Since the announcement of Dell buying EMC back in October of 2015, TSG, as well as most other analysts, has been confident that EMC would sell off Documentum to reduce the debt load. The potential sale was confirmed back in April of 2016 when Bloomberg reported that Documentum was for sale. With 3 months passing, many Documentum customers are wondering why Documentum hasn’t sold. While we might be proven wrong tomorrow (or two weeks from now), this post will present our thoughts on why the long delay.
Documentum Sale Delay Reason #5 – Who needs/wants an ECM vendor?
One difficulty of a Documentum sale is finding a potential buyer that wants to invest in ECM. Back in 2003, rumor had it that Oracle was pursuing the purchase of Documentum and the Documentum executives (Dewalt and DeCeaser), as ex-Oracle alumni, did not want to go back to Oracle. Back then, a Documentum purchase made sense for Oracle in that the bulk of the Documentum installations included Oracle and other customer synergies were easy to see. DeWalt and DeCeaser were able to convince EMC that a purchase of Documentum by EMC would result in synergies from a hardware storage perspective. While the synergies between the Documentum software sales and EMC storage sales never materialized, when looking for a potential buyer in 2016, what companies have the synergies that would make Documentum worth the premium that EMC is hoping for?
As many of the major software vendors, (SAP, Oracle, Microsoft) already have ECM partners/products and would not pay a premium for Documentum. We had heard rumors that a purchase might be Parexel, a life sciences services firm, back in April. The synergies in regards to Life Sciences make some sense. While a partnership was announced at EMC World, the rumors about a purchase have faded.
Documentum Sale Delay Reason #4 – Who is investing in software?
With a push to the cloud, software does not have the interest level that it had back in 2003. One obvious example is Microsoft, one would argue the leader in software over the last 30 years, recently purchasing Linked-In for 26.2 billion. Rather than invest in software, most companies are looking for cloud based “software as a service” (SAAS) vendors to indicate to the market and their customers that they are investing in the “next thing” rather than what was popular back in 2003. Documentum as a software product has minimal cachet as a cloud vendor.
Documentum Sale Delay Reason #3 – File Sharing Unicorns not exactly crushing it
While Documentum might be a very profitable offering, often times the technology space can determine the interest level. The most visible leaders in the file sharing/document space similar to Documentum are Box and Dropbox.
- Box – last quarter lost 46.6 million, about half of its’ quarterly revenue. Since going public in January of 2015, Box stock has shed about half it’s value. While it’s sales have grown rapidly, it is not to the degree that analysts expected. Analysts are concerned it has become a commodity.
- Dropbox – As reported by Forbes back in March, Dropbox is getting similar questions about long term viability. While valued at 10 billion during the last funding round, many are speculating that it is worth considerably less.
Struggles by either of these vendors is not looked at an opportunity for Documentum but more strike against the industry, discouraging others from investing in ECM or Documentum.
Documentum Sale Delay Reason #2 – InfoArchive Included?
When originally reported back on April 6th, 2016, “EMC Corp. is seeking to sell is Documentum business”. As we talked about back when covering EMC World in May, does that include InfoArchive, the one product that EMC sales reps have been able to sell to their storage clients? It is hard to determine if EMC wants to sell the entire ECD division (that includes Documentum, InfoArchive and professional services) or just the Documentum component.
Documentum Sale Delay Reason #1 – 1.7 Billion Purchase Price
When originally proposed back in 2003, EMC bought Documentum for 1.7 Billion. At the time, EMC was investing in their software business (had recently bought Legato). Based on Documentum annual revenues in 2002 of 227 million, Documentum was growing and on a path for about 300 million in revenue 2003, it would be appropriate to gauge the revenue to purchase price at almost 6 times revenue.
The ECD division that includes Documentum had 599 million in revenue in 2015. While the numbers are just about double in the last 13 years, it is important to remember some key differences:
- In 2003, Documentum was growing with revenue growth of almost 35% year over year. As we have reported, Documentum has been declining from 640 million in 2014.
- ECD includes other purchased assets in addition to Documentum including Sitrof and Trinity for professional services as well as D2 and others.
- The product mix of services to software has dramatically changed since 2003.
Given the above, the struggle for EMC will be how to announce the sale of Documentum for considerably less than the 1.7 billion purchase price from 13 years ago. Granted that Documentum (and the ECD division) have been a cash cow with upwards of 30% net income but some insider’s estimation (200 million?), the lack of growth would hurt the purchase price.
As a side note, Dell sold Perot Systems back in March for a loss of 800 million (3.9 billion purchase – 3.1 billion sale).
Selling Documentum has not turned out to be an easy task. While Bloomberg reported in April that Documentum was for sale, we would expect that EMC had been in private discussions for a considerable time before that announcement. As we slip into July and a deal is still not proposed, it is not too difficult to determine that EMC is struggling with finding a buyer at the right price.
As we said back in April, we are still anticipating that the most likely buyer will be private equity. Documentum customers should hope for a low purchase price to allow the buyer to invest in product, rather than just milk the client base and revenue stream. Based on the estimated 200 million (and shrinking) profit margin, we would expect a private equity price that has a 5 year pay back without too much risk somewhere in the 800-900 million range with considerably less if not all the components of ECD are included in the transaction.
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