Acquisitions tighten supply-chain market

Supply-chain vendors kicked off the year with a rush of acquisitions, anticipating that customers are ready to act on their pent-up demand for products and services to help eliminate operational waste and improve forecasting abilities.

In January alone, vendors announced seven deals involving supply-chain management (SCM) technologies, highlighted by Ariba Inc.’s US$493 million bid for former rival FreeMarkets Inc. The consolidation bodes well for the market, observers say, and indicates that vendors have money to spend on acquisitions that can bolster their technology offerings and thin the competitive landscape.

Fueling the spate of SCM deals is a recovery in customer spending. AMR Research Inc. found in its most recent quarterly technology survey that 66 per cent of companies plan to increase their IT investments this year.

Supply-chain specialist ARC Advisory Group Inc. predicts the supply-chain execution market — which encompasses a variety of warehouse, transportation and production management applications — will grow from US$3.3 billion in 2003 to US$5.2 billion in 2008. Additionally, the supply-chain planning and collaboration market will grow from US$1.9 billion in 2003 to US$2.2 billion by the end of 2008, according to the consulting firm.

The promise of spending growth has supply-chain vendors planning for the future by bulking up their technology offerings. Since the middle of last year, vendors have seen stronger interest from prospective customers, said Ken Carey, a senior research analyst at Susquehanna Financial Group.

“Companies are seeing more customer activity, and this time it looks real. That’s why they’re willing to step up and do these acquisitions,” Carey said.

On the customer front, the allure of less waste and more revenue is driving supply-chain investments. The companies investing in new supply-chain technologies are working to integrate disparate systems in order to build a more real-time view of business conditions and weed out inefficiencies. According to ARM, companies adhering to supply-chain best practices have achieved cost savings of 10 per cent of revenue; a 20 per cent improvement in order-delivery performance; 50 per cent less inventory; and a 66 per cent quicker order-fulfillment cycle.

An overcrowded market is another reason for the consolidation. Although the spending environment for SCM software is improving, there are still too many vendors chasing too few deals, said Paul Griffin, executive director of the enterprise software group at CIBC World Markets.

In addition, tight competition for investment dollars can mean a buyout is a vendor’s best option. “Venture investors have become very selective, and the IPO market is still closed for many smaller players,” Griffin said. “Given an uncertain financing environment, (merger and acquisition) can be a more attractive exit strategy.”

It all adds up to more deals. “There has definitely been an acceleration of the pace of (mergers and acquisitions), particularly in the supply-chain management sector,” Griffin said.

Thinning the herd is helpful for the acquiring and the acquired. “It makes sense for companies to slim down the number of competitors out there,” Carey said. “The more companies out there, the more pricing pressure there is and the longer it takes for deals to close because customers are evaluating more products. Overall, it’s healthy for the sector for the consolidation to go on.”

For companies with good technology and a weak balance sheet, being acquired is a viable option for taking the technology to the next level. “It behooves a company, especially if it has good technology, to find a partner that has a strong balance sheet and will be able to spend the necessary sales-and-marketing dollars and continue to invest in (research and development),” Carey said.

Haht Commerce Inc. is an example of a company that needed a partner; it found one in network service provider Global Exchange Services (GXS), which was looking to expand beyond its value-added network origins.

With its pending US$30-million Haht purchase, GXS gains product information management software for aggregating and publishing item-related data from multiple application sources. By combining Haht’s software with its own products, GXS will be able to offer customers software to integrate data from multiple systems with transaction delivery services to electronically connect multiple trading partners in a retail supply chain.

In general, today’s acquisitions are more strategic than many of the deals that occurred over the last couple of years, analysts say.

“After the tech bubble burst we saw a lot of forced consolidations and opportunistic purchases,” Griffin said. “But now the consolidation is happening at a different level. Companies are healthier again, they’ve right-sized operations, and they’re in a position to step out and be a little bit more strategic.”

Being strategic can yield the merger of two competitors, such as the Ariba-FreeMarkets deal in January.

Both Ariba and FreeMarkets set out to streamline companies’ procurement processes, but the two companies cater to different industries and target different buyers within the corporate hierarchy, said John Fontanella, vice-president of supply-chain services at AMR Research. Thanks to their complementary strengths, “they’re a stronger company together than they are apart,” Fontanella said.

Other acquisitions are the result of companies trying to expand their technical footprint by buying technology specialists. 3M Co.’s purchase of HighJump Software falls into this category.

“3M definitely wants to extend itself into the services business,” Fontanella said. HighJump — which makes software for warehouse management, transportation management, supply-chain visibility and trading partner collaboration — will operate as an autonomous unit within 3M’s growing Industrial Services and Solutions Division.

For users, consolidation can be a good thing. A vendor with a weak balance sheet might become more stable if it’s acquired, Carey said. In addition, users stand to benefit if their vendor acquires broader functionality, he said.

Acquisitions also can spell trouble, however.

Silence on the part of an acquired company is a bad sign, Fontanella said. “Customers have applications that are critical to their organization, yet often no one has talked to them about an impending merger or acquisition,” Fontanella said. “That can have an immediate negative effect on the installed base. It sets a bad tone, and it opens up the whole market to rumors.”

A better sign is an acquired company that is upfront with its customers and shares plans for future product support and integration efforts, Fontanella said.

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