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FreeMarkets’ Surprise Acquisition of Adexa Leaves Many Heads Shaking

Written By: Steve McVey
Published On: March 1 2001

FreeMarkets’ Surprise Acquisition of Adexa Leaves Many Heads Shaking
S. McVey - March 1, 2001

Event Summary

In a move that stunned many in the IT community, auction site enabler FreeMarkets agreed to acquire supply chain management software vendor Adexa for $340 million in stock. A privately held company, Adexa had been preparing an initial public offering since last year, one that most industry analysts predicted would be successful. With annual revenues of $50 million, Adexa might have been expected to achieve a valuation of up to $1 billion as a publicly traded company.

FreeMarkets expects the acquisition of Adexa to help extend its sourcing functionality into supply chain collaboration and optimization. One of the primary goals of the new company is to enable global enterprises to manage their direct materials from end to end, using integrated solutions to source and operate their supply chains. Adexa has built a solid reputation as a purveyor of advanced planning and scheduling software for the high tech/semiconductor manufacturing sector and often displaced larger, better-known vendors like i2 Technologies.

The announced sale coincides with former Oracle President and COO Ray Lane's appointment to FreeMarkets' board of directors. "The acquisition of Adexa is a compelling strategic move by FreeMarkets and underscores the company's commitment to enhancing the competitiveness of major global enterprises," said Lane. Adexa CEO, President and Founder, Cyrus Hadavi will become the Vice-Chairman of the combined entity, a position that carries some transitional responsibilities but often precedes a departure.

Market Impact

Press announcements and marketing brochures frequently showcase the "strong connection" between online sourcing and supply chain optimization. Building this connection in the real world requires more than artful sophistry. FreeMarkets has struggled to evolve from a reverse-auction business into providing strategic sourcing capabilities and unless it can accomplish this, it will be virtually impossible to make the link to supply chain management.

Compounding the difficulties is FreeMarkets' uncertain financial viability. Since its IPO in December 1999, FreeMarkets has garnered $91 million in revenue but posted over $150 million in losses. During the heyday of auction markets, such numbers were commonplace and even enviable. The mass extinction among auction and exchange portals recently, has made investors skeptical of idealistic corporate visions in the absence of profits to back them up. In spite of its poor earnings record to date and increasing operating expenses, FreeMarkets still expects to meet analysts' positive earnings projections sometime next year. Given the short lifecycle of online auction houses, it is unclear whether FreeMarkets will be able to transform its Adexa integration efforts into a profitable product before the hourglass runs dry.

User Recommendations

Current users of Adexa's iCollaboration suite probably have no cause for alarm in the short term. There is a risk that FreeMarkets may discontinue parts of the iCollaboration suite that do not fit its direct material sourcing strategy or sell them off. Adexa has a sizeable client base and these could help support FreeMarkets during lean periods when the company is focused on assimilating its new business and integrating its solutions.

 
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