the technology is in place, the current Ariba Marketplace and the new capabilities brought by Trading Dynamics will have a uniform interface to back-end systems , working with Ariba on a marketplace development will be much more attractive than choosing a third party. Others interested in moving into the Market Maker arena will be interested in looking at Ariba's offerings when they evaluate Trading Dynamics, and at Commerce One's when they look at CommerceBid, but are best off making features and robustness the top criteria in their decisions.

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