Updated from 3:47 p.m. ET

Ariba's

(ARBA)

plan to acquire Silicon Valley neighbor

Agile Software

(AGIL)

inspired some cheering from Wall Street analysts Monday, but it came at a high price.

With its decision to acquire Agile, which makes software that helps companies collaborate more efficiently when building a product together, Ariba answered the call from Wall Street to expand its product line.

But at $2.44 billion in stock, it's paying a fat premium to do so, and Ariba's stock paid the price Monday. It fell as much as 12% Monday before rebounding somewhat and closing off $1.63, or 4.1%, at $38.38 What's more, because Agile lost a penny a share in its October quarter and is forecast only to break even in its current one, the deal could dilute Ariba's earnings. Ariba just turned profitable in its December quarter, when it

reported earnings excluding items of 5 cents per share.

Larry Mueller, Ariba's president and chief operating officer, said the deal would produce "very minor" dilution to Ariba's earnings "in the first quarter or two." The deal is expected to close by June 30. But he added that the deal would add to earnings in fiscal 2002, which starts in October for Ariba.

The Need

Still, analysts were saying the deal was one that Ariba had to do given the growing criticism from Wall Street that its product offering is too narrow.

"Three words," said Patrick Walravens, an analyst at

Lehman Brothers

. "Expensive, but necessary." (He rates Ariba a hold, and his firm hasn't done underwriting for the company.)

Ariba's core procurement, or Internet buying, software has lost its sheen somewhat in the last six months as supply chain-management software has come into vogue. With Agile, Ariba will have a good inroad into that market, and the deal will dramatically expand its presence in the so-called direct materials business.

Direct materials are the raw materials used to build the products companies sell. Indirect materials, or the office supplies and incidentals that companies need to run their operations day to day, have been Ariba's core market.

Helping Out

Agile should help because its software includes and parses all the different components needed to build a specific product, a list known as a bill of materials. Plugging that list into Ariba's transaction-minded buying software should help the company see a big boost in the direct-materials area.

"Here you have two companies that are well-established in their respective areas seeing something of a positive that made the deal make sense for both of them strategically," said David Garrity, an analyst with

Dresdner Kleinwort Wasserstein

, who has an add rating on Ariba. "If the projections are right, this software market could be $50 billion in revenue by 2005." (His firm hasn't done underwriting for Ariba.)

Agile, while not as well-known as Ariba outside of software circles, is well regarded in the industry. It's credited with being the dominant player in collaboration software for the electronics industry.

"Agile owns the most strategic part of the manufacturing process, and that's the bill of materials," said Ariba's Mueller. "That's a major asset to own when you're building products, and we wanted to go and acquire it."

And the Alliance?

Some observers Monday wondered what the Agile deal means for Ariba's already

shaky relationship with partner

i2 Technologies

(ITWO)

, which is sometimes seen as a competitor to Agile. Mueller said the deal should have "no impact" on the company's i2 relationship.

But Katrina Roche, i2's chief marketing officer, said, "The key thing for us is that it does position them much more competitively against i2. The overlap of the solutions between our two companies does continue to grow, and that reduces our ability to go forward and partner."

Meanwhile, others wondered about the price that Ariba agreed to pay for Agile. Under the terms of the deal, Ariba agreed to pay 1.35 shares of its stock for each Agile share. Using Friday's closing prices, Agile snared a price of $54 a share, about a 26% premium to its Friday closing price of $42.81. With Ariba's decline Monday, the deal was worth $51.81 a share. Agile rose $7.56, or 18%, to $50.38

"It's a very strategic move for Ariba to expand into direct materials commerce and collaboration," said Jon Ekoniak, an analyst with

U.S. Bancorp Piper Jaffray

who rates Ariba a buy. "But in order to do that and move so quickly, they essentially paid a very expensive price for it." (His firm hasn't done underwriting for Ariba.)

How Much?

Or as Ariba's underwriter

Merrill Lynch

put it in a research note, the company is paying 20 times Agile's projected revenue.

UBS Warburg

on Monday downgraded Ariba to buy from strong, citing valuation and execution concerns. (The firm hasn't done underwriting for Ariba.)

Scott Alaniz, an analyst at

Stephens

, likes the deal but noted that Ariba is "putting out 20% of their equity for a 10% boost of revenue." (He rates Ariba a neutral and Agile an outperform. His firm hasn't done underwriting for either company.)

For its fiscal year, which ends in September, Ariba is forecast to have revenue of $780 million. Agile is forecast to bring in $82 million in its fiscal year, ending in April.

"We weren't looking for a bargain," said Ariba's Mueller. "We made the determination that we wanted to buy the leader, and we believe we picked them up at the appropriate price."

In return, Agile better boost Ariba's direct-materials market share.