Ariba ‘mines’ for its latest deal

Contact: Brenon Daly

After three years out of the market, Ariba returned to M&A on Thursday with the $150m purchase of Quadrem. Both the current deal and the previous one help bolster the supply-chain vendor’s offering in new markets. In the case of Procuri, which was acquired in September 2007, Ariba picked up a company that was targeting small businesses. With its latest transaction, Ariba adds an offering geared for corporate giants, specifically some of the largest mining companies on earth. It also gets further into markets outside the US.

Quadrem was founded 10 years ago, and is still majority owned by a quartet of multinational mining giants (BHP Billiton, Anglo American, Rio Tinto and Vale SA). While sales to mining companies accounted for essentially all of Quadrem’s revenue in its early days, the vendor diversified into other industries in recent years. Currently, mining generates about half of Quadrem’s revenue, with the other half coming from other industries such as oil and gas as well as manufacturing.

Under terms of the deal, Quadrem’s four principal companies have extra incentive to keep using Quadrem even after the sale to Ariba closes, which is expected by next March. The reason: Ariba has held back $25m in payment and will kick in another $25m to the four companies as long as they are still using the network three years from now. Ariba says it expects to pay out the full amount. (Morgan Stanley advised Ariba on its purchase.)

Assuming that Ariba does indeed hand over the full $150m, the transaction would value Quadrem a smidge above two times this year’s projected sales of about $70m. For its part, Ariba trades at more than twice that valuation. It currently garners a market cap of about $1.7bn, compared to projected sales for calendar 2010 of about $370m. Incidentally, since Ariba last announced an acquisition three years ago, its shares have basically doubled while the Nasdaq has flatlined.