EMC’s move to acquire
Legato in July hardly took the storage industry by surprise: The
Hopkinton, Mass.-based storage systems provider had telegraphed its interest in archiving software for months before the purchase, and
analysts were also talking up the possibility.
But EMC’s bid to purchase Documentum earlier this week raised more than a few eyebrows, particularly among rivals in the enterprise content management (ECM) space such as Interwoven, Open Text and FileNet.
After all, what would a leading storage vendor want with a supplier of ECM solutions like Documentum’s, including document work flow, Web pages, records collaboration?
In short, EMC wants to back up its fixed content infrastructure foundation
with a software platform that manages unstructured data, which includes
anything from audio, video, and e-mail attachments to X-rays and other forms
of Web content that cannot be stored in databases.
Indeed, EMC claims that some 80 percent of all data is unstructured. The plan is to combine its Centera
content-addressed storage (CAS) system with the Documentum 5 ECM repository to get a complete information lifecycle management (ILM) solution.
“We already have a strong infrastructure layer for fixed content
requirements, said EMC President and CEO Joe Tucci. “Centera is the fastest growing platform in this space. With Documentum, we are now adding an
intelligence layer, which brings structure to unstructured information,
enabling our customers to put their data in the right place at the right
time, allowing managed access to data tagging, compliance assurance,
collaboration, while providing full audit and information tracking.”
As a marriage of storage and content management, ILM is being seized upon as
a necessary strategy for storage vendors such as EMC and HP. It enables a
customer to create content, such as files and manage and store them from
their date of birth until they are ready to be destroyed.
This concept hardly had the importance EMC or HP now place on it a few years
ago. But numerous accounting scandals in recent years have triggered new
laws, such as Sarbanes-Oxley, which mandate strict records compliance
guidelines. In the health industry, the new HIPPA regulations dictate that a
patient’s personal information and health history be kept on file for 20 or
so years. Much of this is in Word documents or spreadsheets, or unstructured
data.
Take those laws into account with the sprawl of e-mail
and other digitized content being created on an annual basis and the
industry has a growing challenge: Where to store and how to manage the deluge of data piling up across the enterprise.
By attempting to acquire Documentum, likely the last large piece in the
large ILM puzzle, EMC believes it has found the answer to helping
enterprises manage the data deluge. Legato will likely fill those gaps, too.
When it’s all said and done EMC’s Tucci said it will be equivalent to some
$2.2 billion in software license and software maintenance license revenues
for the last four quarters. This is paramount for EMC’s goal to reach
software revenues of 30 percent.
The goods
Documentum has more than 2,500 customers, some of which double with EMC’s
own base, and 550 channel partners. In addition to the 265 engineers EMC
stands to inherit from this purchase, Documentum’s current President and CEO
Dave DeWalt will join EMC as president of the Documentum division and
executive vice president of EMC, maintaining the company’s headquarters in
Pleasanton, Calif.
Documentum has a number of software products EMC plans to integrate with its
Legato ApplicationXtender content management software. In document
management, there is Content Server, Content Intelligence Services, and
Content Services for Applications and Workflow Manager. In records
management, EMC plans to plug gaps with Records Manager, and Records
Services for E-mail. EMC will use Content Server and Rich Media Services for
digital asset management.
EMC will employ the assets of Documentum’s acquisition of eRoom got
real-time services collaboration in conjunction with its own OnCourse
product. In the area of compliance and messaging management, Documentum’s
Document Control Manager and GXPharma will be integrated with Legato’s
EmailXtender. Lastly, for Web content management, EMC will employ Content
Exchange Services/Web Publisher products.
All of these products align with EMC’s ILM strategy to completely manage
their customers’ data flow, a method which EMC believes will help carry its
software sales to new heights, as well as give it the upper hand over rivals
such as IBM.
Analysts say
Investment firm Deutsche Bank was bullish on EMC’s move despite issuing a
hold rating the day after the announcement.
“We believe the deal makes sense from a strategic standpoint,” DB said.
“DCTM clearly fits within EMC Information Lifecycle Management concept and
will help drive EMC software revenue toward its 30% target. However, the
purchase price appears relatively rich when compared to the sales multiple
offered for Legato this past July… we believe the proposed purchase makes
strategic sense, although the purchase price appears a bit steep.”
Based on yesterday’s closing price of $14.45, EMC will be paying an
aggregate of $1.7 billion in stock, or 5.3 times Documentum’s expected 2004
revenue of $322 million. EMC did pay a 29 percent premium on Documentum by
most counts, but this doesn’t detract from the importance of the move,
according to DB.
