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webMethods to Integrate Active Software

By Paul Commins (TMF Buster)
May 22, 2000

In a marriage of matchmakers, B2B integrator webMethods (Nasdaq: WEBM) announced today that it will acquire Active Software (Nasdaq: ASWX) in an all-stock transaction. Both companies provide software solutions that link existing corporate data systems both within an enterprise (Active Software) and among enterprises participating in a joint B2B exchange (webMethods). On the news, webMethods stock dropped as much as 20% in early trading, reducing the value of the transaction, for the moment, from $1.3 billion to roughly $1.0 billion.

"No thanks," you say? Running scared of B2B? It certainly is true that just about everybody who jumped on the pure-play B2B bandwagon earlier this year has suffered through a horrendous few months in the stock market. This chart shows that both webMethods and Active Software shares have followed the general industry trend -- as represented by Merrill Lynch Internet B2B HOLDR (AMEX: BHH) -- easily outdistancing the sharp price drop in the overall Nasdaq.

So, we're considering two relatively small, risky companies in an industry that has been hammered lately. Doesn't sound too appealing on the surface, eh? It's clear that when we (over) use the buzz-acronym B2B, we're talking about a still-emerging industry and that -- even with megatrillion-dollar transaction forecasts everywhere you turn -- no one really knows how much actual profit will eventually be generated. As more pundits are arguing that the Internet's biggest bottom-line impact may be on consumers, not corporations, the same argument is emerging for the B2B marketplace. It seems to be a given that B2B will streamline supply and distribution across the broader marketplace. But will anyone, other than Cisco Systems (Nasdaq: CSCO), actually make any money from it?

In these kinds of uncertain scenarios, it's standard procedure, these days, to go hunting for the "picks and shovels" stocks. These are the behind-the-scenes companies that provide the tools of revolution, without being heavily dependent on brand acceptance from fickle consumers. Without a lot of thought, this strategy would send these more risk-averse B2B investors to software big-shots like Oracle (Nasdaq: ORCL) and IBM (NYSE: IBM), as well as hardware giants like Cisco and Sun Microsystems (Nasdaq: SUNW) that will benefit from Internet growth of any kind. And it will nudge these same cautious investors away from e-commerce-like companies such as VerticalNet (Nasdaq: VERT) and Ventro (Nasdaq: VNTR), which are best thought of as marketplace providers and, as such, are banking on future transaction revenues -- less of a sure thing.

Looking deeper at the picks n' shovels picture, however, you stumble across today's merger partners. The forte of both companies is getting unfriendly business software systems to communicate with one another. As companies around the globe race to throw up their own internal networks, a motley field of software providers is exploding to meet this need. As a result, industries find themselves with a mishmash of computer systems, often even within a single company.

To bridge these increasingly common gaps, Active Software provides Enterprise Application Integration (EAP) solutions based upon a centralized "information broker" that sends and receives platform-independent information by way of platform-specific "Intelligent Adapters." To add a new software system to the conversation, all you need is the matching Active Software adapter.

Active Software even provides Internet connectivity via an XML adapter, so the distinction between their products (within enterprise) and webMethods' products (between enterprises) is technically inaccurate, but fair in terms of history and past focus. Here is a more in-depth description of Active Software's technology from our discussion boards.

Active Software has been around since 1996 and its customers include Motorola (NYSE: MOT) , Lucent (NYSE: LU) , and Juniper Networks (Nasdaq: JNPR). Before becoming a target for acquisition itself, Active Software spent $135 million this year to acquire three companies.

webMethods plays a similar role to that filled by Active Software, except that its XML solutions tie the necessary software systems from different companies into an industrywide B2B trading exchange. For a more technical lowdown, check out this discussion board post from self-described Fool techie TMFLinux. webMethods also counts high-tech companies such as Lucent and Juniper Networks among its clients. Perhaps most impressive, however -- in terms of big-name backing -- is a $17 million round of financing, last year, which included contributions from mega-shipper FedEx Corporation (NYSE: FDX), accounting powerhouse KPMG, international B2B provider SAP AG (NYSE: SAP), and, last but not least, Dell Computer (Nasdaq: DELL), a widely recognized visionary in using the Internet to streamline supply and distribution.

Sound compelling? Well, here's the tough part. How to value this combined venture? First, neither company has made a profit as a public company, and merger costs certainly won't accelerate progress toward this milestone, at least not in the short term. And, second, as discussed at the outset, the profit-generating potential of the B2B industry as a whole -- let alone specific, emerging players -- is still awfully fuzzy. On top of these pitfalls, throw the uncertainty associated with profits from any merged venture and you've got a whole lot of nothin' to hang on to. For the moment, an investment in this new, combined company will call for a solid understanding of the business models involved and their fit into the big picture -- the usual, for Fools. Happy hunting.

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