Friday Rant: The Emptoris Deal and What it Means for Customers
I think the customer impact of the Emptoris buyout has been lost in much of the coverage of the deal so far (including my own). So I thought it proper to at least feature a short rant on my own impressions of the deal and related happenings at Emptoris and their impact on both current and potential customers. Perhaps most important, I'm left with the impression from the buyout that customers will continue to experience similar levels of responsiveness and service as they did before the transaction occurred. For better or worse -- Emptoris has moved many jobs to India in recent years and we all know that such a move can have a negative impact on customers if the transition and management does not go according to plan.
Moreover, from a customer perspective, I'm glad Emptoris did not end up in the hands of Oracle, SAP or Ariba. That would have meant the deathblow for future innovation on the Emptoris platform. And innovation matters at Emptoris -- both to customers and internally. Sure, we could slam their spend visibility and optimization shortcomings -- especially in earlier product releases -- but I could slam others equally as hard if not harder. In truth, Emptoris has probably been the most innovative supply/spend management vendor out there in the past five years when you factor into account the range of offerings they bring to bear. In particular, I've been very impressed with the direction and thought leadership behind their supplier performance products not to mention their market leadership -- along with Upside and a couple of others -- in the contract management space, especially relative to the ERP providers and other best of breed competitors.
The fact that the current management team is staying on should help customers sleep better at night. True, the comments on this blog are testament to the fact that many former employees and investors would love to see Avner's head on a stick. But they're not customers. The combination of Avner and his direct reports staying on after this deal will provide as smooth a transition as any for this type of transaction. Also true, in recent years, Emptoris has had some material turnover in the CFO and technology leadership positions of the company, but I have not heard concern from customers I've spoken to -- and there have been many -- that the churn in these roles has impacted the level of support and innovation they've come to expect from Emptoris. In my view, customers should not expect anything better than before the deal closed -- but they should not expect anything worse. If you liked Avner and his team, don't worry. If not, then you've probably already chosen not to do business with Emptoris -- or won't in the future.
For customers, another point that I'll leave you with is that there's been a lot of criticism of the deal regarding the rumored valuation. To be candid, it does seem rather low, but given the current investment environment, customers and the market (not shareholders) should all be happy that they were able to get the deal done and remain viable. This is especially true given some information that I was able to unearth last night and this morning which adds further fuel to a fire that has been a smoldering theme with Emptoris for some time. I refer to their direct and indirect overstatements of revenue and profitability numbers over the years. Emptoris has insisted for a long-time that the company is profitable (before legal fees), yet the numbers suggest a different story -- one that I don't want to argue with here in detail, but that I think is important to share on a high level because it's an issue that customers should be aware of. On the revenue front, consider that as recently as yesterday, VentureWire quoted AMR's Mickey North Rizza who noted that Emptoris "generated about $59 million in 2007 revenue." We all know that Mickey did not invent these numbers -- she got them directly from Emptoris. Or they were implied or hinted at by Emptoris on a call. That's the plausible deniability that vendors have in analyst briefings around financials -- "what, I said that?"
Yet in the actual court filings, if you dig around, you see a different picture. According to the information that Emptoris provided to the court on 11/18/2008, "In 2007, Emptoris had $18.2 million in sourcing revenue and $41.6 million in total revenue. Emptoris spent $12.4 million in R&D and operated at a net loss of $12.7 million … Emptoris has never made a profit … during the period of infringement found by the jury, Emptoris lost nearly $36 million, plus its (as yet uncalculated) losses for 2008." So next time you hear the company leadership claim Emptoris is profitable, it might be worth reminding them that their own court filing says otherwise. I do not believe this should overly influence a buying decision, but the fact that Emptoris has twisted around profitability and revenue numbers to its advantage through various claims and innuendos over the years is without question. It's a shame the actual numbers had to surface in such a ridiculous process patent court case, but at least they finally saw the light of day. And as we all know, sunlight can work wonders as a sanitizer (or would that be sanity check). At the very least, customers should use this as a final bit of humorous negotiating leverage in a deal situation because trust me, Emptoris needs your business to reach profitability, let alone stay profitable.
