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© 2007 MIT Sloan School of Management June 2, 2014 Enterprise 2.0 M&A Proposal Timothy B. Jones Sloan Fellow 2007
© 2007 MIT Sloan School of Management Overview Recent collaborations (IBM/Yahoo) and increased R&D (Google/Microsoft) in enterprise computing is a key indicator of movement of internet technology inside the firewall Enterprise 2.0 (E2.0), or the use of 2 nd generation web technologies inside the enterprise is based on 5 key components (SLATES) –Search –Links –Authoring –Tags –Extensions –Signals Of the five SLATES components, only Search has been extensively funded; no player has emerged that has consolidated all five areas Source: McAfee, 2006
© 2007 MIT Sloan School of Management Enterprise SW vs. Enterprise 2.0 Existing Workflow Automation New Workflow Creation Source: Nitin Karandikar
© 2007 MIT Sloan School of Management Enterprise 2.0 and SLATES Source: Dion Hinchcliffe, 2006
© 2007 MIT Sloan School of Management Opportunity The opportunity exists to build an independent software/service provider that will dominate the E2.0 landscape as a consolidated provider of SLATES Rather than build this Newco from scratch, M&A of existing private/public players: –Reduces technology risk –Decreases revenue ramp –Absorbs existing channels and partnerships M&A strategy will commence with acquisition of search, but will extend to other components
© 2007 MIT Sloan School of Management Major search market trends Corporate users want search to drive productivity Incumbent pure-plays abandon corporate search focus on solutions Infrastructure players IBM, Microsoft, Oracle, SAP fight for corporate search with Google Convergence of search and business intelligence access and analytics Security increasingly a hot-button issue in IT departments Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Why secure search is mission- critical Growing importance of large-scale, accurate, rapid, enterprisewide information access Search moving beyond documents... to data and records. Heterogeneous, legacy security architectures and software platforms Security = the foundation of trust in communications channels. Regulations, regulations, and more regulations –Securities trading (US SEC 240 17a-4; NASD 3010, 3110) –Privacy (e.g., US HIPAA, GLB; EU Data Protection Directive, others) –Corporate governance (e.g., US SOX) –Records management (e.g., 21 Part 11, EU Annex 11) –Risk management (e.g., Basel II) –Law enforcement (US Section 28 CFR23, UK Data Protection Act) Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Search market landscape Connectors Databases Files Enterprise applications Search subsystem Intelligence systems Market intelligence Customer intelligence Surveillance IP Protection Fraud detection Discovery Quality mgmt. Info. risk mgmt Commerce systems Search merchandising Customer self- service/help Customer analytics Campaign management Call center enablement Media systems Public news syndication Multimedia search Proprietary research and publications Libraries Database offloading Data warehouse Application logs Data transformation Data caches Corporate search Intranets and portals Collaboration Expertise location ECM repositories Knowledge management Enterprise applications Enterprise search platforms Search solutions Source: Forrester Research 2006
© 2007 MIT Sloan School of Management What buyers should look for in search platforms Visibility Control Delivery Architecture Security Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Gartner Magic Quadrant: Information Search Source: Gartner Group 2006
© 2007 MIT Sloan School of Management Forrester Wave: Enterprise Search Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Enterprise Search M&A A survey of market research creates a short list of top players –Private: Vivisimo, Endeca –Public: Autonomy, FAST, Convera, Google, Microsoft, IBM Of these, Convera has the financial profile most amenable to private equity buyout/spin-off transaction Convera is a 15 year old enterprise search company, formed from the licensing of RetrievalWare by Excalibur, and the acquisition of Intels Media Services Team
© 2007 MIT Sloan School of Management Formation History Excaliber Intellectual Property Stock $
© 2007 MIT Sloan School of Management is the only company to search paper, electronic documents, database files, images, and video from a single platform!
