Ariba stumbles on worries about report

According to Deutsche Banc analyst James Moore, information-technology research firm Gartner will release a "a highly negative report on the e-procurement software industry." E-procurement software, which tracks and manages online purchases of materials, is Ariba's specialty.

Ariba makes software that automates buying through corporate intranets, targets preferred suppliers, and connects buyers with suppliers and distributors.

Shares were off 89 cents, or 11 percent, to $7.26 at midday. The worry about the Gartner report is just the latest dose of bad news for the Ariba. The company issued a profit warning last month and recently replaced its CEO. Wall Street analysts have also gone negative on the stock with 28 analysts rating Ariba a "hold," the equivalent of a sell rating.

Moore said in a research note that the Gartner report will cite several issues facing e-procurement software makers, including integration problems, low adoption rates and delayed return on investment. All of those problems have been cited by Oracle CEO Larry Ellison, who argues that a full suite of e-business software is what customers want. Gartner wasn't immediately available for comment.

As recently as last year, many analysts argued a "best-of-breed" approach, which requires customers to pick and choose from a number of software vendors, would win the day. Moore said that customers are moving toward using one software vendor to meet many of their business-to-business needs. That means companies such as SAP, PeopleSoft and Oracle could thrive, and Ariba may have to cut prices to compete.

"We believe pricing pressure continues to weigh on Ariba and have learned the company may be changing its pricing structure in response to this pressure," Moore said. He added that Ariba may offer lower pricing terms as customers push back on the company's usual $1 million or more price tag.

Moore, who attended a Gartner conference in Denver this week, said Gartner is likely to echo a number of topics covered in sessions. "Gartner is predicting that by the year-end 2004 viable standalone e-procurement vendors will cease to exist, with survivors merging with large ERP (enterprise resource planning) vendors," Moore said. "We believe this is not unrealistic considering the significant pushback surrounding pricing, and looming competition from more financially stable ERP vendors."

As evidence, Moore said that Qwest Communications is considering removing Ariba software in favor of the integrated approach offered by ERP companies such as Oracle and SAP.

Moore said Gartner cited a host of companies that have turned away from the best-of-breed approach to go with large ERP companies. Indeed, Commerce One's latest quarterly results were stronger than Ariba's, largely because of Commerce One's partnership with SAP.

But that partnership may not last forever. Moore said Gartner is going to predict that the SAP-Commerce One partnership will either result in a merger or a breakup by the end of 2002.

Add it all up and Moore is recommending that investors tread lightly with the likes of Ariba and Commerce One. The Gartner report will be "cause for concern," considering it has a big influence on IT spending. "Additionally, we believe that financially stable ERP vendors (such as Oracle and PeopleSoft) will use the weakening financial positions of Ariba and Commerce One as a competitive advantage in procurement deals," Moore said.