FreeMarkets Cancels Adexa AcquisitionFreeMarkets Cancels Adexa Acquisition

Online auctioneer FreeMarkets Inc. called off its pending acquisition of Adexa Inc. on Wednesday. FreeMarkets cited the stagnant economy and delays in gaining approval from the Securities and Exchange Commission for its decision. The company will instead take a 3% equity stake, worth approximately $6 million, in Adexa, which makes supply-chain planning applications. The companies also agreed to a reciprocal marketing and reselling deal.

By buying Adexa, a privately held company, FreeMarkets had hoped to broaden its role beyond provider of business-to-business reverse auctions, or electronic sourcing of supplies. Now the company says there's plenty of opportunity left in that market as businesses focus on IT projects that offer a quick return on investment. Online auctions typically take just weeks to set up, whereas supply-chain applications can take a year or more to implement. "We've come to see that the combined offerings between supply chain and sourcing are further out than we thought," FreeMarkets CEO Glen Meakem says. "Customers are really focused on applications that can provide value for them this year, in the short run."

Meakem, speaking on a conference call, added that dilution and integration risks associated with the merger as well as the prospect of entering a new market segment could have delayed the company from achieving its profitability goals. Meshing Adexa's traditional enterprise software licensing model with FreeMarkets' subscription and transaction-fee model may have also posed an obstacle.

FreeMarkets' tangled with the SEC over a warrants-for-revenue deal with auto parts supplier Visteon Corp., which delayed the commission's approval of the Adexa deal. The SEC took issue with $7.9 million in fees the company booked last year from Visteon because it issued the auto-parts supplier warrants to purchase for a nominal price shares of its stock that were worth $95.5 million at the time. The SEC said the money should be considered payment for the warrants, not revenue. FreeMarkets restated its 2000 earnings last month in response to the commission's concerns.

The aborted merger is a reminder of how fragile alliances among IT vendors are as many retrench in order to weather the sudden drop-off in IT spending this year. In a similar move, Ariba Inc. and Agile Software Corp. called off a proposed merger earlier this year. Says Tim Klein, an equities analyst at US Bancorp Piper Jaffray: "Companies are thinking, 'I can navigate these waters better by myself than with some one else. The seas are choppy; let's cut the rope.'"