Monday, September 22, 2008

The Convergence of OEM and ECM - Largest Independent ECM Vendor Open Text to Buy Captaris for $131M

Open Text has acquired Captaris a leading provider of software products that automate document-centric processes for $131M. Under the terms of the agreement, Captaris shareholders will receive cash consideration of approximately US $131 million in total, or $4.80 per share in exchange for their Captaris stock. The deal, which is expected to close by the end of the year, is another example of the on-going consolidation in the office and enterprise solutions markets.

 Captaris is a provider of computer products that automate document-centric business processes. With a comprehensive suite of software, hardware and services, they help organizations gain control over many processes that include the need to integrate documents more securely and efficiently. They develop products and services for document capture, intelligent document recognition and classification, routing, workflow, document management and document delivery. Captaris has a large installed base of customers that includes many Fortune 100 companies, the majority of the Global 2000 companies, and thousands of mid-sized enterprises.  The customers use Captaris products to reduce costs, comply with regulations, increase the performance and productivity of critical business processes, and leverage their IT system investments.

 Captaris products and services include the following categories:

  • Intelligent document capture, recognition, classification, and routing solutions that create “smart documents” and automatically deliver them to meet the collaboration and compliance needs of today’s business environment.
  •  Business process management software that automates both functional and vertical business processes, helps organizations maintain accountability, supports compliance initiatives and increases productivity; and
  • Document management software products that target business needs for reducing paper by storing and accessing digital content throughout the information lifecycle and supporting compliance and collaboration within organizations.

 This acquisition fills out the ‘Capture’ gap within Open Text’s ECM portfolio of offerings while also adding $95M to its top line putting them on track to become a billion dollar firm as the only independent ECM vendor.  Today about 80% of the enterprise information consists of unstructured data stored in hard copy documents and other digital formats.  Captaris’ technology will strengthen Open Text’s ECM solutions by providing another on-ramp for integrating content into our ECM solutions.  Captaris’ software products let customers convert paper documents to digital content, and manage associated processes.  The acquisition will also expand Open Text’s partnership offerings by creating tighter integration with Open Text's invoice management solutions that work with SAP and Oracle.  Considering Open Text’s tighter integration with SAP and its fruitful channel partnership particularly in Europe, this move further cements the company’s strategic relationship with SAP.  Captaris also offers business information and delivery solutions built on the Microsoft .NET framework which integrate process and automate the flow of content.  Following SharePoint’s introduction, Microsoft started commoditizing the lower end of the EMC spectrum with basic content services capabilities now embedded in the MS Office bundle for the enterprise clients that need only entry-level functions, such as version control, check in/out, access control and audit trail.  Open Text’s acquisition will further help enterprise clients improve their ROI on SharePoint while also providing tighter integration into Open Text platform Livelink ECM 10.  

From a solutions perspective, Open Text will be able to further monetize its compliance and litigation solutions leveraging Captaris’ OEM relationships providing on-ramps (e.g. smart MFPs capturing and distributing files at a corporate legal department in preparation for discovery) to capture and digitize hard copy enterprise documents.  Traditionally, compliance and risk oriented initiatives within organizations have been haphazard and fragmented. The unifying element that compounds the challenges organizations face with compliance, risk, and governance activities is the ever-exploding volume of enterprise content. Gartner expects the worldwide ECM software market will reach $4.2 billion in 2010. In 2007, worldwide ECM revenue is projected to total $2.9 billion, a 12.8 percent increase from 2006. More than half of the growth is driven by compliance and litigation related corporate investments.

 This acquisition will likely displace some of Captaris’ competitors forcing them to be acquired by larger competitors; In the fax server and document delivery segment, some of their competitors are Esker, Biscom, Kofax/TOPCALL, Fenestrae, and GFI Software.  Captaris already had the leading market share worldwide and this would further consolidate the market.  In the capture segment where they acquired Oce’s Document technologies business, they face several more formidable competitors; In the optical character recognition (OCR) market, they go up against Nuance’s Scansoft division, ABBYY and Iris. In the intelligent document recognition (IDR) market, they compete against EMC/Captiva, Dicom/Kofax, and ReadSoft among others; these vendors provide packaged solutions. In comparison, Open Text’s acquisition will help them better compete in this segment thanks to Open Text’s size, reach and customer installed base particularly in the Global 1000 segment.   Captaris’ document management solutions compete primarily in the mid-market and MFP dealer channels based on functionality and price.  Their main competitors are Hyland Software (based on the OnBase product), EMC Corporation / Documentum (based on the ApplicationXtender product), Westbrook Technologies (based on the Fortis product) and Compulink Business Systems (based on the Laserfiche product). We would expect to see further consolidation among these vendors as the ECM segment is getting consolidated itself.

Another implication is that we will see the convergence of OEM market with Enterprise Content Management.  Creating and maintaining OEM and strategic relationships for vendors such as Captaris is important to their success because these relationships enable them to market and distribute our products to a larger customer base than we could otherwise reach through our direct marketing efforts. Captaris’ relationship with vendors like Xerox, HP and other has helped them transform their multi-function products into intelligent office utility as an on-ramp to client’s document-intensive business processes.

 Open Text, thanks to its healthy balance sheet and cash generation capacity should continue to make strategic acquisitions to fill in gaps within its Livelink platform and to increase its installed base of customers and channel relationships. This move will further boost Open Text’s strategic value to the major consolidators in the ECM.  SAP and Oracle would be the two top candidates to acquire Open Text within the next 12-18 months.

1 comment:

BigMac said...

As to OCR competitors... most of those you list use Captaris Document Technologies' "RecoStar" engine as a foundation. If Captaris starts to mess with those royalty structures, it's going to get interesting, indeed.