Documentum Sale – What Now?

As we shared back in early April, EMC announced that they were planning on selling Documentum prior to the Dell purchase of EMC.   With the news today that the Dell purchase of EMC has closed 6 months later without the sale of Documentum, (September 12th Update – Documentum sold to OpenText) this post will address our thoughts on what will happen to Documentum, now part of Dell.

Why is EMC (and now Dell) struggling to sell Documentum?

Consider some of the relevant events for Dell/EMC merger over the last year.

• July 23^rd, 2015 – EMC Sale of Syncplicity
• October 12^th, 2015 – Dell to Buy EMC for $67 Billion
• March 28^th, 2016 – Dell sells IT Services unit for $3 Billion
• April 6^th, 2016 – Bloomberg reports that EMC is trying to sell Documentum
• June 20^th, 2016 – Dell sells software division for $2 billion
• September 7^th, 2016– Dell acquisition of EMC completes (without Documentum Sale)

As a private company, the Dell purchase of EMC is financed by a huge amount of debt ($40 billion estimate).  Both EMC and Dell are looking for cash to reduce debt as well as focus on their core infrastructure business.  As we mentioned back in June, EMC is struggling to sell Documentum.  Points from that post included:

• Who wants a legacy ECM Vendor? – Unlike when Documentum was purchased by EMC back in 2003 and was a rising star in the ECM space, there does not seem to be the interest in either Documentum or ECM in 2016.
• Who is investing in Software or ECM Software? – Software, particularly legacy software, does not have the cache associated with cloud vendors or other tech options.
• File Sharing Unicorns haven’t been doing well – On the cloud side, the limited success of Box and Dropbox have not helped Documentum’s value.
• Would InfoArchive be included? – From EMC World 2016 as well as multiple discussions with customers or Documentum resources, InfoArchive has been successful both as a new product source but also as something the EMC reps can easily sell along with other storage and infrastructure components.  If a significant part of Documentum’s divisions new revenues from from InfoArchive, would it be included in any sale?  What is the price of Documentum (and ECD) without InfoArchive?
• $1.7 Billion Initial Purchase Price – Back in 2003, EMC seriously overpaid for Documentum based on the potential of ECM at the time. While Documentum has been successful under EMC, revenues have been declining over the past three years making any sale look bad compared to the initial purchase price.

In regards to the last point, having the sale after EMC is no longer private would not be a bad thing as the terms of the sale could remain private depending on the acquirer.

Why Dell won’t just keep Documentum

A logical conclusion would be, since there doesn’t appear to be a purchaser and ECD (Enterprise Content Division that includes Documentum) is a profitable division, why doesn’t Dell just keep it?  Readers should keep in mind that Dell/EMC are looking to sell assets for two core reasons:

1. To restructure and reduce the debt burden from the merger.
2. To focus on their core strategy

When evaluating the Dell Services sale of $3 Billion, Gartner said:

The sale of Dell Services makes sense, said Sid Nag, Gartner’s research director of cloud technology and service provider group.

“Dell has been looking to shed assets that don’t line up with their strategy for their impending Dell-EMC merger, which will be focused on the enterprise systems and hardware market (server, storage, networking, private cloud), which includes cloud related systems,” Nag said. “Dell Services is one such entity.”

Documentum and the rest of the ECD division do not line up with the Dell/EMC strategy.  We predict that if a buyer can be found, Dell/EMC will still sell.

Would Dell keeping Documentum be a bad thing?

If Dell/EMC were to keep Documentum, consider the following points:

• Documentum would be a non-strategic asset and division of Dell
• ECD, representing less than 1% of overall revenues, would be treated as a “cash cow” with limited product improvements or other strategic investment.
• ECD employees would now be part of Dell (and not EMC). As Dell employees, would Documentum consultants and engineers, that could easily join startups or other public tech companies, stay at Dell?

We touched on the “cash cow” dilemma back in 2014 when we noticed that there was no Documentum 8 in the roadmap anymore.  In regards to the Documentum consultants and engineers, the driving source for any solutions or innovations, we surmised back in April that few would want to stay at Dell for the following reasons:

• 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?
• 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 (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?’

One of the major downsides of becoming part of Dell is the Dell brand itself.   For consultants and engineers, being associated with low-cost PC’s is not a status symbol.  We could see the following scenario:

• ECD Employee: “I work for the Enterprise Content Division of Dell”
• Response: “Do you sell cheap PCs?”

Not quite the environment that keeps in demand engineers when a host of start-ups and other alternatives exist.

(See hilarious video from Conan O’Brien contrasting Michael Dell and Steve Jobs).

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.  Also, the technology has lagged since 2014 as, with the exception of LEAP, is more in maintenance mode as we summarized in our EMC World 2016 Review.

For the brand to truly 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 updated 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.  (Update September 12, 2016- OpenText did become the buyer)
• 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 continue to guess that the most likely purchaser will be private equity, similar to the Syncplicity sale back in July of 2015.  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?

On a side note and something for Documentum to consider, Syncplicity has struggled since going with private equity.  See Gartner’s thoughts on the one year anniversary of the Syncplicity sale.

Summary

Dell’s sale of Documentum (and potentially whole of ECD Division) will happen to help reduce the massive debt from the purchase of EMC by Dell as well a focus on a core strategy that does not involve ECM.  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.

Update – John Newton, original co-founder of Documentum and founder of Alfresco posted his thoughts about Documenmtum and Dell that contains a similar analysis.

See our thoughts from last year in regards to how Documentum compares to Alfresco, one of the newer disruptors in the ECM space.