Readers should know that I am in passionate agreement with their comments that competition is good for the market. I don't want to knock Emptoris unfairly for revenue and profitability miss- or over-statements. But the truth still needs to get out. Let the buyer beware about any skeletons which may be lurking in the closets -- after all, that's fair game for prospects to see and I thank those who have offered their thoughts on the subject so far in the comment pages of Spend Matters -- of Emptoris and others. But the fact that Emptoris is still an option is good for customers. In the very worst case, Emptoris' continued independence will keep Ariba, SAP, Oracle, BravoSoluton, Iasta, Ketera and many others on their toes, giving customers more choice.
At the end of the day (and the sales cycle), it's only those who can spend their dollars on Emptoris' products and services that have the actual vote. The rest of the noise you hear from bloggers, analysts and the media might be useful to some degree, but it does not count when the ink is dry. So it's the customers that I'll be watching with intense curiosity in the coming months to see how they respond to the news. Ultimately, if Emptoris can maintain the growth it claims throughout 2009, then it's the customers -- and only the customers -- who will have cast their ballot in favor of Emptoris' continued independence in the market.
As a final aside, I would be remiss in my blogging duties if I did not point out what I believe to be the rushed impetus for this deal -- the Ariba litigation. Customers who are concerned that the Emptoris patch / removal of infringing capability hampers their ability to run reverse auctions in the manner in which they need to should have cause for concern. While I suspect this is a minority of users, customers should make sure they are comfortable with how the patch / removal of the infringing capability impacts their ability to structure and manage reverse auctions. In one case, Emptoris' patch is still under review by the courts -- Ariba is contesting it. Until this is cleared up, it's an open item that we should all pay attention to.
- Jason Busch
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Always tell the truth. That way, you don't have to remember what you said.
Kevin Potts
Vice President of Marketing and Product Management
Emptoris
I think the two big points out of this investment in Emptoris are, first, the stability and choice offered to customers and, second, the potential for further acquisitions by Emptoris, Ariba, SAp et al in light of current market conditions. I would like to see more on how you see these software providers shaking out. That's an important consideration in the buying process for these solutions.
SAP, of course, is around to stay, however, in the contract and spend space, SAP leaves a lot to be desired. Ariba seems to have the cash to last and has weathered a storm or two, so should make it through this storm, although their management and strategy seems to be a little off-focus in my view. Emptoris I also think has proven itself, having been through the dot-com bust, 9-11 and seemingly secured access to deep pockets for the current financial crisis and perhaps possibly for some acquisitions. The company, and its CEO also seem very dedicated to staying independent and investment in their solutions. Ketera seems a survivor as well, particlarly given deep pockets behind it and vested interest from its owners in staying independent.
After that, i think many of the point-solutions and other best-of-breed providers are in for a tough haul in this economy. They will be relegated to being either the low-cost provider or pushed into small, deptarment or project centric deals. SAP, Ariba, and Emptoris seem the only ones capable of enterprise wide and global deployments. I see someone like Bravo as an acquisition target.
As for the financials, any software buyer would be smart to conduct due diligence on the finances of any private software company. Those who do not, do so at great risk.
However, all software companies have their own weakneses, and areas where extra due diligence should be made. SAP needs to demonstrate that its marketing slides will match is actual capabilities. I know some peers who have been waiting two plus years for promised SAP functionality, specifically in contracts.
Ariba has its own demons. The company's management seems a bit unfocused in the company's strategic direction. For one, I would be cautious about how one grows with Ariba, starting on one system and platform and needing to overhaul to get to the next level. Also, what is their roadmap or vision for expansion of their suite and functionality. Seems SAP and Emptoris are more reliable partners to grow with from my experience and what I've heard. So, due diligence is always needed. its just a matter on which area one needs to focus on, depending on the provider you're talking to or reviewing.
