THE DAY AHEAD: Did Ariba just overpay for the wrong company?

COMMENTARY -- Business-to-business software vendor Ariba (Nasdaq: ARBA) may have paid too much for Agile Software. To make matters worse, Agile is a company that fills a hole in Ariba's lineup, but not the biggest one.

On Monday, Ariba bought Agile (Nasdaq: AGIL), a company that makes Web collaboration software, for $2.55 billion in stock. While Ariba officials got carried away with talk about the strategic importance of the deal and its pitch of "commerce and collaboration," investors should be asking two main questions:

• Why did Ariba give away 23 percent of your company for Agile, which is expected to break even in the third quarter?

• Why didn't Ariba buy a supply chain management software company first?

You won't get an answer on that first question. Publicly, you'll hear about the synergies between the two companies and the paradigm-shifting importance of the deal. But you'll hear a lot of grumbling on Wall Street.

"The acquisition is expected to cost Ariba shareholders 23 percent of their company at a time when Ariba's shares are under pressure," said Steve Bowen, an analyst with First Analysis in a report. "The deal values Agile's shares at $54, a 27 percent premium to the Jan. 26 close of $42.81. The purchase price represents about 25.5 times the consensus estimate of Agile's calendar-year 2001 revenue."

That price wouldn't be such a biggy if Ariba shares weren't struggling. Shares of Ariba are down about 30 percent just this month.

And the B2B software vendor has more important holes to fill in its portfolio. Ariba is under a lot of pressure to expand its offering. Namely, analysts said that Ariba needs to offer supply chain management software, which coordinates functions such as distribution, manufacturing, purchasing and transportation over the Web. With your stock falling wouldn't it make more sense to fill in the gaping holes first?

"They would have been better off going after Manugistics," said Bill Schaff, fund manager for the Berger Information Technology Fund. "If you're going to overpay you might as well get something strategic."

Schaff's argument is that supply chain management software is necessary and proprietary -- you need it. Many analysts view supply chain software as the B2B foundation. You can swap out exchanges. Changing your supply chain software is brain surgery.

Simply put, supply chain software is complicated stuff -- that's why there are only a few companies providing it. Sure, Ariba is teamed up with supply chain vendor i2 Technologies (Nasdaq: ITWO), but most folks think that deal is a facade. Schaff said i2's strategy behind the Ariba partnership is clear -- hang out with the B2B guys and move in on their turf. It's already happening as i2 and Ariba increasingly become competitors.

With cracks between i2 and Ariba almost common knowledge at this point, analysts said Ariba will have to buy a supply chain management software company. Ariba execs were sure to point out that Agile and i2 don't compete, but don't be surprised if the company goes after an i2 rival like Manugistics (Nasdaq: MANU) at some point.

"We see additional areas in which Ariba needs to build out its capabilities: Supplier enablement and enhanced supply chain management capabilities are two we have highlighted as priorities for Ariba," said. Bowen, who indicated that Ariba will have to make several acquisitions this year.

Michael Hughes, an analyst at Raymond James, agreed. Hughes said Ariba is likely to acquire a supply chain vendor, but the company will have to be careful about slowing down its growth. A company like Manugistics would boost sales, but is too large to integrate, he said.

"Ariba would be looking for something easier to integrate," he said. Hughes said Synquest (Nasdaq: SYNQ) and Adexa, which has filed to go public, are two better prospects for the company. An acquisition of Synquest, which topped estimates Monday, or Adexa would keep Ariba nimble and maintain growth rates, said Hughes.

The death of the dot-com tracking stock

Disney (NYSE: DIS) is folding its Disney Internet Group (NYSE: DIG) and bringing it back into the fold. It's also closing the Go.com portal.

Disney will publicly say that the Internet business model is morphing. Yeah right. The dot-com gold is gone and those shams also known as Internet tracking stocks look like a silly idea.

At least, you can't say I didn't warn you. In a column last summer, I said that dot-com spin-offs would be coming home to roost. As soon as Disney changed the name of Go.com to Disney Internet Group, you knew it would be folded back in with Mickey and Minnie.

Aside from the problems with tracking stocks -- no investor rights and little control -- at least investors got something. If Disney Internet Group were a separate publicly traded company (Infoseek anyone?), it would have been out of business by now. TDAIN

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• Downgrades overshadow Ariba's 2Q
• Ariba ups 2001 targets >