Size Matters, Especially to Ariba and Commerce One

If the stock market rewarded companies for thinking big, Commerce One (CMRC) would be on top of the B2B heap.

But it doesn't, and Commerce One isn't.

In fact, after getting a 70% pop during the recent business-to-business financial reporting season, Commerce One is trading lower than it was when it started its upward climb. Since July 12, when its archrival Ariba (ARBA) reported blowout revenue numbers that sent the sector into a tizzy, Commerce One has completed a jaunt to 70 from 50 and back again. It's now trading at just under 50 a share.

Meanwhile, Ariba, which finished at 103 1/2 on July 12, is trading just below 140.

Parting Company Investors like Ariba's strategy, but worry about Commerce One's approach

As two of the sector's pioneers, Ariba and Commerce One are the two most closely watched B2B names by many investors, so their battle has taken on an increased significance. (TSC wrote a story last month about their battle.) The winner also could point investors toward eventual winners among other B2B companies: Ariba focuses on the piece of the sector involving selling software that allows companies to buy and sell goods over the Internet. Commerce One emphasizes building the actual exchanges that companies use to trade goods.

Big Difference

Ariba now reigns with a $32.8 billion market cap, while Commerce One mopes about at $7.8 billion. Some investors and analysts are starting to ask how that disparity will play itself out, especially when it comes to the companies using stock as currency for acquisitions -- a crucial issue in an industry that's mumbling more and more about coming consolidation. In other words, the companies that get biggest the fastest are sure to get even bigger.

"In an environment like we have today, there clearly is a time-to-market cap element," says Ian Morton, an analyst at Chase H&Q, who rates Ariba a buy, but doesn't cover Commerce One. (His firm hasn't performed underwriting on Ariba.) "Those with the biggest market caps are going to be the big consolidators to watch."

Both Ariba and Commerce One have done deals already. Ariba has scooped up TradingDyamics and Tradex, and recently announced its intention to buy SupplierMarket.com. Commerce One has acquired Veo Systems, CommerceBid.com and Mergent Systems; its announced acquisition of AppNet(APNT) is pending.

But the companies have struck out in very different directions: While Ariba has concentrated on selling software to major firms to help them buy supplies online, Commerce One has partnered with companies like General Motors(GM) and Boeing(BA) to set up giant industrial exchanges, using its technology.

Results Now or Later

From Wall Street's point of view, this means that Ariba is getting paid now, while Commerce One's deals are dependent on its exchanges getting up and running, which takes time.

"Commerce One really has [its] hands full now to the point where [it's] got to show the Street [it] can execute," says Carl Lenz, an analyst at industry research firm, GartnerGroup, which has done consulting for the companies. "If you put Ariba and Commerce One neck and neck, Ariba has been more aggressive."

Of course, analysts aren't writing off Commerce One at this point. For a company that had total revenue of $34 million in 1999, a $7 billion market cap is more than respectable, especially for a company that went public a year ago. It clearly has its own momentum, even if it doesn't have as much equity to dole out.

"The question that should go along with the market cap issue is how many more acquisitions does each of them have to do in the short term to fill out their product lines," says Robert Johnson, an analyst with ABN Amro, who rates Commerce One and Ariba both buys, and whose firm hasn't performed underwriting for either. "If they had to do 309 acquisitions apiece to achieve their targets, then clearly, I'd say Ariba's got the upper hand because they have the stock price to do it.

"But equity deals are just one way to do it. Commerce One has been striking a lot of partnerships that have gotten the [company] more customers, and [it] did it without having to lay out acquisition-type stock."

Adding Customers

Those partnerships have included Commerce One giving out small equity stakes in itself, but they've also brought customers. It recently landed a deal to wire General Electric's (GE) GE Global Exchange, which has 100,000 users and processes 1 billion transactions a year, to its own Global Trading Web. If Commerce One can bring those transactions onto the Internet, that would be a major coup.

Chuck Donchess, Commerce One's chief strategy officer, says the company has some firepower of its own. He points to the $7 million -- 11% of its quarterly revenue -- the company collected from its exchanges during the second quarter. Because that revenue is based on transactions that presumably continue and indeed grow, as Commerce One's exchanges gain more users, Donchess says it's better than a one-time software sale.

"We're already at a point where we're showing 11% of our revenue recurring," Donchess said. "That's going to do nothing but accelerate from where we are now. We are way ahead of Ariba in the liquidity game."

But liquidity, or getting lots of companies to participate in an exchange, takes time, and isn't how large market caps currently are being made. They're made from revenue and a clear sales path, something investors see in Ariba.

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