i2's RightWorks deal shakes up B2B sector

Supply-chain software maker i2 closed off $1.94 to $19.50 Friday after saying Thursday night that it will buy procurement-software vendor RightWorks for 5.3 million shares of i2 stock, worth about $114 million.

With the acquisition of RightWorks, i2 broadens its product portfolio. i2's supply-chain management software helps manufacturers plan and schedule production and related operations such as raw materials procurement and product delivery. The company has become increasingly involved in B2B software, and RightWorks will now face off with Ariba, Commerce One and others.

"i2's acquisition of RightWorks will increase pricing pressures for procurement software," said Lehman Brothers analyst Patrick Walravens in a research note. Walravens, who doesn't rate i2, cut ratings for the B2B stocks he covers, citing the risk of a pricing war amid an economic slowdown.

Ariba, off 94 cents to $12.69, Commerce One, down $1.38 to $12.25, and VerticalNet, down 13 cents to $2.88, were lowered to a "market perform" and PurchasePro, down $1.25 to $10.69, was cut to a "buy."

"The only stock we continue to recommend that investors buy is PurchasePro," Walravens said in a research note. B2B stocks have already been suffering along with all other software stocks.

Ariba and Commerce One are by far the most affected by the i2-RightWorks deal. Now that i2 has its own procurement and marketplace software, it could steal market share from the two companies, Walravens said. The situation will also speed the decline of procurement-software prices, he added.

With RightWorks, i2 is a big threat to Ariba. The two companies, which were partners along with IBM, have been taking jabs at each other recently. Ariba partnered with Syncra, an i2 competitor, last week. Analysts said RightWorks competes directly with Ariba's Buyer application. Commerce One will also be challenged, but it has a more diversified revenue base.

Competitive complexities
The "competitive landscape gets muddier," as a result of the deal, said Goldman Sachs analyst Thomas P. Berquist. With RightWorks, i2 will compete with Commerce One, which is partnered with SAP. Other rivals will include FreeMarkets, which recently acquired Adexa; and Manugistics, Ariba/Agile Software and Oracle, Berquist wrote in a research note.

On a conference call with analysts, Vice Chairman Romesh Wadhwani referred to Ariba and admitted the RightWorks deal "will reduce (i2's) need for an external partner," but he said he doesn't "expect this acquisition to affect (i2's) relationship with IBM in any way."

Wadhwani said i2 will continue to serve the 12 customers it served through its partnership with Ariba. "We will continue to offer the joint solution to customers who want it," he said. "But of course if a customer wants...(our new) product...they can have it," Wadhwani said. "We will be happy to upgrade them to this technology."

"For newer customers, we believe that i2 becomes a more attractive solution, since they can provide an end-to-end solution," Berquist said. Other analysts said RightWorks' technology was superior to its rivals' technology, but that it has been held back by a lack of name recognition.

The financial impact of the RightWorks deal is expected to be positive for i2. Bill Beecher, i2's chief financial officer, said on the conference call that he expects the i2-RightWorks joint product to exceed the revenue i2 generated with Ariba, and it won't have the handicap of revenue sharing. He also said the combined company could generate as much license revenue in the first half of this year as RightWorks generated in all of 2000--a figure around $22 million.

"The acquisition will drive limited or no dilution to earnings in 2001 and be accretive to earnings in 2002," said First Union Securities analyst Chip Wittmann in a research report.

i2 is hoping the RightWorks deal will recapture some of the buzz on Wall Street. After Nike blamed i2 software for its recent profit problems, shares of i2 plunged. The stock is still well off its 52-week high of $111.75.

Separately, i2 announced a voluntary stock option exchange program designed to retain employees who may have worthless options. Under the program, employees can swap outstanding stock options for new options to be granted at fair market value. For each option canceled, i2 employees will receive 1.1 new options.