The B2B Analyst - U.S. Bancorp Piper Jaffray's Weekly B2B Newsletter, Volume 1, Number 47 -.

Business Editors & Analysts

MINNEAPOLIS--(BUSINESS WIRE)--Dec. 15, 2000

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Jon M. Ekoniak, 650-233-2278, [e-mail]

Timothy M. Klein, 612-303-5544, [e-mail]

December 15, 2000

In This Week's B2B Analyst: I. INDEX - U.S. Bancorp Piper Jaffray B2BEC Index II. Market Insight - B2B Consortia Exchanges And The FTC Are At The Forefront Of A Longstanding Relationship III. B2K - To Merge Or Not To Merge--That Is The Question IV. Weekly News V. Filings & Pricings

I. INDEX - U.S. Bancorp Piper Jaffray B2BEC Index

Close: 77.63 Past week: -5.16 (-6.2%) Past month: -34.78 (-30.94%) Since inception (7/1/99): -22.37 (-22.4%)

The Index took another downturn this week, dropping 5.2%. Matrix One (a,c), Project Software & Development (a), and SciQuest (a) posted the biggest gains of the week, finishing up 21%, 20%, and 17%, respectively. On the other side were Emerge, Click Commerce (a), i2 Technologies (a), FreeMarkets (a), and Ariba (a), declining 28%, 22%, 21%, 21%, and 20%, respectively.

II. MARKET INSIGHT - B2B Consortia Exchanges And The FTC Are At

The Forefront Of A Longstanding Relationship

When we first started writing about the Consortia of Brick-and-Mortar players (CoBAMs), our view was that they posed a potential threat to many of the independent software and service companies that were targeting various B2B processes, but that threat was a long way off due to a variety of factors. The two primary factors are antitrust issues and adoption (supplier and buyer participation). Covisint appears to have cleared the antitrust hurdle as the FTC granted its approval on September 11, 2000, which was then followed by approval from the German Bundeskartellamt on September 26, 2000. In the language of the Covisint approval the FTC left the door open to potentially change the tone of its September ruling if it feels things are headed in the wrong direction from an antitrust perspective. The FTC is still undergoing an education process regarding B2B exchanges and may likely have varying opinions on antitrust issues relating to them in the future. Going forward, it will be important to understand what the FTC's concerns are regarding B2B marketplaces.

Recently, Thomas B. Leary (one of five FTC commissioners) shared his views on antitrust in B2B marketplaces. The FTC does not view B2B marketplaces such as Covisint as the source of potential antitrust problems. It is its view that B2B exchanges and the technology used to create and operate them are simply a medium in which information is transferred (a high-tech communication hub). Antitrust concerns surround how corporations (especially those that create exchanges) can potentially use that medium to collude, exclude, or exclusively lock partners into the exchange.

Collusion is a key concern as a B2B marketplace in many cases transparently displays price and terms as products are bought and sold in auction (or another) format. Similar to public project bidding in which standard terms are that disclosed suppliers have more information than they normally would and could potentially use that information to collude. Exclusion becomes an issue if a B2B marketplace becomes the standard in the industry and not having access to it would put competition at a disadvantage. A bridge built in the 1800s by a few industry participants that becomes the only way to cross the river puts competition at a disadvantage and violates antitrust law if others are excluded from using it. Along the lines of exclusivity, antitrust law is violated if partners are walled in and forced to only deal inside the exchange. The FTC's view is that if these three antitrust violations are not imminent, it is all systems go for the B2B marketplaces.

Covisint took steps early on to address these issues and others as it was clear antitrust would be a concern. It will be important for other CoBAMs in planning to do the same. The FTC will likely not investigate every CoBAM with a fine-tooth comb as it has with Covisint, but if antitrust issues are raised by members or rival exchanges, state regulators (and potentially the FTC) are sure to take an interest until the state of the B2B marketplace matures and is better understood by regulators. Our conclusion, based on industry checks, the Covisint ruling, and FTC body language is that CoBAMs are going to exist, but will be under ongoing scrutiny, not to curb the efforts to create a more efficient marketplace, but to ensure a fair environment is established in which competition can flourish.

The impact of CoBAMs on competing B2B technology companies remains unclear at this time. Currently, most companies participating in a CoBAM-led B2B exchange (most likely powered by Commerce One [a,c]) are pursuing parallel e-business strategies with players like I2, Ariba, Oracle (a), MatrixOne, Retek (a,c), Agile Software (a), and Click Commerce. This will likely be the case for some time as most marketplaces currently have limited functionality and participation.

III. B2K - To Merge Or Not To Merge--That Is The Question

Since the beginning of the B2B revolution, companies worked frantically to become the biggest and best B2B company around. In attempting to address the broad needs of the space, most companies realize that they cannot tackle the incredible opportunity alone. To supplement their offerings, companies realize they must forge relationships in order to weather the current storm and emerge as winners. The most common ways of doing this has been through strategic partnerships and, to a lesser extent, through acquisitions.

