Ariba, Inc.

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Ariba, Inc.

807 11th Avenue
Sunnyvale, California 94089
U.S.A.
Telephone: (650) 390-1000
Fax: (650) 390-1100
Web site: http://www.ariba.com

Public Company
Incorporated: 1996
Employees: 836
Sales: $229.8 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: ARBA
NAIC: 511210 Software Publishers

Ariba, Inc. is a Sunnyvale, California company that provides software and network services to help corporations manage “spend,” defined as all nonpayroll expenses associated with the running of a business. Ariba’s suite of spend management software applications are accessed by customers via the Internet, offering them real-time data. These applications can then be used in conjunction with the Ariba Supplier Network in order to purchase goods and services. More than 34,000 suppliers worldwide are connected to the network. Ariba also offers technical support services, implementation, training, and consulting. Customers include 40 of the Fortune 100, and the company estimates that Ariba software is found on nearly four million desktops around the world.

Forming Ariba in 1996

Of the seven men who founded Ariba in 1996, Steve Krach was the most influential. He was born in Rocky River, Ohio, the son of John “Butch” Krach, who owned Litco Industries, a steel fabricator where Keith landed his first job cleaning bathrooms, then later graduated to spray painting. He went to Purdue University to study industrial engineering and at the end of his sophomore year he won a scholarship and summer job with General Motors, working in the Cadillac division in downtown Detroit. It proved to be a learning experience in a number of ways. He realized the importance of establishing good interpersonal relationships, a crucial factor in his first job at Cadillac serving as the night product foreman on the chassis line. According to Krach he quickly discovered that discipline was poor and that the top priorities of the 30 men who operated the line were “drugs and prostitution.” As a result, Krach told the Financial Times in October 2000, “I made friends with the biggest guy on the chassis line.” Another aspect of the plant that would directly influence the creation of Ariba was restrictive, paperwork-intensive procedures, including procurement. As Krach described it, “It was a total nightmare. Guys would pull out these thick books all the time, they could not act without a manual.” After graduating from Purdue, Krach earned an M.B.A. from Harvard University, paid for by GM. He then returned to GM, a rising star in the organization, becoming the company’s youngest vice-president at the age of 26. He now learned even more about the frustrations of procurement at a large organization: “At GM I had to fill out so much paperwork to buy a new PC and software that I would go to the store myself, pay the 35 percent retail mark-up, put it on my expense form, and then beg for forgiveness.” When he was not skirting the bureaucracy, Krach was successfully launching GM’s robotics division in 1982. In just five years he created from scratch a market leader generating annual sales of $200 million.

Krach’s involvement in robotics brought him into contact with California’s Silicon Valley, where he ultimately concluded that his future resided. In 1987 he decided to leave GM, teaming up with a Harvard friend and some IBM research scientists to found a start-up company to develop computer-aided design software for mechanical engineers. The business was named Rasna Corp., and over the next nine years Krach served as the chief operating officer, playing an instrumental role in the company’s rapid rise. In 1995 Parametric Technology Corp. bought Rasna for $200 million, creating 31 Rasna millionaires. For his part, Krach walked away with $10 million at just 40 years of age.

Although rich enough to retire, Krach looked for a new business opportunity. He could have easily secured financing for a new venture or taken a well-paying CEO position at an existing start-up. Instead in early 1996 he became a $150,000-a-year “entrepreneur in residence” for Benchmark Capital, a venture capital (VC) firm. He was brought in by Benchmark partner Bob Kagle, who had met Krach when both men worked for GM. They had kept in contact by meeting for breakfast a few times each year. Fortune summarized Krach’s new position: “From an office at Benchmark’s digs on Sand Hill Road, a strip of land in Menlo Park, Calif., so crowded with moneymen that it is to Silicon Valley what Wall Street once was to the robber barons, Krach would spend his days playing venture capitalist—meeting with industry leaders and other VCs, attending Benchmark’s Monday-morning partners’ meetings, listening to pitches from eager entrepreneurs looking for funding, and generally ruminating on the future of technology. Eventually, if he felt like it, he could form his own company and Benchmark would fund it.” Moreover, Krach was under no obligation to Benchmark and could strike a financing deal with another VC firm. But for Benchmark it was a risk worth taking. Fortune explained that funding an entrepreneur in residence was “hardly some kind of VC-subsidized welfare. Venture firms often get better returns from companies created by EIRs than they get by buying equity in existing startups.”

