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Author: newsreporter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3069  
Subject: Desired Monopoly Date: 10/2/2011 9:25 AM
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Ariba: A 'Desired Monopoly' In The Tech Space
http://goo.gl/vAkKR


Perhaps Ariba’s most valuable asset is the Ariba Network (AN). The AN is a scalable Cloud infrastructure that connects buying organizations with their suppliers to exchange product and service information as well as a broad range of business documents, such as purchase orders and invoices. Over 333,000 registered suppliers of a wide array of goods and services are connected to the AN. As a result, buying organizations can connect once to the AN and simultaneously access many suppliers. By using the AN, businesses can realize cost savings through greater process efficiencies, better employee and contract compliance, reduced inventories and fair pricing opportunities. Revenue flowing directly from usage of the AN represents 50% of Ariba’s subscription revenue (itself 60% of the company total), and this is the fastest growing and most profitable revenue stream for the company.

The AN allows buyers to send orders from procurement software programs (like Ariba’s own “Buyer” module) in one standard format that are then converted into the supplier’s preferred transaction format. These formats include industry standards like EDI, cXML and CIF, along with simpler technologies like e-mail or fax. Moreover, Ariba benefits from network effects in that, frequently, suppliers join the Ariba Network at the request of buyers who purchase goods and services using Ariba Spend Management solutions. This type of customer acquisition is cheaper by far than any other, including traditional advertising and even renewals of existing customers.

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Ariba is the dominant player in Spend Management. Other ERP firms (Oracle (ORCL), SAP (SAP), etc) have some of the features in various software applications and modules, but nobody addresses the whole landscape like Ariba. Some smaller, private software-as-a-service companies are offering some of Ariba’s functionality, including Perfect Commerce, cc-Hubwoo, Ketera Technologies, Coupa and Iasta. For example, Coupa is competing well in the narrow “procurement” space. But again, while some of these vendors can clip off business from customers who don’t need Ariba’s soup-to-nuts offering, none can hook them up to the Ariba Network.

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Ariba is an almost perfect embodiment of a desired monopoly: increasing market share and cash flow driven by network effects. Recent order trends indicate business is accelerating, which supports the conservative assumptions leading to our $67 DCF value. Plus it trades at a valuation that leaves plenty of room for eBay to offer a premium to Ariba’s shareholders, while still making a deal accretive to eBay’s earnings.
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