Analyst reports: Street notes Commerce One-automaker deal

Pleasanton, Calif.-based Commerce One announced it will provide all of the front-end and back-end auction technology and catalog content to power Covisint, a giant online mall for the automobile industry's largest manufacturers and an estimated 30,000 suppliers.

Commerce One and its larger rival, Oracle, were both named earlier this year as founding "technology partners" in Covisint, formed in February by General Motors, Ford Motor, DaimlerChrysler, Renault and Nissan Motor. Commerce One has already facilitated more than $1.5 billion in transactions for Covisint.

But the new deal may give Commerce One significantly more business and heighten its profile among investors, analysts speculated. Under the terms of the agreement, Commerce One will receive cash compensation, a share of the e-marketplace revenue and an equity interest in Covisint, which is expected to go public in 2001.

Largely because of the new agreement, which fuses the e-commerce player with one of the world's largest Old Economy industries, two financial institutions initiated coverage on Commerce One on Tuesday. McDonald Investments initiated coverage of the company with a "buy," while Lehman Brothers initiated coverage with an "outperform" rating.

According to the agreement, Commerce One will get a cut of Covisint revenues for 10 years. Commerce One also received a two percent equity interest in Covisint, which will be held in escrow until Commerce One is restructured into a holding company.

Also as part of the agreement, Commerce One will undergo a corporate restructuring into a holding company in which all of Commerce One's outstanding shares of common stock will automatically be converted into shares of the holding company common stock at a one-for-one conversion rate. As a result, Commerce One will become a wholly owned subsidiary of the new holding company, which will continue the business and keep the name of the current Commerce One.

The Commerce One holding company on Friday issued 14.4 million shares of its common stock to Ford and 14.4 million shares of its common stock to GM. Half of each of Ford's and GM's shares will be held in escrow and will be released to Ford and GM in December 2002 upon the satisfaction of certain conditions under the Covisint agreement. Otherwise, the shares will not be released to these companies until June 2004.

The proposed corporate restructuring is subject to the approval of Commerce One's existing stockholders and is expected to take place in the spring or summer of 2001. In the event this approval is not obtained, the Covisint agreements will remain in place. Commerce One will in that case issue a total of 28.8 million shares of its stock directly to Ford and GM in exchange for the 28.8 million shares of holding company stock currently held by them.

Analysts said that the complicated agreement may be a slight blow to Oracle. Although it remains an official technology partner in Covisint, the Redwood Shores, Calif.-based database giant has no formally defined role in Covisint.

"Commerce One is the only technology provider with revenue share, which implies Oracle was unable to negotiate a revenue-share provision," Salomon Smith Barney analyst Gretchen Teagarden wrote in a research report issued Tuesday. "The fact that Commerce One is the only company receiving revenue share from Covisint we view as somewhat of a negative for Oracle."