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Wednesday, October 31, 2007

Iron Mountain Moves Into E-Discovery, Acquiring Stratify

After months of rumors that Iron Mountain was going to do “something”, the grandfather of records management announced today that it is acquiring Stratify for $158 million in cash. My best guess is that Stratify will do about $30 million in bookings this year, making the purchase price about 5X revenue – a pretty good multiple for a services business with gross margins of 50-60%.

Iron Mountain’s motivations are not hard to guess. It stores oodles of electronic data for large corporate clients. Whenever those clients have a case, they retrieve a subset of that data and send it off to a service provider like Stratify for processing. Through this acquisition, Iron Mountain now has a chance to up-sell its customers on Stratify and capture that service provider revenue for itself. This will be compelling to customers if (and this is a big “if”) Iron Mountain is able to integrate Stratify with its archive, making it easy to pass data from one to the other. As one Iron Mountain customer at a major Wall Street bank told me, “Iron Mountain is great about getting data in; it’s awful when you want to get data out.” If Stratify can help solve that problem, even if it’s only in the case of litigation, then every Iron Mountain customer will cheer.

Given the obvious potential of this deal to Iron Mountain, the question is less about why they would want to acquire a service provider in general, and more about why Stratify in particular. E-discovery services is a large, fragmented market, and there is no shortage of players to choose from. That said, I think they found Stratify a compelling target for 3 reasons:

  • Good Technology: Unlike many service providers, Stratify (or Purple Yogi, as it was originally called) started life as a product company. It went through several incarnations: starting out in 2000 to “personalize the internet” for consumers, it soon moved on to knowledge management for corporations, before finally settling on e-discovery services for law firms. To fund all this, it raised over $30 million in venture capital and invested a good chunk of that in product development. The result is a sophisticated product that goes far beyond the review platforms that most other service providers have built.
  • Right Size: Many acquirers like companies in that $20-30 million in revenue range. On the one hand, they are big enough to provide a solid platform for growth; on the other, they are small enough to be affordable. When Iron Mountain analyzed the market, it will have found the vast majority of targets either too big or too small, leaving it with only a handful of players to consider, like Stratify, Cataphora and H5.
  • Willing Seller: It is no secret that Stratify’s largest shareholder, the venture capital firm Softbank, is winding down and was looking to sell its stake in the company. That, together with the inevitable fatigue that sets in after 7 years of slugging it out, most likely made Stratify a willing seller.

So, on paper, this is a good deal for both sides. Stratify gets a decent return for many years of work; Iron Mountain gets the chance to capture more revenue from its customer base. My congratulations to the Stratify team – I have huge respect for entrepreneurs who weather the dark days, re-invent their company, and lead it to a successful outcome. I wish them well on their new adventure.

6 comments:

Pushkar said...

Aaref:

I liked your blog on the acquisition of Stratify. I am studying pricing multiples in the document management industry and I was curious on why you would think 5x would be a good Price/Sales multiple.

Also, were there other ways to estimate the $30Mil?

Also, what are some of the best ways to learn about acquisitions or acquisition targets in this industry?

I would really appreciate your response.

Thanks,

Pushkar

Aaref Hilaly said...

Pushkar,

There are 3 main reasons why I think this is a good multiple for a business like Stratify:

1. It's services, so gross margins are only 50-60% and, to grow, you need to hire people, which means you cannot grow as fast as a product company;

2. The business is transactional, not relationship based. Law firms use Stratify on a case, then don't call till the next case. So there's not a continuous revenue stream, unlike a product company which charges annual support;

3. The business is lumpy, meaning sales are unpredictable since they depend on when law firms have cases, which cannot be predicted. That means Stratify can take less debt, again reducing equity value.

On Stratify's revenue, I believe Iron Mountain -- it is a public company and its CFO would not lie. For other acquisitions, I do not have any ideas beyond Google.

Hope that helps,
Aaref

Pushkar said...

Thanks Aaref!!!!

Two more questions,

Based on your extensive knowledge of this industry (I read your bio on Clearwell's website) which would you think are the most prominent I-Banking firms representing clients in the $20-$30 Mil range in e-Discovery/Imaging?

Also, I am also looking for VC's who would have invested substantially in this area. Any idea which ones I could look at?

Again, thanks for your response.

Ted Arbuckle said...

Dear Pushkar,

I recommomend the Kenyon Group to advise you if you are considering selling your company. We are a firm that has been very active in the litigation support, legal technology, and legal staffinig space for the past 3-4 years. A couple recent transactions are CaseLogistix and SV Technology (LawPort). Our web site is www.kenyongroupinc.com. We are finalizing a redevelopment and upgrade to the site, which should be completed by the end of the week. Please shoot me an email if you want to discuss your situation.

Regards,
Ted Arbuckle
ted@kenyongroupinc.com

Ted Arbuckle said...

Dear Aaref,

I am also curious about the $30 million revenue number for Stratify. You say it came from the CFO. Do you have a press release or some other source for this statement. Thanks, Ted Arbuckle

Aaref Hilaly said...

Hi Ted,

I found the $30M-in-revenue number in Byte and Switch:

Stratify, a profitable privately held firm founded in 1999 and headquartered in Mountain View, Calif., is predicted by Iron Mountain to be on track for $30 million revenues this year. It has around 110 customers and 185 employees, about half of whom reside in Bangalore, India. Iron Mountain says Stratify's profit margin is now between 20 percent and 30 percent, but the new parent plans to improve on that. Earnings from Stratify, however, will be minimally accretive to Iron Mountain's earnings in the first quarter of full ownership, execs say.

Separately, PE Hub reported that Stratify "has raised just over $40 million since 1999, when it was known as Purple Yogi. This includes Series C and Series D infusions in 2000 at a post-money valuation of approximately $65 million and $113 million, respectively."

Hope that helps,
Aaref