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.

A potential quarter-billion dollar M&A hangover for JDA

Contact: Brenon Daly

The cost of JDA Software’s purchase of i2 Technologies just got a lot steeper. A jury has found that i2 software failed to do what it was supposed to do for department store chain Dillard’s. The case goes back a decade, long before JDA picked up the supply chain vendor. (The $568m acquisition, which we called a buyout-style play, closed in December 2009 after a very rocky process that played out during the depth of the credit crisis.)

As part of its decision, the jury awarded Dillard’s a whopping $246m: $8m of that for direct damages and $238m in punitive damages. JDA says it will appeal the verdict. Regardless of outcome – and how much JDA has to pay – the company has already lost in the court of Wall Street. Investors sliced $215m, or 20%, off JDA’s valuation on June 16. (Shares of the supply chain management vendor are now changing hands at about 10% lower than they were when the deal closed, compared to a 5% gain in the Nasdaq over the same period.)

With JDA on the hook for a quarter-billion dollars (at least potentially) because of legal problems at an acquired company, it joins a dubious list of buyers that have gotten burned. Most notably, SAP picked up software maintenance provider TomorrowNow in early 2005 as a way to siphon off some of the rich maintenance stream that Oracle collects for supporting its application. Oracle sued SAP, alleging that TomorrowNow illegally downloaded information about Oracle’s support program ‘and then used that data to service its own customers.’ SAP has since shuttered the division. It looks likely that the Oracle-SAP case will go to trial later this year.

CDC Software’s rollup is rolling along

Contact: Brenon Daly

Since being spun off from its parent company less than a year ago, CDC Software has been rolling along with its planned rollup. It has done a half-dozen acquisitions of small, on-demand software companies to help expand its portfolio of ERP, CRM and supply chain management offerings. (It got bigger eyes earlier this year, when it made a short-lived run at fellow public company Chordiant Software.) In general, the technology has come from startups that have been passed over by the market. That’s certainly the case in CDC Software’s latest – and largest – acquisition, the purchase of TradeBeam last week.

Ten-year-old TradeBeam had burned through a mountain of venture backing and had snatched up the assets of three other vendors, but had struggled to actually build its business. (We understand that the company generated only about $9m in recurring revenue in 2009, and that projections for this year called for $10m in recurring revenue. That got the target around $20m in its sale to CDC Software, according to our understanding.)

Still, TradeBeam was able to develop some fairly useful software, thanks to its generous VC subsidy, that should fit well inside CDC Software. The company had two main product lines, which each accounted for about half of overall sales. TradeBeam sold global trade management software, which helps customers handle regulatory compliance and other aspects of the import/export business, as well as supply chain visibility, which provides additional capabilities around forecasting and collaboration with suppliers.

CDC Software’s recent acquisitions are part of a larger plan to slowly but steadily transition its business from selling software licenses to ‘renting’ software through a subscription model. Recurring revenue will still be a small slice of the overall $220m or so of revenue that the vendor is expected to put up this year. But if CDC Software can pull off its SaaS rollup strategy – and couple that with even a smidgen of organic growth – it could very well see a bump in its valuation. The transition to SaaS has certainly put a shine on the valuation of Concur Technologies and, to a lesser extent, Ariba. For its part, CDC Software, which is still majority owned by CDC Corp, trades at basically 1 times sales and 4x EBITDA.

No-go IPO for RedPrairie

Contact: Brenon Daly

Scratch another name off the list of IPO candidates. RedPrairie, which had filed to go public in late November, instead sold on Tuesday to buyout shop New Mountain Capital. The sale moves the supply chain management software vendor from one private equity portfolio to another. (We understand that the two book runners on the proposed offering – Bank of America Merrill Lynch and Credit Suisse Securities – both advised RedPrairie on the deal.) In mid-2005, Francisco Partners acquired the company for $237m and subsequently rolled up another half-dozen smaller shops. Ahead of the proposed offering, Francisco owned 90% of RedPrairie.

The trade sale of RedPrairie isn’t all that surprising. (Nor, for that matter, was the fact that it put in its prospectus. We noted a month before the company officially filed to go public that it was getting close to an offering.) Looking at the financial profile of RedPrairie, it was hard to see Wall Street getting too excited about the vendor. Undoubtedly, it is profitable and hums along at a decent 20% EBITDA margin. But the top line leaves a lot to be desired.

Revenue at RedPrairie dropped 12% in the first three quarters of 2009, with license sales declining twice that level. In the first three quarters of last year – which was, admittedly, an extremely tough time to sell enterprise software – RedPrairie sold just $27m of software licenses. Meanwhile, rival JDA Software was able to generate twice as much license revenue ($60m) during the same time frame. JDA even managed a slight increase in sales of its software, compared to a double-digit percentage decline at RedPrairie.