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Thursday, July 5, 2007

Autonomy Buys ZANTAZ: True Love Or A Marriage Of Convenience?

People get married for a million different reasons. Some do it for love; some for a green card; some because their parents tell them to; and others just because it is time to settle down. So it is with corporate mergers, where many different motives come into play. When I heard about Autonomy’s acquisition of ZANTAZ for $375M on July 3, I could not help wondering what had led to their marriage.

In announcing their union, the happy couple explained that the #1 reason is to achieve “significant scale in a number of key financial areas”. A second reason is that combining the companies will lead to cost savings of $25M per year. In other words, according to the companies, it is a love marriage, in a similar vein to Veritas’ acquisition of ZANTAZ’s main competitor, KVS, in 2004. In that case, Veritas paid 10x trailing revenue for an industry leading product to which it then added tremendous value by building out distribution in the US.

In this case though, the evidence does not support a love story. ZANTAZ is already doing $100M in revenue, so adding Autonomy’s $260M in annual sales does not exactly propel it into a different league. If cost savings are the motivation, then why run ZANTAZ as a separate subsidiary instead of integrating it with Autonomy more closely? Two other things also arouse suspicion: timing and price. On timing, I have to ask: who makes a major announcement on July 3 when half the country is on holiday and the other half can only think about fireworks and hot dogs? Either Autonomy/ZANTAZ’s PR departments are incompetent, or they are trying to downplay the whole thing. Second, on price, why is it so low? ZANTAZ sold itself for 3.75X trailing revenue, a fraction of KVS’ multiple and less than the 4-6X revenue that CommVault and Guidance trade at today.

The story makes more sense as a marriage of convenience. Consider what buyer and seller each get from the deal:

  • Autonomy: It is easy to understand why Autonomy is a willing buyer. As my friend Dave Kellogg likes to say, their core business of enterprise search is caught between a “rock” (known as Google Enterprise Search) and a “hard place” (custom apps leveraging open source components like Lucene and MySQL). Yes, Autonomy continues to have the occasional good quarter, but long term their revenue will likely trend down. In that situation, management only has a couple of options. One is to bulk up, for example, by giving up 11% of the company to increase its revenue by 38%, which is what the ZANTAZ deal does. A second option is to diversify into new, growth markets where Google is unlikely to follow, like email archiving and e-discovery. Again, ZANTAZ fits the bill.
  • ZANTAZ: In many ways, ZANTAZ is a remarkable company. Having spoken to some of its early investors, management team, and employees, I have huge respect for the way that they weathered the technology downturn early in the decade and built the company back up. The company grew rapidly on the back of big deals for tape restoration into Digital Safe (hosted archive). When ZANTAZ saw the on-site archiving market grow, it added EAS via a smart acquisition. The problem is, having done all that, shareholders had no way of realizing a return. The public market is not interested in the low-margin hosting business that provides the bulk of ZANTAZ’s revenue; for larger companies who want to acquire an archiving product, there are many cheaper, less complicated options. Enter Autonomy who, if nothing else, can provide ZANTAZ’s patient shareholders with liquidity.

Missing from this analysis is any mention of the value Autonomy will add to ZANTAZ’s business, mainly because I cannot think of any. Best case, it leaves ZANTAZ alone, as EMC wisely did with VMWare; worst case, it merges Aungate and the IDOL platform with ZANTAZ and they spend the next few months debating how to reconcile the product roadmaps.

None of this is to say that the marriage will not be successful. As anyone who has seen When Harry Met Sally can tell you, there is no single formula for a successful marriage. I, for one, certainly wish the happy couple well.

2 comments:

messaging said...

Great Blog and I like the marriage theme.

You raise great points. My take on the announcement is very similar. Announce the price when no one is looking because it wasn't a great deal.

Zantaz growth has been declining of late especially in their two focus areas, hosted archivng software and E-Discovery. In both cases Zantaz was not keeping pace with the market.

To keep with the marriage theme. Sometimes it is easier to find a date at last call before the bar closes. It may not be the ideal partner but at least your not competing for enterprise search revenue alone. ;)

Sean R said...

Great Blog and I like the marriage theme.

You raise great points. My take on the announcement is very similar. Announce the price when no one is looking because it wasn't a great deal.

Zantaz growth has been declining of late especially in their two focus areas, hosted archivng software and E-Discovery. In both cases Zantaz was not keeping pace with the market.

To keep with the marriage theme. Sometimes it is easier to find a date at last call before the bar closes. It may not be the ideal partner but at least your not competing for enterprise search revenue alone. ;)