September 2, 2014

Thoughts on the Guidance/CaseCentral Merger

Guidance Software recently announced the acquisition of the hosted e-discovery provider CaseCentral for $17.1 million. While I would be the first to point out that commenting on the likely success or failure of any acquisition a few days after the close of the transaction is at best unwise, I think there are a few comments that can be made with some degree of forecast success.

My first comment (and I do hate saying this) is this was a smart move for both organizations. Neither company has succeeded in capturing additional share of the e-discovery market. The disclosed CaseCentral revenues suggest that organization has not experienced meaningful growth for quite some time and from what we can tell Guidance software’s e-discovery efforts also appear to be stuck in neutral. When software companies fail to achieve a leadership position in their relevant markets there are really only two options that can turn things around.  The first is to bring in new blood, identify a new direction, and engage in a revamp of the product lines. This is extremely time consuming, very expensive, and really difficult.  Given the profile of Guidance software shareholders this really isn’t a viable option. The only other practical alternative is to improve the revenue generated per customer by offering additional product and or services. In that vein this acquisition makes a ton of sense.

Guidance Software’s eDiscovery solution is, in my opinion, largely just a collection tool. Most of the customer feedback we receive is the tool is used to perform collection but the data is sent to a service provider for processing and review.  It’s basic business logic for Guidance to offer their own processing and review services. Pick a percentage, but the dollars flowing to the service providers is far more than any amount spent on software.  Trying to build a functional review platform from scratch would have taken at least two years and the market is far too mature, so acquisition was really the only realistic path forward.

On the CaseCentral side the acquisition is even more compelling. Not only did they get a solid multiple and liquidity, but their customers are likely to be better off.  Guidance Software simply has more resources to continue to develop the CaseCentral review platform.  The review space is moving so quickly I really don’t think there is room anymore for small players operating on the margins. Law firms and corporations are no longer looking for piecemeal solutions. To be competitive, solution providers must have a rich portfolio to capture and sustain e-discovery business and CaseCentral was not in a position to deliver that breadth and depth.  The acquisition really gives them a much longer lifespan than they otherwise would have had.

As with any acquisition the million dollar question is going to be about execution. Can Guidance really deliver a meaningful integration that produces a 1+1=3 type outcome? I certainly have an opinion on this subject, but it’s not appropriate to publicly speculate because, at best I can only offer an educated guess based on few facts. What I do feel comfortable saying is if Guidance is going to truly integrate these technologies and deliver a seamless solution, the technical challenge is going to be enormous. Guidance has developed its own index engine and its own database structure so as of right now the two products likely have extremely different back-ends. While the user interfaces can be merged with little effort, to truly achieve an integrated solution with consistent search results that offers a workflow to support attorney review, the products must leverage an identical index and database.  I can tell you first hand, that when done right that task is quite challenging to design and execute.

Given the size of the development chore to create an integrated solution I am not expecting Guidance to immediately achieve a meaningful assimilation. Instead they will more likely focus on a procedural integration of the CaseCenteral products wrapped in their services offerings and then try to cross sell to the market.  In either case I think it was definitely an interesting announcement and further validates AccessData’s position and product portfolio in the space.

Tim Leehealey

Tim Leehealey is Chairman and CEO of AccessData. Prior to joining AccessData he was VP of Corporate Development at Guidance Software. Prior to that he was an investment banking analyst covering the security market at Wedbush Morgan.

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