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Tuesday, December 11, 2007

Seagate Acquires MetaLINCS For $80 million

First ZANTAZ, then Stratify, and now MetaLINCS – all within 5 months. The e-discovery space is consolidating fast!

On December 6, Seagate announced its acquisition of MetaLINCS. Financial terms were not disclosed, but my sources tell me that the price is $80 million. Given that MetaLINCS is a 50 person company with fewer than 25 customers , this is a fantastic outcome and I congratulate the MetaLINCS team. My educated guess is that in 2007 MetaLINCS will earn $5 million to $10 million in bookings, making this a healthy multiple of 8-16X. Contrast that to the 5X revenue paid by Iron Mountain for Stratify, and MetaLINCS shareholders clearly got a great deal.

That still leaves the question of why Seagate, a non-entity in e-discovery, would want to pay such a rich price. The answer, according to Seagate, is its desire to grow beyond manufacturing hard drives by having its services group provide a broad range of “solutions”, including archiving, back-up, recovery, and e-discovery. EVault, acquired last year for $185 million, is the backup and recovery part of that equation; MetaLINCS is the e-discovery component; and, say the analysts, don’t be surprised if an archiving acquisition is next.

Does Seagate’s entry into the e-discovery market make any sense? I don’t think so, and here’s why: there is a mismatch between Seagate/MetaLINCS and its target market. Seagate’s services offering will appeal most to mid-market companies which often outsource archiving, backup, and recovery. Seagate admitted as much when it announced the EVault deal. But the mid-market will be the last place to adopt e-discovery software like MetaLINCS; it is the Global 2000 who will move first, as they are the most sophisticated and in the greatest pain. For the limited amount of mid-market e-discovery business that is out there, Seagate/MetaLINCS will compete with every other service provider, from Kroll to Stratify to the hundreds of mom-and-pop shops across the country.

Net net: this acquisition is great for MetaLINCS, is small enough to be immaterial for Seagate, and will likely have no impact on the e-discovery market which will be won and lost in Global 2000 companies that are not interested in a Seagate/MetaLINCS service offering.

First ZANTAZ, then Stratify, and now MetaLINCS. It makes you wonder who will be next.

5 comments:

David Ferris said...

Hi Aarif,

Regarding valuation, I think Seagate may have got a good deal. Based on rough rule of thumb: Firm that has established itself with good technology in the early stages of an important new market, fetches between $75 million and $300 million.

Were I on the MetaLINCS end, I would have thought there are reasonable arguments for a lot more than $80M--assuming your $80M figure is correct.

More details on the argument at http://www.ferris.com/2007/12/11/terms-of-seagatemetalincs-transaction/.

BTW, thanks again for the nice nice, if rather pessimistic, book by that LA geographer. I enjoyed it a lot.

Aaref Hilaly said...

David,

There are a couple of different rules-of-thumb for valuing companies:

1. Revenue multiples: Seagate paid 8-16X current year revenue;

2. Comparable transactions: Is MetaLINCS worth 50% of Stratify or 20% of ZANTAZ?

Any way you look at it, MetaLINCS got a great price and I am sure their shareholders are very happy. Companies commanding the kind of prices you quote (e.g., $300m) would have to be a market leader, which MetaLINCS is not.

Glad you enjoyed the book, hope we cross paths again soon.

All the best,
Aaref

Michael Potters said...

I know the MetaLINCS folks well, we were retained by Ramon to place some key personnel before the acqusition. To a person they are all quite pleased with the deal.

More important though is what is this book about the LA Geographer?

I am a geography freak and Antique map collector , so this all intrigues me even more than the MetaLINCS deal.

Feel free to contact me directly to talk cartography or business.

All the best!

mp


Michael Potters
CEO/Managing Partner
The Glenmont Group
www.glenmontgroup.com
michael.potters@glenmontgroup.com

Pushkar said...

Aaref:

Talking about multiples and timing, do you think the multiples for HummingBird (2.07) and Ibis (2.91) were very low as compared to the recent activity? Do you think that these companies should have waited an additional year?

Also, I am trying to understand the Price/Sales ratios of CommonVault, Guidance, EMC and OpenText. All of them are below 4. Does that imply that these companies are undervalued? If not, why would they pay such high multiples for their acquisitions? If yes, then why do you think is Wall Street undervaluing them?

I would really appreciate your comments and thoughts.

Also, wish you a Happy New Year!!

Pushkar

Aaref Hilaly said...

Hi Pushkar,

Happy New Year to you!

The key to understanding multiples is to appreciate they are tied to growth. If a company has a low multiple, it is because it is not expected to grow very fast.

That raises the question, then, of why the market does not expect the companies you list to grow very fast? The answer is that they are not pure play e-discovery software companies. Most of Guidance's revenue comes from services or forensics; EMC and CommVault are storage companies; etc. These are slower-growing markets which command lower multiples.

Best,
Aaref