I've opined too much, like to hear your and other reader stake on both the acquisition angle and the due diligence by provider angle.
I don't understand your statement - 'Sure, we could slam their spend visibility and optimization shortcomings'. What shortcomings are you talking about? I doubt anyone else in this space has innovated more than us in Spend Visibility. Talk to our customers. They will tell you if you are wrong or right.
Kirit Pandit
VP, Product Mgmt, Spend Analysis and Cmpliance
First let me see I have never questioned your integrity. You are one of the most straightforward, candid and forthright marketing executives that I have ever dealt with. But you have not been running marketing for the entire time at Emptoris, nor does marketing always rest with marketing, as we both know. Going back many years, Emptoris and AMR have had an issue with synching up the numbers. In fact, AMR even had to revise a report based on numbers that they incorrectly assumed or received from Emptoris a number of years back. AMR does not usually get things wrong. I know their diligence process. I know their analysts (including ones who worked their in the past) on a professional and personal level. I know what makes them tick and I trust them. I would work for them and they would work for me -- that's how much faith we have in each other's rigor and analysis. They would not get things wrong twice, nor would they put their credibility on the line to publish or state numbers that they had not confirmed or reasonably implied from discussions with them. Perhaps it is best for AMR to comment on this, although I understand if they do not feel comfortable. Personally, I would like to say more, but I do not want to breach any personal confidences, past or present. But I will leave you with a couple of previous thoughts.
Here is one previous post on the subject for those who are interested:
http://tinyurl.com/8qhdc4
Also, Kevin, did you take issue with the comments in this post?
http://tinyurl.com/8o4wko
"I abhor Emptoris’ disclosure of incorrect and/or misleading financial metrics over the years. They outright lied to AMR a few years back in a quantitative study that the analyst firm was forced to retract and change. I have no doubt that more recent studies that take into account "ability to execute" are in part based on financial metrics which again, were potentially overstated. Of course Emptoris could deny this by saying these numbers were never written down but were suggested in phone calls or by providing ranges -- both of which provide plausible deniability. But check out the numbers that circulated in relation to the court case and you'll see a very different story than what the market has absorbed based on what Emptoris has somehow suggested over the years."
You excerpted my comment. In it, I said "especially in past releases" which I should have been more direct on in referring to spend visibility. Both of us know that the entire spend suite was rewritten following the Zeborg deal for a lot of reasons that you probably don't want me to dredge up. And from an optimization perspective, we could still get into numerous shortcomings in the software-only product itself (many of which are on your roadmap to address), but I don't want to go there here. I still count you today as one of the leaders today in both areas, yet no one is perfect. Thanks for responding.
Ariba had a $48 million operating loss in FY 2008. A $7 share price after trading in the $20 to $22 range just a couple years ago. Up to 6% of their shares held by shorts.
Tells me their bleeding money and Wall Street doesn't have a heck of a lot of faith in them.
http://finance.yahoo.com/q/is?s=ARBA&annual
So, due dilligence in financials is due all around when buying software these days.
If you're so convinced that Jason got it wrong, why not let the doctor give your systems a complete health check?
Personally, I think this is the best post he's ever done on Emptoris ... but I've been known to be among the extreme minority in my views on a number of occasions.
Is that what they mean by "spend management" ??
Signed - John Kerry - I allowed my self to get "swift boated" and I approved this message.
I have been in active conversations with a range of providers, channels and customers throughout the litigation and the acquisition. These include both Emptoris and Ariba for the litigation and Emptoris for the acquisition. I have also had my own PACER account for years which provides access to court filings. I have also asked for and received documents from Ariba, Emptoris and Emptoris' past investors surrounding the litigation and deal as part of my research. As such, both providers have provided significant material to me, including their own spin. In total, I have taken dozen of hours to listen to both the Emptoris and Ariba view -- not to mention the customer view -- surrounding the litigation as well as spending the time to read the court filing and rulings myself. I hope this helps.
