Just over five years ago, the U.S. Supreme Court amended the Federal Rules of Civil Procedure to create a new category for electronic records. Specifically, the Court named e-mails and instant message chats as potential records to be archived and produced when relevant. Not too surprisingly, the demand for electronic discovery (e-discovery) – products and services – services virtually exploded. E-discovery represents processes whereby electronically stored information (ESI) is identified, secured and searched for purposes of establishing evidence for use in all types of litigation. And given the steady increase in civil litigation, criminal prosecutions, and regulatory oversight, not to mention the associated need for communications to be preserved for discovery, it’s reasonable to think that explosion will resonate for years to come.
Against that backdrop, it’s no surprise either that the e-discovery space is gaining prominence around the mergers and acquisitions market. In fact, with the multiples on recent e-discovery M&A transactions exceeding prior peaks, it’s clear the space is attracting new, well-capitalized players. Underlying this activity is a powerful combination of double-digit revenue growth and a discernible trend towards comprehensive e-discovery information management solutions. As the amount of electronic stored information, or ESI, spirals upward, aggregate e-discovery software and services revenue could surpass $6 billion by the end of 2013.
Large new entrants
Confirming the attractiveness of the e-discovery sector, Hewlett Packard, one of technology’s premier companies, moved aggressively to bid for Autonomy Corporation PLC, a leading e-discovery player. Seeking to augment growth by building on its software businesses, HP offered a staggering 11 multiple of revenues in a $10 billion transaction. A strong e-discovery participant, Autonomy has developed a fundamental technology, referred to as the Intelligent Data Operating Layer (IDOL), which allows computers to understand the meaning of unstructured information and process it automatically. With the acquisition, HP immediately became a serious player in the e-discovery market.
Interestingly, Autonomy itself had been an aggressive acquirer over the past five years, with transaction including the recent $380 million acquisition of the digital assets of Iron Mountain, the $775 million purchase of Interwoven in January 2009, the $375 million purchase of archiving firm ZANTAZ in July 2007 and the $500 million takeout of Verity in November 2005.
Symantec’s $390 million purchase of Clearwell is another seminal deal in the e-discovery market. A young and rapidly growing company, Clearwell handily achieved premier status in the space as it expanded from addressing only early-stage e-discovery needs to providing solutions for the spectrum of the e-discovery process, creating a highly valuable, comprehensive system of solutions.
The multibillion-dollar e-discovery market appears to have lured another major player, Bloomberg LLC. The firm will likely enter the segment without an acquisition given its meaningful in-house expertise at building complex search technology through the Bloomberg Vault division, which is now headed by a former Autonomy executive. We would expect the firm to launch e-discovery solutions for its clients in the 2011-12 timeframe. Bloomberg apparently has set its sights on the legal sector, as evidenced by its almost $1 billion acquisition of BNA, the big legal, tax and regulatory publisher.
The anticipation of and response to the actual Federal Rules of Civil Procedure revisions in 2006 entailed a tremendous growth opportunity for e-discovery companies and fostered a spate of deals. Certain e-discovery transactions for which data is available include:
With the onset of the global recession in 2009, deal-making eased across the e-discovery market, with FTI Consulting’s acquisition of Attenex the one notable transaction. Recently, however, M&A activity has soared. We think that trend is likely to continue in light of four specific factors:
- The e-discovery market is a dynamic one with a steady stream of new challenges and opportunities
- E-discovery is a highly fragmented market ripe for consolidation; Forrester estimates there are 600 vendors serving the broader space
- Cloud adoption and internal e-discovery outsourcing are now taking hold, resulting in new requirements from vendors
- Clients are increasingly seeking end-to-end and cost-effective e-discovery capabilities.
The competitive landscape is changing quickly with former niche players striving to become turnkey e-discovery providers capable of servicing the entire Electronic Discovery Reference Model, or EDRM.
In this environment, we see a number of smaller industry participants standing out including:
- Recommind, an independent e-discovery company, which has continued to excel. Recently, it secured a U.S. patent for “predictive coding,” the process of iterative legal review using search and classification software. Predictive coding accelerates the review process and thereby reduces the amount of time that lawyers spend manually coding evidence. Recommind has been a trend-setter, already successfully migrating certain products to the cloud.
- Catalyst Repository Systems, a privately-held company founded in 2000, which is known for its search expertise. The firm’s products cover processing through search, analytics, and review and handle case workflow management of automated productions. Gartner refers to it as a far-seeing e-discovery company.
- FTI Technology, a subsidiary of FTI Consulting, offers products through Attenex and Ringtail that perform functions from processing through production. To date, this e-discovery business, which is made available via a subscription for service or enterprise model, has fared well within the parent’s consulting business.
- kCura, a 10-year old privately held company, focuses exclusively on the review, analysis and production of documents. The firm’s products receive high acclaim in the marketplace.
Whether these firms become targets or acquirers themselves, they all merit attention in the next cycle for their outstanding businesses. One way or the other, with more and more large technology companies like Hewlett Packard looking to acquire smaller, pure-play e-discovery companies, it’s inevitable that such consolidations will impact the marketplace.
In the meantime, e-discovery is becoming increasingly more global and the legalities of data storage and the global communities should evolve fast. It wouldn’t be at all surprising to see more unique case law concerning issues that are only just now emerging, like cloud computing and social media. And as more countries adopt e-discovery methodologies – quicker, perhaps, than expected – they will be looking to the U.S. for guidance and direction. All of this portends well for a high level of M&A activity in the e-discovery
Mary Jo Zandy is a managing director at Berkery Noyes & Co. with over 20 years’ experience in finance and investment banking. She has closed and advised on dozens of transactions, with a principal focus on valuations and divestiture work and sale of privately held companies including divestitures for The McGraw-Hill Companies, IDG Group, IHS Group, Pearson, The Thomson Corporation, Primedia & Standex International. She is a Chartered Financial Analyst. Berkery Noyes provides strategic mergers and acquisitions transaction advisory services, financial consulting and strategic research to middle-market information and technology companies in the United States and internationally.