FreeMarkets makes deal for supply-chain business

FreeMarkets Inc. (FMKT) is making its move into supply-chain management. The undisputed king of online business-to-business auctions revealed Thursday that it has signed a definitive agreement to buy Adexa Inc. (ADXA) , a Los Angeles-based provider of supply-chain software, for about US$340 million in stock. The deal would put FreeMarkets in a position to challenge Ariba Inc. (ARBA) , Commerce One Inc. (CMRC) and i2 Technologies Inc. for dominance in electronic procurement and supply-chain applications.

FreeMarkets runs online reverse auctions, in which suppliers bid against one another to win contracts to supply everything from aircraft engine components to computers for large customers such as Heinz, Microsoft Corp. (MSFT) , United Technologies Corp. and Visteon Corp. (VC) . The company says that next week it will offer a software application that enables customers to run their own auctions.

One knock against FreeMarkets has been that it provides just one element of a company's sourcing needs, so customers must go to software vendors for tools for managing product design and their supply chains. Thursday's deal aims to fill that gap by giving FreeMarkets the software that companies need to manage the design of products, schedule when components arrive, and track their suppliers' inventory.

"We're the leader in e-sourcing," says FreeMarkets Chairman and CEO Glen Meakem. "We're combining that with optimization and business process automation, which is a combination no one else really has. And we're a sizable player in this space."

The deal gives FreeMarkets new customers, a much larger sales force and a way to tap the market for supply-chain management software, which AMR Research Inc. forecasts will reach US$9.5 billion by 2002. During a conference call announcing the deal, one financial analyst that covers FreeMarkets described the deal as "the Yankees trading for Babe Ruth."

However, Pierre Mitchell, an analyst at AMR, says FreeMarkets will find it difficult to achieve the synergies it wants. "They are both very strong companies but they are in very different areas," he says. "FreeMarkets has been a services company that is just getting competency in software sales. Its product involves competitive sourcing. Adexa sells very complex software, and it deals with complex collaborative relationships. It's going to take some time for them to bring the different approaches together."

Nevertheless, FreeMarkets got a good deal on Adexa. The vendor had been valued at $750 million to $1 billion. But the company was struggling to generate enough revenue to survive on its own. Ariba had looked at acquiring Adexa but chose instead to buy Agile Software Corp. (AGIL) in January for $2.6 billion. Agile provides software for managing product development. Last year, i2 Technologies, the leading supply-chain application vendor, paid $9 billion for Aspect Development Corp. (ASDV) , a company that sold information on high-tech components and software for managing supply chains.

Adexa was running out of options, which is why it wound up accepting far less than its original valuation. The company was founded in 1994 and has about 60 customers, including Advanced Micro Devices Inc. (AMD) , Lucent Technologies Inc. (LU) , Matsushita Electronic Components Co. Ltd., Philips Semiconductors NV and Sanyo Electric Co. Ltd.

Under the terms of the agreement, FreeMarkets will issue a total of 17.25 million shares and options in exchange for all of the outstanding shares and options of Adexa. The value of the deal, based on FreeMarkets' closing price on Feb. 7, is about $340 million. Adexa had more than $50 million in revenue in 2000. FreeMarkets CFO Joan Hooper said the acquisition would be accretive to revenue and gross margins in 2001 and would not change FreeMarkets' expectation of turning profitable in the first quarter of next year.

The boards of both companies have approved the stock-for-stock merger. FreeMarkets and Adexa stockholders are expected to approve the deal, which should close in the second quarter. Adexa will become a wholly owned subsidiary of FreeMarkets. Cyrus Hadavi, Adexa's founder, president and CEO, would become vice-chairman of FreeMarkets upon consummation of the transaction.

FreeMarkets also announced today that Raymond J. Lane, the former president and COO of Oracle Corp. (ORCL) , would join the FreeMarkets board of directors. A spokesperson for FreeMarkets said Lane would advise the company on integrating Adexa into FreeMarkets.

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