As other readers have mentioned, Ariba is also losing money. Lots of it. Never has made a profit. Think their total Net Loss for the last 5 years is around half a billion. At the end of the day, financial viability is far from the biggest reason to pick or avoid a vendor. Scare tactic sure.
I'll jump ahead and just say that once one gets the answers to these questions, they will most likely conclude that the fact that Emptoris actually survived despite their best efforts was a major blow to Ariba.
Or Ariba loses $15 million per lawsuit, so they can only sue three more vendors before sending themselves into bankruptcy.
Or Ariba has lost an average market cap of $7 per share per year for the past few years, and is currently trading at $7, so Ariba will be bankrupt in a year.
Obviously all that is inane as well. A lot more Ariba FUD here than facts.
In my view, Ariba wins on three fronts: 1) they force Emptoris' hands to raise more money, wiping out (or nearly wiping out) existing shareholders and forcing them into the hands of a PE firm which will not necessarily allow them to control their own destiny; 2) they gain the upper hand in sales situations by the perceived (whether actual is another case) damage to Emptoris' brand and balance sheet; and 3) they force Emptoris to remove or alter functionality that at least in some cases, does have an impact on how reverse auctions are structured.
The question is whether or not these three reasons were worth the legal fees (which were certainly more than what Emptoris will be paying them as part of the settlement). I believe they were based on the deal impact we'll see in 2009, though I hope others can prove me wrong because as I've previously stated, I abhor process patent madness.
Given the disruption to Emptoris, I think Ariba would spend their $17M over again. Other than getting an even bigger damage award and putting Emptoris out of business, it could hardly have worked out much better for them.
"Associate yourself with men of good quality if you esteem your own reputation, for 'tis better to be alone than in bad company."
George Washington
Or I suppose that is more ineptitude and greed.
Either way, Ariba's poor strategy and free-spending is costing its customers, and that's why you see them not holding onto tier-one global companies/customers.
(and Checkers clearly has a chip on his shoulder)
1. You state, “Going back many years, Emptoris and AMR have had an issue with synching up the numbers.”
Fact: Only once has this ever been in question, and that took place in 2005. See details below.
2. You state, “In fact, AMR even had to revise a report based on numbers that they incorrectly assumed or received from Emptoris a number of years back.”
Fact: AMR did revise the report. However, not because I misled them. For AMR’s 2004 Sourcing and Procurement Market Assessment, I provided traditional statistics of a privately-held company. These included number of customers, number of employees, number of new customers, % growth rates of revenue and bookings, etc.. Using these numbers, AMR made their market assessment. You challenged AMR’s credibility publicly (I looked for your blog entry on the challenge to AMR’s credibility but I could not find it. This would have been posted in the September 2005 time frame). I remember the aftermath so clearly. I was in the parking lot at 200 Wheeler Road getting into my Honda to drive home when I received the call from the AMR analyst. I was asked to validate the numbers. I provided no comment as was our policy. I did find this blog entry on the topic however:
http://www.spendmatters.com/index.cfm?mode=entry&a...
3. You state, “AMR does not usually get things wrong. I know their diligence process. I know their analysts (including ones who worked their in the past) on a professional and personal level…[they would not] put their credibility on the line to publish or state numbers that they had not confirmed or reasonably implied from discussions with them.”
Fact: While I can’t dispute what you were told by someone else, I did not confirm or reasonably infer (phone call or otherwise) a number to AMR for our revenue. Going back to my fundamental assertion, when doing market assessments, analysts are paid to make assumptions based on the information available (e.g., using number of employees to estimate revenues based on rules of thumb). When a number is not available, they make assumptions. I don’t know what the assumptions were. I wasn’t asked. I too know the analyst you refer to well and I hold this analyst, and AMR, in high regard. Neither this analyst nor any other analyst at AMR challenged integrity or called me a liar.
