i2’s Aspect Acquisition Not Overpriced

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i2's Aspect Acquisition Not Overpriced
S. McVey - April 13th, 2000

Event Summary

Giving analysts less than a week to prognosticate on its new alliance with IBM and Ariba, i2 Technologies announced it would acquire B2B collaboration software makers Aspect Development Corporation and Supplybase, Inc.

i2 agreed to pay a staggering $9.3 billion in stock for Aspect, a sum that eclipsed Computer Associates' $4 billion bid for Sterling Software announced less than a month ago. Although the price dropped to around $8.6 billion at close of trading on the announcement date, the deal is still the largest software industry merger to date, though the valuation was met with skepticism by some Wall Street observers. Aspect had $95 million in revenues in fiscal 1999, making i2's offer price nearly one hundred times its revenue, a multiple that dwarfs that paid by Computer Associates for Sterling. Clearly, i2 based its offer on the potential for capturing part of the $100 billion B2B market that Aspect provides, while mindful of the attention such a sum would receive in the larger B2B software arena.

A publicly-held company based in Mountainview, California, Aspect brings two key contributions to the union. The first is an integrated system for product lifecycle management (PLM) and part sourcing. Aspect's PLM applications enable companies to design products while maintaining visibility to sourcing options and constraints, a combination that helps ensure availability and minimize costs at all stages of the product lifecycle. To complement this, i2 brings optimization capabilities to PLM problems that include transition planning, development and resource scheduling, requirements planning and product portfolio planning.

Second, Aspect brings content: a collection of electronic data catalogs containing information on 17 million industrial parts and several thousand suppliers. i2 will channel this information to its TradeMatrix and customer-centric e-markets to give participants a wider selection of procurement options and other marketplace services (see Table 1).

Table 1 - i2 e-Markets
Vertical Marketplace
Vertical Focus
i2 Equity Partners
Open for Business
HightechMatrix.com High tech electronics none Now
SoftgoodsMatrix.com Apparel and softgoods VF Corp. April 1
Fasturn.com Apparel and textiles Fasturn, Inc. Second quarter
MyAircraft.com Aerospace Honeywell InternationalUnited Technologies Corp. Second quarter
iStarXchange Automotive parts and service Toyota Motor Sales, Inc. Second quarter
Tradematrix Retail Services Retail and consumer goods services none Second quarter
Horizontal Marketplace
Open for Business
FreightMatrix.com Logistics providers and the services source for shippers participating in vertical TradeMatrix marketplaces Second quarter

Supplybase is by far the smaller of the two acquisitions, but the potential of its technology for development and strategic sourcing of custom parts make it a huge bargain for i2. Custom parts represent the most strategic component of procurement for large, complicated designs.

Market Impact

While some have suggested the merger flirts with antitrust issues, i2 and Aspect are far more complementary than competitive. Aspect's content and management applications made it an established player in the product lifecycle management (PLM) market long before i2 entered in September 1998. Product lifecycle management optimizes the management of products from concept, design and test, to phase-out and replacement.

Largely symbolic at that time, i2's entry into PLM was calculated more to demonstrate that it understood the synergies offered by combining supply chain management (SCM) capabilities with PLM. At the very least, manufacturers of products characterized by short lifecycles, such as PCs, mobile phones, and other consumer electronics, gain cost benefits from having access to large numbers of components and suppliers. Greater synergies can be achieved in the interplay of SCM and PLM throughout the procurement, manufacture, and distribution of goods across their life cycles.

The acquisitions, which come just as i2's revenue growth had reached a relative low point, demonstrates why i2 is a market leader. Many companies would be content with 100+% revenue growth (CAGR) over five years, but i2 saw the benefits that its supply chain management capabilities could bring to B2B procurement and didn't wait for its competitors to take the initiative. Though Aspect is its largest purchase to date, both in terms of price and people, i2 has been successful in reaping return from past mergers and its financial position tees it up for success in this case as well.

The merger may have unpleasant consequences for Aspect alliance partners SAP, Oracle, and Baan. These ERP vendors acquired or developed SCM modules to compete with i2. Aspect has strategic reseller agreements with SAP and Baan and has established a marketing and integration alliance with Oracle.

Although i2 has stated that existing partnerships will be kept up, competition will place considerable strain on these relationships over time. SAP has introduced Advanced Planner and Optimizer (APO), which competes directly with i2's RHYTHM supply chain management applications as well as procurement solutions through mySAP.com. Formerly a close integration partner of i2, Oracle began marketing its own SCM products along with its ERP suite last year, although Oracle's SCM products have yet to reach the market as released products. Oracle further alienated i2 in November, 1999 when it and Ford Motor Company launched a high-profile venture, AutoXchange, an e-market serving Ford and its suppliers. The venture is on a par with i2's iStarXchange, a joint effort of i2 and Toyota announced in late February.

User Recommendations

i2 had previously announced Aspect as a preferred content supplier for TradeMatrix, but with the merger, i2 plans to incorporate Aspect data catalogs into TradeMatrix immediately, giving users a substantially enhanced selection of parts and suppliers.

A more pressing question for users is when the merger will deliver an integrated solution that marries SCM and PLM. The confluence of these two disciplines represents a new market that addresses the impact of supply chain management on product design. So far, the companies have spoken only at a high level on the whole being greater than the sum of the parts, which indicates that much work needs to be done. i2 and Aspect have collaborated on past implementations so some of the groundwork is there, but expectations are now so high that i2 will be hard pressed to live up to them.

Users should not expect a true SCM-PLM integrated offering for at least six months, which even then will be essentially a prototype. Part of the reason lies in the difficulties inherent in predicting demand through all stages of a product's lifecycle.

Though lifecycle planning is basically a forecasting problem, it is complicated profoundly by uncertainties in market demand, success of promotions, competitive actions, and many other factors. A supply chain optimization algorithm that seeks to suggest accurate replenishment quantities and capacity reservations to match this fluctuating demand faces a nearly insurmountable task. When the integrated solution becomes available, users should consider constructing scripted scenarios around a past product introduction for i2 to demonstrate prior to signing a contract.

As i2 grows, it will find itself under even greater scrutiny, from both professional market watchers and the public at large, that will magnify missteps and make it prone to the same headaches as rivals SAP and Oracle. But of course, these are good problems to have. Users should herald the merger of i2 and Aspect as an investment in the future of B2B collaboration, but avoid being overtaken by the hype.

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