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.