With the recent announcement by Bloomberg about EMC shopping Documentum as well as EMC World/Momentum just two weeks away, many clients have been asking us about our thoughts on the impending sale of Documentum. Unlike the original purchase of Documentum by EMC in 2003, this sale is more of a fire sale as Dell/EMC are looking to sell off non-core assets for cash to reduce the massive amount of debt required for the EMC purchase. This post will address:
- Our thoughts on the current state of Documentum including revenues, technology, and value of the Brand
- Which companies may buy Documentum
- Our thoughts on what it means to current Documentum customers.
Documentum by the Numbers
ECD, the division that includes Documentum, has been decreasing in revenue over the last three years as we reported back in March. Numbers include:
- $599 million in revenue in 2015, down from $640 million in 2014
- $156 million from new product sales and $443 million from services sales.
- Product sales have been decreased from $180 million in 2013, $164 million in 2014 to the $156 million last year.
- Reports are that roughly 30% in net income ($180 million?).
- Documentum was initially a $1.7 billion dollar purchase by EMC in 2003.
On Friday, CMSWire reported a quote from Rohit Ghai in regards to the health of the Enterprise Content Division:
In the last quarter of 2015, …..,software license bookings grew 5 percent YoY. “So total revenue was down but the most important growth and health metric for a software company is its software license bookings. More people signed on the dotted line to buy our software licenses in the fourth quarter of 2015 compared to the fourth quarter of 2014. That’s most important and bodes well for our future. That is the most profitable part of the business as well,” he said.
In looking at the numbers, the ECD division had $53 million in 2015 4th quarter product sales and $56 million in 2014 4th quarter sales so we are slightly confused about where Rohit calculated the 5% growth. While we appreciate Rohit’s optimism, (there’s got to be a Pony here somewhere), the numbers point to declining revenues on both the sales and services side over the last 7 years. New numbers come out this week and we would expect, given the Dell purchase and a typical dip in 1st quarter due to incentive, end of year, 4th quarter sales, that software sales will be significantly lower in the first quarter.
What do the numbers mean for potential buyers? Buyers would fall into two main groups:
- Growth Focused – If the price is right and a buyer thinks they can leverage their other skills/relationships/products to allow Documentum to grow.
- Profit Focused – Those that look at the ECD profits want to add them to their portfolio.
EMC bought Documentum for growth at a high multiple based on its potential at the time. We would predict that most buyers will be profit focused as most observers predict continued declining revenues for Documentum.
Documentum by the Technology
Outside of the numbers, a more troubling concern about Documentum and ECD is a concern regarding how much of the revenue is based on legacy products and technology.
As we reported back in Momentum 2014, Rohit wanted clients to move from the existing 2nd platform to the 3rd Platform. One of those components was supposed to be Syncplicity, which was sold off in July 2015. The other major component was Project Horizon, that was formerly introduced at Momentum 2015.
Project Horizon is based on Cloud Foundry, an open source cloud computing platform as a service originally developed by VMware and now owned by Pivotal Software – a joint venture by EMC, VMware and General Electric. While Cloud Foundry made sense when Documentum is looking for synergies with EMC, does it make sense when spun off?
The core of Project Horizon is focused on ECD building a new database component of an ECM repository with the xDB XML Database portion of the Xhive purchase in 2008. By providing the database component, the thought was ECD can save client’s money on the database while providing a more modern architecture. We have significant concern about the reliance on xDB as the XML approach has been eclipsed since 2008 with multiple better open source alternatives like Hadoop as well as cloud venders like Amazon’s Dynamo. Rather than benefit from the better open source alternatives coming from big data, reliance on xDB leaves Project Horizon on dated technology without the ability to embrace these new alternatives.
On a similar note, much of the cloud-based discussions regarding Documentum has always focused on hosting with the EMC/VMWare cloud. Do customers still want EMC/VMWare to host their products when options from Amazon and Microsoft are significantly better priced and positioned for the future?
In discussions with multiple Documentum clients:
- Most are still on Webtop with some, but not a majority, on D2 or xCP
- Many are still on Documentum 6.x repositories rather than 7.x (Documentum is not announcing a roadmap for 8 given Project Horizon)
- We were not able to find a client looking at Project Horizon to replace their existing Documentum infrastructure.
The CMSWire article linked above also mentions that “Documentum has staying power”. Often we have seen Documentum systems that survived the 2007 recession limping along with minimal updates. We see that customers, having already spent significant time and money on the implementation, often postpone movement to another ECM platform due to the cost of migration and implementation, not the capabilities of the software.
Documentum – the People
Beyond the dollar and technology components of a Documentum sale, a critical component will be the people. As we mentioned when the EMC sale to Dell was announced last year, many employees will most likely be let go or will have been looking elsewhere. Some items to consider:
- EMC options were one major reason many were staying at Documentum. With those options vested (Dell is private), will employees leave to explore other opportunities? Will the purchasing company offer options or other incentives?
- California – For the engineers, Pleasanton has never been a draw as it isn’t really San Francisco. Would engineers (now vested) look for alternatives? With California’s no non-compete law, there is nothing preventing employees from considering all alternatives. Jeetu Patel left in August of 2015 and is now at Box, as was Whitney Tidmarsh (update: Whitney Bouck left Box last December 2015).
