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Monday, November 26, 2007

Postscript To The Iron Mountain-Stratify Deal

In the past couple of weeks, I have spoken to several people close to the Iron Mountain-Stratify deal, and it has been interesting to hear their different perspectives.

The one thing they all agree on is that, as a business, Stratify was doing well. From a combination of news reports, Iron Mountain’s statements, and my various sources, I learned that Stratify’s revenue grew from $24M in 2006 to $30M this year. That is below the $40M+ it forecast earlier in the year, but healthy growth all the same. Gross margins are an impressive 60-70%, which is great for a services business, and profit margins are 20-30%. The vast majority of its 110 customers are law firms but – I know from personal experience – it has had some success in the enterprise. Net net: Stratify was in pretty good shape.

But at that point, opinions begin to differ. I heard 2 competing interpretations of the acquisition:

1. It’s a good deal for all sides

This was my initial reaction and the topic of a blog post written on the day the deal was announced. It has since been echoed in the press and by the analyst community. The story goes something like this:

Everyone wins from this deal. Once you factor in assumed stock options and retention packages along with the $158M that goes to existing shareholders, Stratify gets a multiple of 5.5X current year revenue, which is high for a services business. It also gets to operate autonomously under the Iron Mountain umbrella, with (supposedly) minimal interference from back East. For its part, Iron Mountain gets a growing, profitable business which it can grow more quickly, by selling into its installed base, and more profitably, by leveraging its existing sales force.

2. Stratify sold too cheap, too early

Why sell a profitable, growing business, especially one in a rapidly growing market like e-discovery? Given its growth trajectory, won’t an independent Stratify be much more valuable in 2-4 years time than it is today? Why repeat the mistake made by shareholders of VMWare and MySpace, who sold billions in value for a few hundred million?

The answer, say people who hold this view, has nothing to do with Stratify’s business and everything to do with its shareholders. On the one side, Mobius, the venture capital firm which owned 70% of the company, wanted out – the firm is winding down, some of its partners are raising a new fund and wanted an outcome to boost their VC track records. On the other side, the founder was tired after 8 years slugging it out and wanted a payoff. The business is not suitable for a financial buyer (sales are too lumpy and unpredictable, making it hard to take on large amounts of debt), so an acquisition was the only option.

With the benefit of more time to digest the deal, I have come to feel that both views are in fact correct. It’s a good deal for all sides, even though there’s a strong case that Stratify sold too early. Regardless, there’s still a lot for the Stratify team to feel good about – and, following the MySpace example, they can always go back and ask for a pay rise.

5 comments:

Ramana said...

Aaref,

I am the founder of Stratify you allude to in your post - Ramana Venkata - and its President & CEO. We never met, and frankly I am curious to see if you would post my reply on your blog.

You clearly saw one version of our old financials (our revenues and margins are under-reported in your post :-) ), and you wrote a post mixing outdated facts with your or your "sources"' conjectures.

First and foremost, I am not "tired after 8 years of slugging it out", nor was I looking for a payoff. If I were tired, I wouldn't have signed up to continue to run Stratify as an independent business unit of Iron Mountain. I fully intend to do that, and grow our current revenues many fold leveraging the very synergies you talked about in your first post. All of my team joins me in retaining this passion for our business, and is looking forward to accomplishing this objective inside of Iron Mountain.

Also, Mobius was not looking for a way out - they were absolutely one of the most supportive, enabling and value-adding VCs any Silicon Valley entrepreneur could wish for. I should know. I had them on my board for many years. They left this decision to the company's management team and were willing to back us either way.

Finally, I can tell you there were also a bunch of financial buyers desperate to take over the company if we let them - as long as the management team stayed with the company. Our "lumpy" sales notwithstanding.

We did the deal with Iron Mountain because it was *great* for everyone. My investors made big money, my employees made very good money, we are going into a great environment, and there is plenty of upside still to come for all of us.

So... go with your initial reaction and don't listen to the idiots out there who, unable to actually accomplish anything of value themselves, make a sport of casting aspersions upon the motives of those who do.

Cheers,
Ramana

Aaref said...

Ramana,

Thanks for your response. I am happy to post all comments (even from people I have not met :-), so long as the comments are not ad hominem attacks or use inappropriate language.

Just so you know, my post was based on 3 credible, independent sources, all of whom were in a position to speak knowledgeably about the company and the transaction. I combined that with data from public statements made by Iron Mountain’s CFO and tried to be clear in my post where I was offering my own thoughts (e.g., the final paragraph).

That said, I welcome your input. It’s good to hear that you, and the team, are so charged up about joining Iron Mountain and I hope it works out as you expect.

Best,
Aaref

Steve Jreige said...
This comment has been removed by the author.
Steve Jreige said...

Aaref,

Do you think the preexisting relationship between Iron Mountain and Stratify (here)
gave Iron Mountain additional leverage and therefore contributed to the view point that Stratify sold too soon/for too little? Any idea what sort of discount this relationship may have afforded Iron Mountain (if any)?

--Steve

Aaref Hilaly said...

Hi Steve,

That's a great question. In my opinion, the partnership did NOT give Iron Mountain leverage over Stratify. The reason is that Iron Mountain accounted for a relatively small share of Stratify's revenue, so it could not say: "sell to me at this low price or I will crush you". If anything, the reverse is true: the partnership gave Stratify leverage over Iron Mountain because buying Stratify is lower risk than buying anyone else since they were already working together (think of it like dating before marriage – how many people date one person and then marry a complete stranger?).

There is no definitive answer as to why Stratify sold for a respectable-but-unspectacular price –- only the two theories outlined in my blog post.

Best,
Aaref