The Second Time Around

Why Commerce One's auto-industry partnership arrangement may not be lovelier in this incarnation.

It looked like great news for Commerce One Inc. last December, when it proudly announced it was becoming a technology partner with Covisint LLC, the online auto-parts exchange formed by General Motors Corp., Ford Motor Co., and DaimlerChrysler. The procurement-software maker gave a total of 28.8 million Commerce One shares to GM and Ford in the deal–a 14 percent stake worth a total of $1.2 billion at the time. For its part, Commerce One received a 2 percent equity stake in Covisint, a share in Covisint’s revenues for 10 years, and consulting fees.

But some are questioning whether the deal is either great or new for Commerce One. While the deal has been hailed as a groundbreaking alignment with the auto giants, in reality its terms largely reworked an earlier, two-party arrangement between Commerce One and GM.

Some 13 months before, in a deal the Covisint announcement didn’t mention, GM had named Commerce One
as a partner for GM’s 1999 online parts marketplace, called TradeXchange. For that opportunity, Commerce One– then a much smaller player in the procurement field–agreed to give GM alone 28.8 million shares, which then represented about a 20 percent interest in the company. (That deal never formally closed.) So the Covisint agreement actually halves the number of Commerce One shares GM was supposed to hold, while giving the other half to Ford. Of the total shares given to GM and Ford, 50 percent will be held in escrow until 2002–or 2004, if Covisint fails to meet certain performance conditions. The stock transfer is expected to occur only after Commerce One restructures into a holding company.

To some analysts, the new deal appears far less attractive for Commerce One than the previous deal in 1999, when an up-start software firm first grabbed a chance to work with giant GM. Says analyst David Mahoney, principal at Wit Soundview, the original deal made sense because it “kick-started” the company. But that was “before industry consortiums started coming together,” he says. “Now, it’s not all that advantageous to give up such a big chunk of your company to some players so you can sell software.”

The stock market has agreed that the Covisint deal leaves something to be desired for Commerce One, as if fails to give the software firm the same big bounce it experienced with the 1999 deal. The hot and cold investor responses, in fact, illustrate clearly that big partnership deals involving equity swaps aren’t nearly the Wall Street darlings they used to be.

COLLATERAL EFFECT

From GM’s perspective, the advantages of this second deal are fairly easy to gauge. Halving its expected Commerce One interest reduces the exposure to Commerce One’s volatile shares, which shot up from around $50 to $137 after the first deal was announced (after accounting for two stock splits) and then plunged to around $35 just before the Covisint arrangement was announced. Jon Ekoniak, senior research analyst for US Bancorp Piper Jaffray, figures that GM promised the 14.4 million Commerce One shares to Ford essentially to “coerce” it into joining the Covisint partnership. “Overall, it’s a dilutive deal to [Commerce One] stockholders,” says Ekoniak. “If the deal were done today, it would not be a good deal.”

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