On August 18th, HP announced its acquisition of Autonomy. While this was huge news in the IT industry both because of the size of the acquisition and because of the strategy change it was part of at HP, the acquisition was even bigger news in the e-discovery market. The reason for this is not because the play somehow alters the overall e-discovery market dynamics – it actually doesn’t; as a company Autonomy was already 10 times larger than any other player in the space so the fact that they are now part of HP is basically irrelevant. What was really significant about this acquisition was that before it occurred, HP was the last large and viable player standing on the periphery of the e-discovery M&A landscape.
To fully understand this point let’s take a few minutes to look at the e-discovery M&A market and how the major transactions of the last 5 years appear to have fared. During e-discovery’s relatively short history, the following large IT companies have all made acquisitions in this market:
- Iron Mountain – In 2007 Iron Mountain was the first significant player to acquire its way into the e-discovery market when they purchased Stratify. That acquisition was clearly a definitive failure because just a few months ago Iron Mountain sold Stratify as well as several other businesses to Autonomy.
- Seagate – In 2007 Seagate acquired Metalinks. I am definitely not an expert on Seagate but I can tell you that literally no one in the e-discovery market has heard from Metalinks since the acquisition.
- EMC – In 2009 EMC acquired Kazeon. While EMC definitely made a more meaningful push into the space than Seagate did, the end result appears largely to have been the same. I personally haven’t seen EMC in an e-discovery deal since 2009 and the word on the street seems to support my observations.
- Symantec – In 2011 Symantec acquired Clearwell (too early to comment, but Clearwell already seems quieter).
- HP – In 2011 HP acquired Autonomy (too early to comment and not a pure e-discovery play).
There are two things I would quickly point out about these transactions. The first is that they were all done by storage companies looking to leverage e-discovery across their storage/archiving product portfolios. Symantec is second only to EMC in storage software market share. I’ll leave the long term strategy of HP to Leo Apotheker, but they obviously have a massive shift in play going on, which is about much more than simply e-discovery. The second point is, for all intents and purposes the list is complete – meaning it contains all the companies you would expect to enter into the e-discovery acquisition arena.
It is true that if I wanted to get enthusiastic I could say the list is missing Oracle, CA, Microsoft and IBM. I would then point to IBM’s acquisition of the litigation hold provider PSS Systems as an indicator of their interest in the space. If I really wanted to be an idealist I would start talking about all the legal service providers – like FTI and Kroll – that are always potential acquirers. And these observations are in fact totally true, but honestly they are also completely optimistic. I haven’t seen Oracle, CA, Microsoft, or IBM meaningfully sniffing around this market and their businesses are not really as tangential as those companies that have already made acquisitions. In addition while service providers may make acquisitions they will do so at far lower multiples than those at which software companies typically perform M&A.
If I am correct and it is overly optimistic to think that Oracle, CA, Microsoft, or IBM will acquire in this space anytime soon, then that radically changes the landscape for those of us left. It is like a game of musical chairs when everyone realizes that all the chairs are taken and there is that brief moment of confusion and panic as people try to decide how to handle what has just happened.
So what is likely to happen next? From my perspective there will be three outcomes directly related to this turning point:
- I don’t see VC’s backing any new players. The market is too mature at this point and the remaining viable exits are too few to gamble big money on.
- Players who are too small to viably go public will be forced to shift their business models to focus more on cash flow than growth, attempting to combine with each other in the hopes of achieving scale – or simply selling at far reduced multiples.
- For the few companies that are of significant size (which is only AccessData, Recommind and kCura as best as I can tell) I expect them to begin the process of attempting to go public.
Of course I will keep my fingers crossed that I am totally wrong and that there are still a few visionaries left out there willing to drop down a chair, turn on the music and keep the game going…