One-Time Tech Bust Finds New Life

05/11/2010 1:00 pm EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, says Ariba’s "spend management" strategy is a global success.

In many ways, Ariba (Nasdaq: ARBA) seems like a poster child for the tech bubble of the late 1990s. The business came out of a venture capital firm looking for a new technology concept to bring to the IPO-crazy stock market of the time.

Their idea was to help companies streamline their purchasing decisions by more efficiently connecting them with suppliers. Thus was born the “spend management” industry.  

Even before the company had a final product, they were able to forge licensing agreements with the likes of Cisco Systems (Nasdaq: CSCO) and Advanced Micro Devices (NYSE: AMD). When the IPO was finally consummated in 1999, the stock was priced at $24, opened the day at $61 and closed at $90! By the end of 1999, the stock had hit $259.   

The initial strategy was to grow both organically and by acquisition. However, the company was pushing to grow too fast, and accounting irregularities surfaced after 2000, exacerbating the problems related to the broader tech decline. In 2003, Ariba was forced to make substantial restatements of operating results going back almost to the day of its IPO. The stock collapsed and underwent a 1-for-6 reverse split in 2004.  

For all of its difficulties, Ariba differed in two crucial respects from most of the other poster children from the tech bubble: It created a product with real value, and it is still around today. The company currently has more than 1,000 corporate customers, including more than half of the Fortune 500, and is the leading supplier of spend management solutions. Moreover, with 40 offices in 21 countries, Ariba’s reach is truly global.  

While the recent economic turmoil did not help Ariba’s short-term results, they bode well for the company’s longer-term prospects. As businesses of all types continue to seek cost reductions and efficiency improvements, demand for spend management products should increase significantly.  

Management looks quite competent, having proven itself over the course of a tumultuous decade, negotiating both the fallout of significant accounting issues and the troubled global economy. It has cut costs while still growing sales, with the result that Ariba was profitable in 2009 for the first time in its history. And the recently announced results for its quarter ended March 31 showed continued improvement.  

The balance sheet is strong. With no debt, positive cash flow, and $222 million in cash and investments, Ariba should have no trouble funding future growth. Many investors probably still think of Ariba as one of those crazy tech companies of the late 1990s that flamed out like a shooting star.

But in reality it is now a solid company with a dominant position in a growing market, a good management team and a strong balance sheet. We recommend buying Ariba up to $22. (Ariba closed Monday at $13.40—Editor.)

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