Gartner analyst Carolyn DiCenzo said the move was hardly surprising given
EMC’s full attention to an ILM strategy, which it took public at its annual
analyst meeting in August. And while many rumblings have suggested Oracle
might have been considering acquiring an ECM concern like Documentum,
diCenzo said EMC’s competitive move was more of a strike against IBM, which
has a number of content management pieces in its five major software brands.
“IBM doesn’t have an information lifecycle management story,” DiCenzo said.
“They already have a content management story and the pieces for ILM but
it’s in their vertical stacks. EMC’s key challenge here, as it was for
Legato, is integration. If EMC can pull off an integrated solution that
takes advantage of data migration, policy-based management of content, which
is the piece they get from Documentum, they will be in good shape.”
This could potentially vault EMC over IBM in the hunt for new customers and
market share, DiCenzo told internetnews.com, noting that while IBM
has backup and recovery in Tivoli, they are weak on e-mail archiving, a key
piece of the ILM puzzle.
“IBM keeps their assets very compartmentalized, which has usually been EMC’s
way, too,” she said. “The winner will be the one who brings an integrated
solution that seamlessly links processes end-to-end, or else customer get
individuals point products. It’s always comforting to a customer to go to
one vendor for what they need. Customers are often willing to take good
enough if they can get it from one place.”
Sageza Research summed up its thoughts on the acquisition bid.
“With Documentum’s technology in hand, EMC can now put forward to its
customers significant means by which they can craft more granular filters to
all forms of content, beyond and complementary to what is stored in
relational databases,” Sageza analysts Jim Balderston and AJ Dennis wrote in
a research note. “When one considers the sheer volume of contracts, basic
records, medical files, and other such unstructured data in the enterprise,
the logic of providing the ability to manage the authenticated access,
utilization, replication, and recovery of this information in a storage
network seems obvious. As such, we believe this acquisition, along with the
Legato transaction, offers concrete proof that EMC’s strategic software
charge, to deliver significant software value add to its storage offerings,
is real and made of stuff much sturdier than most strategic marketing
communication campaigns. This acquisition tells us that EMC is pursuing a
cogent, well-considered strategic vision that could significantly
differentiate the company from most of its current competitors.”
Inside the ECM world
“Why did EMC turn to the content management space? The answer is simple,”
Tucci said on the conference call. “First, and most importantly, content
management is a perfect fit for EMC’s strategic direction of information
lifecycle management. I believe content management is becoming the single
fastest growing software segment in the enterprise.”
Statements like that are what make executives like Scott Testa salivate.
Testa, chief operating officer of midmarket ECM provider Mindbridge
Solutions, said EMC’s announcement to buy one of the largest fish in his
company’s pond caused a clamor in the space and validated an industry which
has seen its fair share of consolidation in the last few weeks.
“I’m not surprised that Documentum was acquired,” said Testa, whose
Philadelphia-based concern. “I was kind of surprised who it was that bought
them.”
But more than that, Testa said that what was widely perceived to be a high
valuation of the company is what makes the remaining players excited.
“The general consensus from the market is that EMC is overpaying for the
acquisition,” Testa said. “That is a very good sign. It certainly validates
the rest of us. Maybe it wasn’t quite as high as it would have been in the
to dot-com days but it was very, very good from our company’s perspective.
It wasn’t a fire sale.”
Like Tucci, Testa believes ECM is destined for great growth over the next
few years, perhaps multiplying from what many analysts see as a current $8
to 10 billion figure. “There is room for growth. It will get more complex
as more companies see the value of capturing and distributing data to
employees and to their stakeholders.”
Testa said EMC’s move could trigger additional consolidation in the space.
Major players such as Interwoven, File Net and Open Text might pick off one
another. As an example of companies in the space looking to build out there
wares, Documentum purchased
eRoom, while Interwoven moved to acquire iManage this past August. Both buyers succeeded in adding collaboration
capabilities to their content management platforms.
Still, there is bound to be some head scratching, Testa said. “Historically,
I think when you take any primary company that moves to acquire a software
company, it creates FUD [fear, uncertainty, doubt],” Testa said, noting that
Nortel threw the market into a tizzy when it bought Clarify in 1998.
Looking forward, it’s anyone’s guess what kind of consolidation, if any,
will take place in ECM. Documentum’s market share in content management was
6.1 percent last year, according to IDC, while the remainders include
FileNet (10.5%), Interwoven (4%), Open Text (1.8%), Stellent (2%), and
Vignette (2.8%).
Still plenty to pick from if IBM chooses to counter EMC’s move, or if Oracle
would like to jump into the ECM game. From a competitive standpoint, EMC has
clearly lobbed the ball to the other side of the court.