The question remains, how, when, and why should a company journey down the path of consolidation? Many factors need to be considered in such a decision. Perhaps the most fundamental questions are, "Why this deal?" and "Why now?" Both buyer and seller must consider a myriad of strategic and financial questions before entering into a relationship. For example, is this a compelling opportunity to broaden the product offering? What will the synergies be? How will the shareholders react? What is the strategic vision? Is it a land grab? Buy versus build? How and when will accounting and budgeting be integrated?

For many, M&A is an opportunity for growth companies to consolidate their resources, minimize the costs associated with establishing a product, and add functionality, in effect increasing the company's ability to own the customer relationship. We have seen many of these relationships emerge within the B2B sector that appear to make strategic sense. For example, the recent formation of Citadon by Bidcom and Cephren represents an opportunity for these two construction companies to effectively double their customer base and tech-development capabilities, operate on a leaner base of expenses, and become a more formidable competitor in the space than either would have been as a stand-alone entity. Moreover, in January 2000, PeopleSoft acquired a CRM product through its purchase of Vantive Corporation rather than expending the resources to develop one internally.

Upon successful integration of Vantive's CRM solution and PeopleSoft's e-business application, the companies are to combine customer information, transactional data, and business intelligence.

While the deals mentioned above appear to make strategic sense, it still remains to be seen whether or not they will work in practice. As history shows, such combinations are inevitably risky. For example, large mergers since 1997 have under performed the S&P 500 by 14 percentage points. Moreover, of the top 700 deals from 1996 to 1998, 83% failed to boost shareholder value.

What determines whether deals succeed or fail? Mergers typically fail for several reasons including unrealistic views of synergies, management infighting, poor company culture compatibility, longer-than-expected integration of products, facilities and staff, loss of key employees, misplaced objectives, and fundamentally different lines of business. When one or many of these pitfalls occurs, what one acquired for a seemingly small premium at the time of purchase could in fact be far more costly than anticipated. On the other hand, potential success factors include the buyer's previous experience in executing successful acquisitions, the degree to which the companies' products and customers are complementary, the overall strength of the business, identification and retention of influential employees, and the companies' ability to make tough decisions and successfully assimilate the two organizations.

For those trying to attack a market as quickly as possible with the broadest selection of products, at first glance an acquisition strategy appears to be the most sensible route. However, in reality it is often much easier to strategize than to implement. Within the B2B sector there is a wealth of consolidation opportunity, much of which we would encourage companies to consider. Yet, given all the points made above, our final advice would be "Buyer Beware!"

We would like to thank our colleague, David Runkle, for his assistance in preparing this article.

IV. WEEKLY NEWS

-- Commerce One, Inc. and Oracle Corp. announced the finalization of an
agreement with Covisint, LLC. Commerce One is expected to provide the core
e-marketplace procurement infrastructure while Oracle is to provide Covisint
with the B2B software necessary to support and manage the company's B2B
activities. Both companies are to receive an equity position in Covisint.
Commerce One is expected to also receive a share of the e-marketplace revenue
for an anticipated 10-year term.

-- Project Software & Development Inc. (PSDI) plans to change its corporate
name to MRO Software Inc. and NASDAQ ticker symbol to MROI.

-- eBreviate won a deal to provide strategic sourcing technology to Transora,
after having won a $13.8 million deal with the U.S. Navy (NAVSUP) earlier in
the week. eBreviate provides sophisticated e-sourcing technology, including
negotiation and multiparameter auction functionality.

-- CheMatch.com announced that it has acquired The Energy Group (TEG), another
example of a "click" vertical marketplace acquiring a "brick" presence.
CheMatch.com is a leading Internet-based marketplace and information resource
for buying and selling bulk commodity chemicals, plastics, and fuel products.
TEG is a leading petrochemical feedstock and gasoline components brokerage
firm.

-- Click Commerce and Commerce One signed a memorandum of understanding to form
an alliance allowing Click Commerce's customers to sell products on Commerce
One's Internet marketplace.

-- Telelogic AB announced the completion of its acquisition of Continuus
Software Corporation (a,c). Continuus ceased to be listed on NASDAQ as of the
close of business on Friday, December 8, 2000. Telelogic AB is traded on the
Stockholm Stock Exchange under TLOG.

V. FILINGS & PRICINGS

There were no major B2B filings or pricings during the past week.

Some or all of the following hedges may pertain: (a)U.S. Bancorp Piper Jaffray Inc. makes a market in the company's securities. (b)A U.S. Bancorp Piper Jaffray Inc. officer, director, or other employee is a director and/or officer of the company. (c)Within the past three years, U.S. Bancorp Piper Jaffray Inc. was managing underwriter of an offering of, or dealer manager of a tender offer for, the company's securities or securities of an affiliate. Additional information is available upon request.

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This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this publication may not be eligible for solicitation in the states in which the client resides. U.S. Bancorp and its affiliated companies, and their respective officers or employees, or members of their families, may own the securities mentioned and may purchase or sell those securities in the open market or otherwise. In the United Kingdom, this report may only be distributed or passed on to persons of the kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended by the Financial Services Act 1986 (Investment Advertisements) (exemptions) Order 1997). Securities products and services offered through U.S. Bancorp Piper Jaffray Inc., member of SIPC and NYSE, Inc., a subsidiary of U.S. Bancorp.

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