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Wednesday, July 25, 2007

Cisco Leads The Way On E-Discovery 2.0

I have written before about the irony of technology companies failing to use technology to improve their own businesses. As with any rule, there is an exception – and in e-discovery, that exception is Cisco.

This will not be a surprise to anyone familiar with Cisco, since the company has a reputation for innovation that extends well beyond networking. In the 1990s, it was quick to embrace the internet, becoming a poster child for how the web can help streamline a company’s operations. Its M&A group has probably done more to power M&A in the tech sector than anyone else, since it was Cisco which disproved the old adage that technology acquisitions do not work.

So it is with e-discovery in general, and E-Discovery 2.0 in particular. The team at Cisco – Neal, Pallab, Mark, Joel and others – are among the most thoughtful, sophisticated corporate legal departments that you will find. They support the large team of inside/outside counsels who represent the interests of Cisco’s global business, and they do it in a way that saves the company money. I have seen them do more with less than companies a fraction of their size. Neal has been talking about the phenomenon that is E-Discovery 2.0 long before me; in fact, he’s one of the people who have educated me on the topic.

Companies like Cisco, Charles Schwab, Qwest, and Wells Fargo, are “canaries in the coalmine”. That’s why, when one of them says something, people listen.

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.

Monday, July 2, 2007

The Wonders Of Shrinking A Market

We love investing in technologies and business models that are able to shrink existing markets. If your company can take $5 of revenue from a competitor for every $1 you earn – let's talk!

- First Round Capital

At first glance, this statement may not make much sense, but I think it is actually quite profound. The idea becomes clearer when you think of it from the perspective of a customer. To paraphrase: if you can save a customer $5 by charging them $1, you have a great business. Yes, you will shrink the market, but you will blow your competition out of the water. Consider some examples:

  • A small business hungry for leads pays about $1.40 for each call (or unqualified lead) it gets from placing an advertisement in the Yellow Pages, and it has to pay for the ad up front. Compare that to an average cost of 40c per click (or unqualified lead) on Google AdWords – and the 40c is only paid if someone clicks;

  • When I took a 2 day trip to Guyana in March, it cost my wife 87c a minute to call my hotel using AT&T. Compare that to 28.6c a minute she could pay for the exact same call using Jajah;

  • It must cost over $50 (I’m guessing) to place a personal ad in a newspaper. Compare that to a zero cost for the same ad on Craig’s List. And based on my experience, Craig’s List is more effective (I know someone who met their fiancĂ©e on Craig’s List, but have yet to meet anyone for whom a newspaper worked out);

  • Many companies doing e-discovery gather data based on custodians, date ranges, and keywords and send it out to service providers like Applied Discovery or Kroll at $2,000 per GB – and then wait weeks for the results. Compare that to paying $200 per GB for a (E-Discovery 2.0) product that enables you to analyze the data in-house – and gives you the results in hours.

All this begs an obvious question: how can someone offer customers the same (or, in many cases, more) value at a fraction of the cost of existing players? That’s where new technology or business models come in. Google and Craig’s List do not spend money on printing and distributing huge volumes of paper; Jajah avoids connection fees and other costs by leveraging VoIP; and, E-Discovery 2.0 products leverage the latest innovations in search, open source, web and storage technologies.

It is ironic that the technology industry is so obsessed by growth, given that its greatest achievement is often shrinking a market.