Buyers in the second quarter of 2000 spent $974 million on 33 transactions involving B2B exchanges, services that match industry buyers and sellers in "virtual" marketplaces. In Q1, at the peak of B2B frenzy, buyers spent $10.8 billion to complete 31 deals, with most of the spending occurring in the Health & Medical sector.

High B2B Stakes Drive Deals

Huge opportunities in the B2B sector are a primary driver of deals. The Boston Consulting Group recently predicted that B2B e-commerce in the U.S. will generate $4.8 billion in 2004, if you include electronic data interchange (EDI) and all of the purchases that occur along the supply chain. In addition, a new Forrester survey of purchasing executives at 50 major companies indicated that corporate chiefs plan significant increases in the spending they channel though B2B exchanges.

High stakes are only one factor driving B2B player to do deals. Another factor is the time-consuming and difficult task of building a B2B business from ground up. To be successful, B2B exchanges need to build both chicken and egg at the same time; on the one hand they need to generate a critical mass of suppliers and on the other hand they need to build critical mass of buyers to buy from those suppliers.

In addition, it all needs to be done fast because B2B marketplaces have a "winner-take-most" dynamic - those that capture the largest share of buyers and sellers first are likely to take most - if not all - of the activity.

These factors combine to create enormous pressures for B2B companies to grab market share quickly in the sector they target. Given the imperative to seize market share, it should not be surprising to see strategists making attempts to buy, rather than build, in these markets. While most sectors are unlikely to spawn the $15 billion rollup campaigns that were seen with WebMD in the medical sector, we are certain to see some multi-billion dollar deals in many of the larger B2B niches. In fact, Forrester Research predicts that by 2003 the number of B2B exchanges will consolidate down to less than 200 from the current level of 1000.

B2B M&A Strategies
B2B mergers and acquisitions reflect several kinds of business strategies:

Roll up suppliers and customers to gain market share.
This is perhaps the most common type of B2B acquisition. In this category buyers increasingly are acquiring existing software companies that bring both enabling software and a customer base to the enterprise. For example, in Q2, Silicon Energy, an energy B2B solutions provider, bought SRC Systems Inc., a provider of energy analysis software. Not only will Silicon Energy adapt SRC's software to the web, it also will inherit SRC's 5,000 corporate customers, including such companies as IBM, Marriott Corp. and Siemens.

Merge forces with a competitor to obtain scale.
In this case, two very close B2B competitors join forces to bring more resources to bear on the marketplace. In Q2, for example Munich-based DCI.de (Database for Commerce and Industry), an IT and telecommunications exchange, acquired its direct UK rival Ace-quote.com for US$39.2 million in cash and stock. In that case DCI.de brought 100,000 business buyers, and 30,000 suppliers while Ace-quote contributed 12,000 buyers and 2,400 registered suppliers to the party.

Initiate a new B2B business.
Buyers in this case simply buy an existing B2B business to create one where there was none before or to jumpstart a moribund existing effort. One example in this category in Q2 was Ariba Inc's $558 million acquisition of SupplierMarket.com, an exchange for industrial materials. The deal not only gives Ariba a new B2B marketplace of its own, it provides it with materials-sourcing expertise that it can leverage to customers in other sectors.

Add a new vertical category.
Another common B2B strategy is to acquire a "line extension" to an existing B2B business. VerticalNet has been an active example, making 20 acquisitions in the past 18 months to add to a collection of B2B businesses that now totals 57. In one Q2 example, Belgium-based construction exchange Bricsnet acquired California-based software provider VISCOMM to add facilities management services to its offerings.

Acquire enabling infrastructure.
Again, the imperatives to move quickly in the B2B space cause many buyers to buy, rather than build the infrastructure they need to support e-marketplaces and the associated supply chain services. In some cases, the above-mentioned acquisition of a software company provides both the enabling technology and the customer base in one fell swoop.

Acquire revenue.
Many of the above transactions also offer the added benefit of buying the revenue that so often eludes early-stage B2B businesses. For example in Q2, ImageX.com, Inc. a business printing B2B exchange acquired traditional printing company Howard Press, gaining not only some printing capabilities but also some $30 million in 1999 revenue.

Given the pressures inherent in building B2B marketplaces, it is certain that will see continued mergers and acquisitions activity in this sector for many quarters to come.