Although promised plenty of time to decide on a new venture, Krach, soon after joining the Benchmark program, almost became involved in what Kagle called “one of those hot, new sexy Internet things.” Kagle talked him out of the project, and Krach continued to attend the Monday morning partners meetings, schmoozed at the Friday night beer bashes, and took part in a plethora of breakfast and luncheon meetings at the trendiest eateries Silicon Valley had to offer. After three months of the EIR grind, he decided to team up with a new Benchmark entrepreneur in residence, Paul Hegarty, a close associate of Apple Computer’s Steve Jobs and former vice-president of engineering at Jobs’s Next Software Inc., which later became part of Apple.

Krach and Hegarty brainstormed and came up with the idea of automating the purchase of common supplies and services, the attraction of which Krach knew from his days at GM. Krach brought in some former Rasna executives to found the business: Rob DeSantis, who became the head of sales at Ariba; Edward Kinsey, who became CFO; and Paul Tuow, who was put in charge of business development. They soon learned, however, that others were pursuing a similar idea. John Mumford, the cofounder and chairman of what would become Office Depot and managing partner of the Woodside, California, VC firm of Crosspoint Venture Partners was also interested in automating the purchasing process for companies and had already enlisted the support of two Crosspoint entrepreneurs in residence: Bobby Lent, a former executive at Inmac, a computer accessory and supplies company; and Boris Putañee, a veteran from the Internet Shopping Network. Mumford’s group was in need of a leader and when he learned about the venture taking shape at Benchmark he contacted Krach, on whom he had received a glowing report. Krach and the Crosspoint EIRs hit it off and they agreed to join forces. Lent became vice-president of strategy, and Putanec the head of development.

In September 1996 the four EIRs and three former Rasna executives incorporated Ariba, the name drawn from the Spanish word for “up,” “arriba.” (The first idea for a name was ProcureSoft, but the founders soon changed their minds.) Krach became president and CEO of the enterprise. In the beginning the strategy was to focus on the buyers in the procurement process, in the belief that the suppliers would quickly come on board in an effort to follow the money. The first round of funding was completed later in the month. Benchmark paid $3 million to acquire a 19 percent stake in the business and Crosspoint invested $2.5 million for a 16 percent share. Because of the difficulty in finding suitable real estate in the area, the company’s dozen employees worked out of four Benchmark offices for the first three months. The first blueprint of the product architecture was done in crayon on a paper tablecloth during a lunch at Quadrus Café in Menlo Park. In these early months the company operated in what Krach called stealth mode, keeping a low profile while it met with some prospective customers, 60 Fortune 500 companies, asking them what would be the ideal solution to their cumbersome, paper-based procurement process. Krach told Upside in a 2001 interview, “The answer was: ‘It would have a walk-up user interface. It could parametric ally change business models. It could integrate to our financial systems. It would hook right up to the supplies. It would run on this new thing called the Internet.’ ”

Company Perspectives

Ariba offers a powerful suite of solutions to help companies manage “spend” so that expenses fall faster than revenues in down times, and grow more slowly than revenues in up time. Ariba Spend Management Solutions significantly improves the bottom line results of a business.

After three months Ariba had a prototype product and DeSantis began to approach major corporations, his sales pitch bolstered by research from Killen Associates in Palo Alto, which maintained that a 5 percent decrease in the cost of procurements could result in as much as a 20 percent increase in profits. Even before the product was ready Ariba was able to sign up software licensing deals with three major customers: Cisco Systems, Advanced Micro Devices, and Octel Communications. The company shipped its first product (now known as Ariba Buyer) in May 1997. Krach quickly moved to take advantage of the company’s momentum and sought a second round of investment, which would normally remain in the realm of venture capital firms. Instead, he looked for money from investors that generally came in on later rounds, asking six times the price paid in the initial round. The gambit worked, so that Ariba’s valuation increased from $16 million to $113 million in just nine months. “In fact,” according to Fortune, “there had been so much investor interest in Ariba that the company actually turned down an even higher price, fearing the effect of an unrealistic valuation.” As it was, Ariba accepted far more money than it had planned, $13.2 million instead of $6 million. Although involved in the pedestrian business of buying supplies, Ariba was sexy enough for savvy investors.

