ECM M&A
What to Make of ECM Mergers and Acquisitions
by Tony Byrne
28-Aug-2003
After a while it was becoming a joke. For years, major analyst firms were forecasting imminent, massive consolidation within the CMS software industry, making many prospective CMS buyers believe they were perpetually standing on a precipice that was about to dissolve underneath them into an avalanche.
Well, with rare exceptions, industry consolidation never happened, and only this year have the dire predictions subsided. Indeed, most of the CMS firms around in 1999 remain with us today, and if anything, their ranks have swelled.
Yet, mergers and acquisition ("M&A") activity is happening, perhaps even with greater velocity than ever. The difference is this: for the most part, individual products aren't disappearing, they're just changing owners. So what in fact is going on? And what does M&A activity mean for prospective software buyers?
Some consolidation, Some mergers
To be sure, a handful of CMS vendors have disappeared outright, at a rate of about one per year. This year saw divine -- the latest purveyor of the redoubtable "Content Server" CMS product -- go into liquidation. Its Content Server package was acquired by FatWire, who is using the codebase to essentially replace its own, lighterweight CMS offering, UpdateEngine. So subtract one package from the marketplace. Now CMSWatch only has to track about 40 other major players and well over 200 minor vendors!
Nevertheless, substantial M&A activity is taking place. CMS vendors are broadening their offerings by adding new, niche capabilities to their product lines, all in search of the latest holy grail, Enterprise Content Management ("ECM"). Consider the following examples.
- Documentum has had a very busy two years, buying syndication vendor Boxcar, Digital Asset Management (DAM) provider Bulldog, records management (RM) vendor TrueArc, and collaboration supplier, eRoom.
- Interwoven purchased MediaBin (DAM), iManage (collaboration), and is rumored to remain hungry.
- Stellent bought DAM vendor, Ancept, and syndication player Kinecta.
- Vignette took a slightly different tack, merging with portal vendor Epicentric.
- OpenText, a DM and Collaboration vendor, just bought Web Content Management (WCM) player, Gauss.
Meanwhile, a raft of other DM-WCM partnerships likely presages other acquisitions yet to come, especially in the mid-market.
The Lure of ECM
Vendors are not making these acquisitions in a vacuum. Major analysts incessantly promote the notion of ECM, and vendors don't want to appear pass. To be fair, some vendors' biggest customers are also urging them to provide "integrated platforms." From an enterprise viewpoint, the argument goes, all content should be available to any individual or application with the right privileges, at any time, in the format they need. Disparate DAM, WCM, Imaging, KM, etc. implementations smack of stovepipes that should be dissolved for greatest value and efficiency for the enterprise.
In combining software firms in the ECM stack, vendors are making a big bet that the rest of the marketplace wants to buy diverse capabilities from the same supplier and integrate them across the enterprise. At this point, I don't think this is a winning bet (that's another article), but CMS vendors are likely to continue their M&A binge.
Where did my company go?
There is another, more practical reason CMS vendors are buying other software providers. Their companies are disappearing underneath them and they need to find a way to grow again without increasing expenses.
Under pressure from Wall Street, publicly-traded CMS firms have shrunk substantially -- in some cases to fractions of their former size -- in an effort to ensure that costs don't exceed rapidly dwindling revenues. Investors want to see a profit, or at least not major losses. Ironically, these same vendors are typically sitting on a pile of cash and newly revivified stock equity. But now their key budgets (e.g. marketing, R&D) have become severely pinched and their ability to maintain an expansive installed base is at risk. In the apt words of Forbes magazine, they are "undead."
One way to pump up staffing and realize better economies of scale is to grow the breadth of the company by using cash and stock to purchase another vendor with a complimentary product line. If you merge two software firms, theoretically you can combine engineering and sales resources, achieving a viable size to build robust products and sell them effectively.
However, this is not easy. Early returns suggest that vendors are struggling to obtain synergies from separate groups of engineers and provide quality customer care for disparate product lines.
Cross-training sales people presents an even bigger challenge. Several companies who attempted to integrate formerly separate salesforces and implementation teams by geography rather than product line have ended up disappointed. It turns out vendors often have to sell a portal to a whole different set of people -- who speak an entirely different language -- than the ones to whom they pitch a CMS. And a good Imaging salesperson may not be a strong DAM product seller.
The news for vendors is not all bad, though. For companies with a large installed base and a strong inside sales program, a new product line can be useful for cross-selling to existing customers. Documentum has been particularly good at this, despite the fact that its disparate offerings are not as well integrated as those of some of its competitors.
Looking forward
These sorts of cross-functional acquisitions and mergers will likely continue. In fact, some of the big fish doing the munching now might get eaten themselves. Major enterprise platform players (IBM, Oracle, et. al.) presently enjoy fruitful relationships with multiple CMS vendors and could continue to keep them all at arm's length. Nevertheless, if one major platform vendor buys a large CMS provider, it could set off a game of musical chairs where the others become compelled to move as well.
Just for fun, let's speculate how these pairings might play out. BEA and Vignette appear well matched (much to Day's chagrin). Sun and Fatwire make a good couple. Oracle and Interwoven are dancing more together, although Oracle remains skittish here and sometimes deludes itself that it already offers a CMS.
That leaves Documentum with IBM likely not a good match since they compete too broadly, which only goes to show you that it's possible to shuffle the pairings differently and come up with several other plausible scenarios. I'm not making stock picks based on any predictions, and you shouldn't either. (Microsoft, of course, already has its own Web CMS offering, taken on via acquisition two years ago.)
What you should do
If you already own a commercial CMS or DAM package, your vendor is likely to come calling offering a parallel product. Be wary here. Don't buy a product and foist it on your business users just because you know the software company. Undertake the same due diligence on an offering from your incumbent vendor that you would do if you were buying a package from someone else.
Be sure to understand any proposed cross-product integration paradigm. Remember that the CEOs who consummate M&A deals are by and large ex-salespeople who typically possess only vague notions of how their products really work. The deals usually result from pre-existing partnerships where the two vendors' professional services teams have accomplished only application-level integrations in specific implementations, as opposed to real software integration at a lower level in the code. Senior vendor reps will show you elegant PowerPoint slides about how well integrated the two products are. Ask them to prove it to you on your implementation.
Beyond application integration, you should also understand that two products' approaches to storage and library services may differ. After a merger or acquisition, some vendors will combine the two products' repositories; in others they will keep them separate (with varying degrees of pre-packaged ability to communicate with each other). There are valid use cases for each approach. Which do you want?
When your vendor is buying or being bought, be sure to attend user conferences and chime in on project roadmaps. Be particularly wary if an acquisition of a product could mean you lose a lightweight feature in your existing implementation in favor of having to buy a heavyweight package down the road. For example, you could be perfectly happy with the image library in your WCM but could be told by your vendor that going forward, they were only going to support image management via the spiffy new DAM package they acquired. And that will be another $200,000, please.
In general, the acquisition of a smaller CMS vendor can be a good thing for present and future customers -- who can now rely on the resources of a larger and nominally stronger provider. In the medium term, however, some of the acquired products are going to go away. Sometimes it takes a new owner to realize that a software product is a real dog -- or that its market has truly dried up. Or the product is fine, but it just wasn't a good match for the acquiring company. As always, stay on your toes, remain in touch with real software engineers at your CMS vendor, and make sure you are communicating your needs consistently to your suppliers.