Why SAP’s Cash Makes a Difference to Commerce One

The CFO for the B2B company explains how his firm will use its new bankroll.
Joseph RadiganJuly 10, 2001

Peter Pervere, Commerce One’s CFO, says the high-tech industry may have been doubting the strength of the relationship between the business-to-business marketplace provider and SAP. But the $225 million SAP spent to gain a 20 percent stake at the end of June should all but erase those doubts.

The new funding should also ease some of the concerns about Commerce One’s survivability.

“SAP and Commerce One have had a long-standing relationship,” says Ken Vollmer, research director of B2B integration strategies at Giga Information Group. “It’s probably a pretty good indication that SAP believes in Commerce One’s technology, and wants to make sure it stays liquid.”

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In 1999, the B2B sector was on fire, and no company benefited from the roaring stock market more than Commerce One.

But the once high-flying company’s fortunes have soured recently. The same day SAP’s investment was announced, Commerce One said its second quarter sales would be no more than $100 million to $120 million, some $50 million less than it realized on its top line in the first quarter.

Early forecasts for the second quarter had the company grossing $160 million in sales.

Pervere blames the poor economy for most of the shortfall.

“There is absolutely no denying that we are in an economic downturn that is very fundamentally affecting technology companies,” Pervere says.

The downturn has clearly taken its toll on Commerce One. The company lost $228 million in the first quarter, and the cash on its balance sheet, as of March 31, stood at $249 million, down from $341 million at the end of 2000.

The majority of the first quarter’s red ink stemmed from $203 million in amortization costs, and Pervere says the cash burn rate is not as severe as it might appear. But he acknowledges, “Certainly adding cash to our balance sheet is very helpful.”

Beyond the immediate financial impact of SAP’s investment, there’s a longer term implication not just for the two companies but the B2B marketplace as a whole.

Giga’s Vollmer says, Commerce One has “morphed over the last two years.” The firm started out as a builder and integrator of B2B exchanges, but more recently, Vollmer explains, “It’s become obvious to companies that supply-chain optimization is a good area to focus on.”

For Commerce One, a closer relationship with SAP means a tighter integration between the supply-chain and procurement functions that are part and parcel of any online marketplace and the back-office financial applications provided by SAP.

“There is much more interest in doing heavyweight application integration,” Pervere says. “B2B hit the spotlight primarily based on doing relatively simplistic transactions over the Internet. But what the market was really looking for over the last year and a half is to fully integrate a supply chain.”

“We realized it when we went out and started working with the large auto companies,” he notes. Commerce One was an early technology provider and business partner in Covisint, the online auto parts exchange created last year by General Motors, Ford, and DaimlerChrysler.

“But we also realized that those heavyweight applications were going to take years to build,” Pervere explains.

The timeframe involved was going to be very costly for a company, that despite having enjoyed a market value well in excess of $20 billion at its peak, is still, at the end of the day, a young tech start-up.

Pervere says that the funding from SAP will naturally go partly toward sponsoring product development that will add to the integration, most of it geared toward bringing Commerce One’s products closer to SAP’s. But he also notes that there are no specific guidelines on how SAP’s investment should be spent.

Pervere also says SAP’s heightened financial interest doesn’t preclude Commerce One from working with SAP rivals like Oracle, PeopleSoft, and J.D. Edwards. In fact, although the 20 percent ownership puts SAP that much closer to acquiring Commerce One outright, there are valid reasons for the German software giant to allow the B2B specialist to keep its autonomy.

“SAP gets a lot more out of us if we are independent and entrepreneurial,” he explains. The value in supply chain integration is only going to be realized, if, for example, a manufacturer using SAP can link to a supplier who runs PeopleSoft or J.D. Edwards. Customers are likely to question Commerce One’s flexibility to provide that integration if it becomes wholly owned by SAP.

Still, there is a precedent for SAP buying outright a company it had a long-standing technology partnership with. Earlier this year, it acquired portal software developer Top Tier for $400 million.

But if Commerce One can take this latest cash infusion from SAP and turn the corner to profitability, a buyout may not be necessary.

Some previous stories about Commerce One and Covisint from CFO magazine and . . .

The Second Time Around

Can Covisint Shift into Gear?