Finally, you ask whether I object to the same accusation from a November Friday Rant post. Of course I do. It refers to the same “event” described above, which leads me to the my fundamental argument regarding this accusation. The accusation keeps coming back like Banquo’s ghost. At least once every six months you write about it, but I never see further arguments or evidence to support it beyond the one event disputed above from four years ago. Is that fair to the readers of this blog?
Kevin Potts
Vice President of Marketing and Product Management
Emptoris
Thanks for your detailed reponse and commentary. I have tried to locate the report that you reference and cannot find it. The only time I can remember taking anything down from Spend Matters was in reference to a particular individual following the comments getting out of control (this had nothing to do with Emptoris). I will keep searching for this piece, however, that you reference, which very well could exist – the software just might have eaten it. Please note that not all of the older posts are indexed by Google, however, if you use the search feature of the blog and have the patience to go through back posts, everything should come up, though I’ve had examples in the past where I can’t find something I’m looking for, so there are quirks.
To be honest regarding the numbers, I can respect any private company that does not wish to provide specific details. But in this particular case (going back to 2005), I can say that from the multiple conversations I had with all of the parties that some individuals certainly felt mislead from the events that transpired. More recently, in 2007, another firm, Forrester, grossly miscalculated your company’s revenues (see:
http://www.bizjournals.com/boston/stories/2007/01/...). In this story, Andrew Bartels notes that "The company is doing very, very well”. The story continues: “Emptoris Chief Executive Avner Schneur said revenue rose about 60 percent last year, due to a mix of organic growth and acquisitions (including diCarta Inc. of San Carlos, Calif., last April), but he declined to disclose exact figures. Bartels of Forrester estimated Emptoris had $110 million in revenue last year. Though Schneur declined to discuss net income, he noted the company has not had to raise venture capital for the past three years and is self-supporting.”
Following this most recent investment and my coverage on these pages in the past couple of weeks, I see no reason to continue to dwell on this topic. I will happily shut this ghost in the closet once and for all. But the topic is one that I wanted to get out in the open because the multi-firm analyst misinterpretation of Emptoris’ revenue appears to be a constant occurance starting in 2005, continuing in 2007 and going into 2008 and 2009. I sincerely apologize if I was incorrect in my asssertion that Emptoris mislead AMR, Forrester and others into arriving at a certain number that in fact they conceived of on their own. There are certain things I can’t discuss on this topic because I do not want to violate specific confidences, but I think we have both done a commendable and fair job getting multiple perspectives on the table. Above all, I stand corrected if anyone misunderstood my analysis earlier and thought you were involved in misleading or incorrect disclosures. My current read of the situation is that you, Kevin, had nothing to do with the analyst interpretation of Emptoris’ numbers.
Thank you again for your clarification and additional thoughts. I will sign off on this topic unless there is anything else you would like to add or discuss. I think we would both agree that there are more important matters for Spend Matters, the media and analysts to cover regarding Emptoris’ solutions and market traction. Above all, I want to see Emptoris remain a viable leader in the sector. We’ll all be the better for it, especially cutomers who will have a greater choice of products and services and will continue to be able to tap into the innovation that you've brought to the market over the years.
Cheers, Jason
What is disappointing is that the revenue numbers were out there for anyone to see if they know about a tool named Google. I think at some point I went out on a limb and did some crazy query like Emptoris and turnover. And there was a link from Netinvest, a Swiss holding company. Now it is known as Tec-Semgroup. You can see Emptoris revenue and business performance in their annual reports at http://www.tec-semgroup.com/index.php?option=com_c...
and http://www.tec-semgroup.com/index.php?option=com_c....
Noted your ongoing coverage of the private equity investment in Emptoris, and Marlin Equity put out a press release today providing some detail on the investment:
http://www.marketwire.com/press-release/Marlin-Equ...
"Marlin's investment in the company was structured to include 1.) a buy-out of the existing venture capital investors, 2.) extinguish certain liabilities, and 3.) fund an additional $20 million in working capital to ensure the company's continued growth ....
4.) additionally, Marlin has allocated a significant amount of capital to fund future strategic acquisitions."
Sounds like a healthy committment