23 January 2004 Two of the pioneers of the e-procurement sector — spend management software vendor Ariba and online auction facilitator FreeMarkets — are to merge in a $493 million stock deal.

Accelerating the rapid pace of consolidation in the sector, Ariba is snapping up rival FreeMarkets only a matter of weeks after FreeMarkets itself bought the assets of Covisint, the high-profile e-marketplace established by America’s three largest car makers.

Ariba has also picked up procurement business process outsourcing provider Alliente recently.

The market for standalone e-procurement tools and services was at one time expected to create a vast new segment in the IT industry. But the technologies — for aggregating spend and bringing Internet efficiencies to the sourcing of goods — have not been universally adopted by large organisations.

Moreover, the major enterprise resource planning software companies — SAP, PeopleSoft and others — have progressively added such facilities to their widely-installed product lines.

Revenues at Ariba, which counts drinks maker Diageo, Lloyds TSB and Unilever among its customers, have been flat in recent years at about $230 million.

However, after sustaining heavy losses throughout all of its eight years, it has finally moved into profitability in the last six months, posting healthy profits for the past two quarters. It has also stopped eating into its still-hefty cash reserves, which stand at $128 million.

FreeMarkets, which operates online auctions for customers such as the Royal Mail, Norsk Hydro and Electrolux, has reported slightly slower demand for its services, with annual revenues down 8% to $142 million in 2003.

Both Ariba and FreeMarkets say that they will proceed with “all committed product deliveries as planned”. Over time, though, the companies’ separate applications will be merged into a single platform.

In its most recent financial filings, Sunnyvale, California-based Ariba said it employs 845 people; whereas Pittsburgh, Pennsylvania-headquartered FreeMarkets has a headcount of about 1,000.