Friday, January 30, 2009

Autonomy buys Interwoven for $775m; Who will be Next? Vignette or Open Text or Autonomy itself?

Enterprise Information/Content Management (ECM/EIM) Industry Consolidates at Full Speed

British enterprise search and information management company Autonomy has bought US-based content management firm Interwoven for $775m. The combined entity will have $713M in sales operating with 35% margin.

Interwoven is not coming cheap: it is costing Autonomy a 36% premium on Interwoven's average share price in the preceding 30 days. But Interwoven is doing well – they are growing and profitable, with high-quality products and a good customer base. According to Gartner and Forrester, they are a pioneer and market leader in the web content management space that has benefited from corporate migration to Web 2.0. They currently power over 100,000 corporate web sites, intranets and extranets globally.

 Autonomy is paying for Interwoven with a mixture of stock and cash. It is placing 21.6 million new shares, or 10% of its share capital, with institutional investors. The shares rose 6.58 per cent to £11.01 when the news was announced. The deal is also being funded with a new revolving credit facility with Barclays Bank and from the two companies' cash reserves. Autonomy has said that after the deal closes it will have "at least" $75m cash left in the bank.

At the analyst briefing, Autonomy said the combined entity will have a customer base of over 20,000, giving it scale as well as cross-selling opportunities. Autonomy was particularly attracted by Interwoven's strength in the legal sector thanks to their acquisition of iManage -- Autonomy has been making way with products of its own aimed at compliance with legal and regulatory obligations.  They have over 1200 of the top law firms and 11 of top 30 accounting firms as customers.  E-discovery is a sizeable market projected to grow at double-digits in the current corporate litigation-rich environment. In addition, Autonomy expects to be able to save around $40m per annum in the first year as a result of these synergies.

As far as the strategic rationale goes, Autonomy accelerates the ongoing consolidation in the enterprise information management industry creating a $0.7B independent competitor to Open Text, another vendor that has grown through acquisitions aiming to be acquired by a larger infrastructure provider. Secondly, the deal combines Autonomy’s core technology expertise with Interwoven’s vertical industry expertise and marketing presence. Autonomy, a leader in context-based desktop search company, believes that more traditional content management systems are not good at understanding the meaning or context of the content, while Autonomy's IDOL technology is designed to do just that;  Interwoven’s products know what the customer interactions are, and Autonomy’s IDOL will allow them to know what they mean.  Thirdly, the combined client base will provide scale and attractive cross-selling/up-selling opportunities into 4,600 customers globally. Finally, thanks to both companies track record at successfully and rapidly integrating acquisition, this should be highly accretive in the next two quarters.

Undoubtedly, this acquisition could accelerate the pace of acquisitions in the space; We could see Open Text making a bid at Vignette that has failed to consistent deliver earnings unlike Autonomy and Open Text.  They are two largest independent enterprise information vendors rushing to reach the magic $1B mark through flawless execution of both organic and inorganic growth despite a recession economy. After the Interwoven announcement, Vignette as a takeover target now has no choice but to look for a buyer to survive.  What we are seeing in the industry right now, is the rapid commoditization of the low-end of the market by Microsoft moving up with SharePoint, which leaves Open Text and Autonomy about 18 months before the next Share Point release which is typically bundled in the enterprise license of MS Office.  In the high-end of the market we have the usual suspects namely, IBM/FileNet, EMC/Documentum, and Oracle/Stellent, each of which already cherry-picked the best Enterprise Content Management (ECM) vendors.  Now we could see more transactions from SAP, HP or even Oracle.  Given its long-standing OEM relationship with Open Text, SAP should emerge as a likely acquirer should any other vendor approach them in the near future.  Having completed the Business Objects acquisition, SAP CEO publicly announced that an ECM acquisition would likely follow.  However, the wild card will always be HP; Under the leadership of Mark Hurd, HP has successfully made sizeable services and software acquisitions to drive sustainable growth.

These are very interesting times indeed.  Keep following the latest on my blog….more analysis is on the way on Vignette and Open Text and what they could do next.

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