Ariba devoted much of 1998 to recruiting top-notch personnel, while Ariba Buyer underwent several revisions within a year. Hiring was such a top priority at this stage that Krach estimated he devoted about 40 percent of his time to the task. To help retain staff and create a productive team, Ariba also began to establish its own company culture, creating a climate of what would be called “scary fun.” Employees were encouraged to take risks, and to reinforce the concept on the recreational side Ariba sponsored such activities as a rafting trip and a go-cart race at a Malibu course. Also key to staff retention was a rigorous, three-stage interview process.

In April 1999 the company began to operate a supplier network, entering the business-to-business marketplace, as Ariba began to take the next step in its strategy for becoming a leader in what Krach called the global electronic trade revolution. The endeavor was aided in its ambition by establishing strategic alliances with other companies. IBM, in addition to being a customer, agreed to resell Ariba products around the world; e-payment service arrangements were made with American Express and Bank of America; and Descartes provided logistics commerce services, an area in which the Canadian company was a leader. In June 1999 Ariba went public at $23 per share. On its first day of trading it reached $90 and for the next several months continued to climb. By the end of the year Ariba stock reached $259 per share, then split two for one. It was a stunning success for a three-year-old company that was still losing money, as evidenced by the fact that Krach’s stake in the business, which was gaudy enough when it was valued at $473 million after the first day of trading, exceeded $1.5 billion when the post-split share price proceeded to hit $150 in December 1999.

Nevertheless, Ariba was not ensured a position as one of the winners when the global electronic revolution was finally sorted out. The company faced formidable challenges from emerging e-marketplace web sites that provided a place where corporate buyers and sellers could conduct business. In order to attain crucial technology needed for online business auctions, in December 1999 Ariba agreed to pay $465 million in stock to acquire TradingDynamics, Inc.—a hefty price for the business in light of its $4 million in sales. TradingDynamics’ CEO then suggested to Krach that Ariba should consider acquiring Tradex Technologies, Inc., which could fill in another gap, software for building online communities of buyers and sellers. In March 2000 Ariba closed on a deal to buy Tradex for $1.4 billion in stock. As a result of these transactions, Ariba shipped two new products in 2000, Ariba Dynamic Trade and Ariba Marketplace. Later in 2000 Ariba made yet another significant acquisition, paying more than $600 million in stock for SupplierMarket.com, which led to the launching of Ariba Sourcing.

In the autumn of 2000 the prospects for Ariba appeared quite bright, with Krach announcing that the company planned to turn a profit by the end of the year. In September 2000 the price of Ariba stock reached $168.75, which would prove to be a high-water mark. The company did in fact post a $10 million profit in the December quarter but was about to enter a difficult period, as did many in the technology sector when a faltering economy forced corporations to retrench and cut back on investments. In just nine months Ariba stock lost 95 percent of its value. Nevertheless the company started out 2001 in growth mode, and even negotiated a $2.55 billion stock swap purchase of Agile Software, developer of collaborative e-commerce supply chain software. Within a matter of weeks, however, the deal was off, following the reporting of a severe drop in revenues at Ariba. Moreover, the excitement about online marketplaces evaporated, as companies decided to manage their spending in-house, and the company was forced to take a $1.4 billion write-down on its purchase of Tradex. With the future of the economy uncertain, Ariba took drastic cost-cutting measures, slashing its payroll and laying off 700 workers, or about a third of its staff.

In May 2001 Krach stepped down as CEO, remaining on as chairman, and promoting President and COO Larry Mueller to replace him. Mueller’s time at the helm would be brief, less than three months, but it would have long-term repercussions. According to press reports Mueller resigned suddenly, “amid internal criticism of his management style.” Krach returned to the CEO post on an interim basis while a replacement was recruited. In October 2002 CFO Robert Caleroni, a recent hire, assumed the position and set about the task of refocusing the company on its spend management capabilities. He cut another 350 jobs and instituted other cost-saving measures, such as eliminating holiday parties and free bottled water.

In early 2003 Ariba received unwelcomed publicity when it was forced to restate financial results for fiscal 2001 due to an unusual $10 million payment made to Mueller by Krach. Two weeks later the company announced that it was expanding its restatement to cover ten quarters after an internal investigation revealed that millions of dollars in items listed as company expenses should have been considered compensation for Mueller, including $1.2 million in chartered jet service. Calderoni, in the meantime, flew coach as he traveled the country trying to drum up business for the company’s original Ariba Buyer. Procurement software was staging a comeback in the marketplace, but whether the new CEO would be successful in reviving the fortunes of Ariba was very much in doubt. “I thought I was joining a small, fast-growing organization,” Calderoni told Forbes in March 2003, “I only got the ‘small.’ ”