The Winners In B2b Commerce - business to business stocks and investments

Kiplinger's Personal Finance Magazine, Sept, 2000 by Mark McLaughlin, Sean O'Neill

STOCKS | As companies flock to do BUSINESS ON THE INTERNET, who's getting rich?

ON THE SAME day last November, Ford and General Motors announced they would each set up an Internet exchange for the buying and selling of parts and other materials. A few months later, when Ford CEO Jacques Nasser called to congratulate Richard Wagoner on his appointment as head of GM, he suggested the companies discuss a combined exchange. That set the two giants to recruiting more partners for the venture, the industry's entry into what is known as the business-to-business (or B2B) e-commerce marketplace. By June the exchange had a name, Covisint, and the participation of the world's top three automakers. It will go live later this year. "We quickly realized," Wagoner says, "that traditional, individual, stand-alone models weren't the winning strategy."

Automakers are not alone. Competitors in industries ranging from pharmaceuticals and aerospace to retailing and railroads are banding together to save time and money by moving mundane but essential tasks such as purchasing and order fulfillment to the Internet. There, phone calls, faxes and sales visits are replaced by mouse clicks. Buyers use the Internet to scan a universe of suppliers for the best price on what they want, while sellers connect to customers they never knew existed.

Boring stuff, but the opportunities it creates for investors are tantalizing. B2B e-commerce is already more than ten times larger than the more-established consumer e-commerce market and is expected to grow much faster, says Forrester Research. Boston's AMR Research predicts that revenues of B2B enablers--the companies that run these marketplaces--will grow 56% a year over the next four years, jumping from $1.7 billion in 1999 to $16 billion by 2004.

Software leaders

THOSE ENABLERS cover a wide swath, from consultants like Diamond Technology Partners to security providers like VeriSign. But industry watchers say the most compelling investments may be companies that make software used to build online marketplaces and automate operations. Early leaders are upstarts Ariba and Commerce One, as well as the more-established i2 Technologies. But software giants Oracle and Siebel Systems are also players.

"A lot of players suggest they will be able to do this, but we suspect they have underestimated how hard it is," says Michael Sandifer of Amerindo Internet B2B fund. How difficult is it to build marketplace software? Tough enough to persuade Germany's SAP, the world leader in back-office software, to partner with Commerce One. "New, technology-dedicated companies have a better chance of being successful than companies that restructure to do this," says Sandifer.

And after the shakeout of technology stocks this spring, these new leaders are trading at their most attractive valuations in some time. As of June, shares of Commerce One were 58% off their 12-month high; Ariba shares were 31% lower; and i2 shares were off nearly 37%. "It's a great time to think about these names," says Jim Houlton of Strong Internet fund. "A lot of speculation is out of them, and the businesses are fantastic."

The name businesses choose most often is Ariba. The Mountain View, Cal., company doubled its customer base in the 6 first quarter of this year and has signed up 20 Fortune 100 companies, including Internet-savvy clients Cisco Systems, Hewlett-Packard and Motorola. And it inked an alliance with IBM and i2 this spring that will enable it to offer customers more B2B services and give it the marketing might of IBM's global sales force. Ariba (symbol ARBA, recent price $126) has been taking in more money than it spends for almost two years (what Wall Street calls positive cash flow) and should be profitable by the second half of 2001, says Randy Chin, research director for eHarmon Internet fund. AMR projects that sales will jump from $59 million in 1999 to $334 million this year.

Customers like Ariba's flexibility. Ariba software can help a single company move its purchases and supplier relationships to the Internet or create B2B marketplaces for whole industries. Since Ariba is an "open platform," it can be seamlessly integrated with products from other vendors.

Commerce One (CMRC, $69) does for suppliers what Ariba does for buyers and is the market leader in building e-marketplaces. The Pleasanton, Cal., company focuses more on exchanges than on individual clients and is the official technology provider to Covisint, energy exchange Pantellos, and similar marketplaces in the food and electrical-components industries. Commerce One is also well positioned to eventually connect marketplaces of different industries, so that aerospace suppliers could sell raw materials to automakers, says Jeff Wrona of PBHG Technology & Communications fund. Its sales should climb from $34 million in 1999 to $86 million this year. Whether you favor Commerce One or Ariba depends on whether you think buyers or sellers have the most to gain from B2B e-commerce. "You start splitting hairs when discussing differences," says Chin.