- Consulting – as we mentioned, many of Documentum’s products are really consulting offerings. Will consultants stay as part of the deal or be included in Dell/EMC Consulting?
The best case scenario for an acquirer will be one that already has both sales and engineering resources to be immune to the transition of resources.
Documentum – it’s all about the Brand
When a company is sold, it can command a better value based on the value of its brand. In 2004, the value of the Documentum brand to EMC was that it was the leader in the ECM market as well as a growing software firm. EMC wanted to be seen as innovating and adding a growing software firm to its portfolio improved the value of both EMC and the Documentum brands.
Over the last 10 years, much of that brand value has eroded as Documentum has moved from an innovative, growing company to a legacy cash cow division of EMC. In talking with Documentum clients, most of the concern regarding Documentum comes from an overly aggressive sales approach that has hurt the brand for both clients and partners. Some familiar quotes include:
- We have a constantly revolving door on Documentum sales representatives who are always looking for “what can I sell you today”
- We were subject to an aggressive Documentum Software Audit back in 200X– our CEO has instructed us to not buy any more Documentum and remove it if possible.
- We bought enterprise licenses to Webtop but those licenses are not applicable to D2 or xCP
- Competitor shows up with 5 people that know our industry and needs, Documentum shows up with a junior sales rep and a price list.
Overall the brand has been hurt by the focus on aggressive sales of the last 10 years as well as a constantly changing and confusing technology roadmap (Webtop, CenterStage, D2, xCP, Project Horizon, etc.) that ties to aggressive sales. Many clients have stayed on Documentum because of the difficulties of migrating to another platform, not for a love of the brand.
Documentum Sale – Best Case Scenario
Back in 2014, 451 Research Analyst Alan Pelz-Sharpe posted a paper entitled “It’s time for Documentum and EMC to go their separate ways” – see our review of it here.
As an independent company, Alan thought that Documentum (called IIG at the time):
“would surely be keen to fight hard to revive the brand and regain its former market status. We firmly believe IIG has some very good technology and good people behind it, and that its future and that of EMC’s as a whole would be better served if it were to become independent and was spun off from the core business.”
Of course, with Dell/EMC’s desire to pay off debt, spinning off is no longer an option as Dell/EMC desire the cash and an outright purchase. For the brand to recapture its market status, it would need an acquirer that:
- Has an existing brand that represents value with a large and loyal client base.
- Has existing engineers and consultants familiar with ECM and solutions
- Has an existing sales channel with ability to add Documentum to their client offerings
Of the possible suitors, some quick thoughts:
- Oracle – Big brand that gets software and also based out of San Francisco. Supposedly the sale back in 2003 to EMC was because Documentum didn’t want to be acquired by Oracle. Lots of changes since then but probably the easiest to be able to absorb although they have multiple ECM solutions already. No comment on the Oracle brand that also suffers from some aggressive sales techniques. (Many remember DeWalt and DeCeseare were both ex-Oracle and set up the Documentum sales culture)
- HP – Another big brand with California roots. Can’t see them looking for something in this space given the failure with Autonomy purchase.
- SAP – We have always had a preference for SAP given their install base and understanding of technology. Given a tight relationship with OpenText, would see this as a stretch as well.
- OpenText or IBM/FileNet – the easiest from a sales channel with ECM consolidation but both already have a confusing mix of different ECM products. IBM has announced a tight partnership with Box so we that might disqualify them.
- Apple, Microsoft, Google……obviously they have the money but purchasing a non-growing, legacy tool isn’t what they do.
- Computer Associates – the king of buy the software and milk the maintenance stream. Rohit was a CA at one point so that might be a possible outcome.
- Others – speculation from the unicorns Box or DropBox that want to get into the enterprise space. They do have the desire, but do they have the cash? Why would they buy Documentum when they can just hire the resources and start with a newer platform?
Documentum Sale – Probable Outcome – Private Equity
We would guess the most likely purchaser will be private equity, similar to the Syncplicity sale back in July. Unlike Syncplicity, the purchaser would be buying the product for the maintenance stream rather than growth given Documentum results over the last 7 years pushing the purchase price to something where the numbers make sense (1 to 1.5 times revenue). Private equity has lots of money looking for something to invest in so, if the price is right someone will make the commitment.
Depending on the firm, a private equity purchase might be either good or bad for the Documentum brand. The deal would have to address:
- Sales Channel – would the portfolio of the private equity firm provide additional clients/opportunities for Documentum (or vice versa)?
- People – would the firm put together incentive packages to get key resources to stick around?
- Clients – would the firm be able to assure clients that the technology would be maintained, updated and supported compared to other alternatives?
EMC’s sale of Documentum (ECD Division) will happen to help reduce the massive debt from the purchase of EMC by Dell. Given that Documentum is viewed as a non-core asset by Dell, EMC will look for the buyer with the best cash offer, not necessarily the one that is the best for the customers or brand. We are predicting that the buyer will probably be private equity. Without knowing the buyer, it is difficult to predict success or the effect on customers. Given the erosion of the Documentum brand over the last 10 years, any buyer will experience some difficulties in reestablishing Documentum as a growth company most likely continuing to treat it as a “Cash Cow” division and milk the maintenance stream for the foreseeable future. We are recommending that current Documentum customers have a “wait and see” attitude but look into alternatives and have a strategy identified if they are concerned about the potential buyer.
Let us know your thoughts below.