© 2007 MIT Sloan School of Management Convera: Maturity and undervalued assets Convera has a deeply entrenched customer base in the defense and intelligence communities. Key customers include NASA, the CIA, and other intelligence agencies. These customers and channels are inherently sticky because of the security requirements Embedded in the RetrievalWare product, Convera also provides a video search capability (aka Screening Room) The company is currently migrating from selling to enterprises with RetrievalWare to hosted, web search/indexing for advertising (aka TrueKnowledge)
© 2007 MIT Sloan School of Management Why Convera? The Companys problems appear more execution-oriented than technology-based Though the RetrievalWare product is deemed mature, the market for Enterprise search is just emerging The RetrievalWare brand is established, and could easily be absorbed by a new company Video search is becoming more important; Converas mission of providing complex data and multimedia search was 5 years too early, but the technology is complete The opportunity exists to leverage an undervalued asset in a rapidly growing new market Converas announcement of a shift in business model/strategy provides an opportunity to separate the mature enterprise product from the emergent web- based offering Many customers, for security and competitive reasons will NOT migrate to a web- hosted solution, and will continue to look at enterprise solutions Convera will require cash to fund the transition to web-hosted consumer search, and thus should be amenable to an additional outside investment
© 2007 MIT Sloan School of Management Sample of Convera Customers British Telecom Institute of Financial Services (ifs) Intel Corporation Oxford University Press (OUP) Proquest Skoda Auto Sony Corporation of America Telefonica Telefónica O2 Czech Republic United Kingdom Atomic Energy Authority (UKAEA) Unilever US Department of Homeland Security US Department of State FBI CIA NSA FDA DOD Sandia Labs NASA DOE
© 2007 MIT Sloan School of Management NASA PROBLEM NASAs Johnson Space Center is using Converas Screening Room to manage video content originating with Space Shuttle and International Space Station missions to increase knowledge sharing among researchers. SELECTED SOLUTION BECAUSE It captured, encoded, archived and managed to provide real- time and post mission analysis and re-purposing of the video over the NASA intranet. Allows researchers to easily search for and access relevant video assets from a desktop or laptop computer anywhere in the world. BENEFITS Reduces the time to get critical content on the web Makes archive and search easy.
© 2007 MIT Sloan School of Management U.S. Department of Energy PROBLEM U.S. Department of Energy (DOE) archive of photographs, x- ray images, weapons materials standards and other information. Multimedia search functionality for a database of over 10,000 weapons materials standards documents, enabling weapons engineers to quickly and easily find information critical to the development of weapons –Inventory of over 13,000 hi-resolution photographs of the people, weapons and facilities SELECTED SOLUTION BECAUSE The ability to search across both text and image files from a central point. The ability of the system to include technical terms in the search even when other terms are used. BENEFITS Reduces the time to get critical information to decision makers
© 2007 MIT Sloan School of Management Sandia National Labs PROBLEM Needed a solution to convert their video libraries to digital format; that could be indexed for search SELECTED SOLUTION BECAUSE Screening Room enables their users to quickly and accurately search for and access relevant video assets from a standard Web browser using either a desktop or laptop computer BENEFITS Reduced labor, time and travel costs associated with video management Improved access to video content resulting in more effective training and near-instantaneous delivery of relevant video assets Ability to create multimedia reports Field employees can search and view videos on laptops
© 2007 MIT Sloan School of Management Convera Partners/Channels Perot Systems BT CapGemini Siemens Business Services Fujitsu Services IBM LogicaCMG General Dynamics HP Lockheed Martin Northrop Grumman SRA
© 2007 MIT Sloan School of Management Analyst Assessments Convera has recently announced its transition to a new product line. This is a critical move for the company, which has a large government customer base and cash in the bank, but an extended history of operating losses. Customer support and sales must dramatically improve for the new TrueKnowledge products, founded on a new product architecture, to gain traction in the marketplace. We believe Convera's intellectual property is strong, but its credibility among commercial clients has eroded, and its opportunity in the government sector has been damaged by years of difficulty in supporting its product line. -Whit Andrews & Rita Knox, Gartner Group, October 2006 Convera shows signs of exiting the enterprise search platform market. Convera revealed very little of its future plans for enterprise search and, in the past year, has seen declining market presence. The company appears to be shifting its relatively limited resources into a product offering called Excalibur not the original Excalibur engine but instead a hosted search offering that indexes and categorizes the World Wide Web. The existing RetrievalWare product is outdated, with none of the more advanced capabilities offered by Autonomy, FAST, and Endeca. Given the companys shift in strategy, Forrester thinks its unlikely that Convera will carry this product forward in any competitive way. - Matthew Brown, Forrester Research, June 2006
© 2007 MIT Sloan School of Management Convera Strengths Public sector footprint Categorization and KM focus Cross-language search Weaknesses Declining enterprise search revenues Lacks structured data search story Shifting focus away from enterprise search Lacks modern management tools Reporting tools are absent Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Convera best fit Enterprise search platforms Search solutions Connectors Search subsystem Intelligence systems Market intelligence Customer intelligence Surveillance IP Protection Fraud detection Discovery Quality mgmt. Info. risk mgmt SVCDA Commerce systems Search merchandising Customer self- service/help Customer analytics Campaign management Call center enablement SVCDA Media systems Public news syndication Multimedia search Proprietary research and publications Libraries SVCDA Database offloading Data warehouse Application logs Data transformation Data caches SA Corporate search SVCDA Intranets and portals Collaboration Expertise location ECM repositories Knowledge management Enterprise applications Databases Files Enterprise applications Security Visibility Control S V C D A Key Requirements Delivery Architecture Source: Forrester Research 2006
© 2007 MIT Sloan School of Management Financial Profile Stock Down over 60% last 52 wks, trading at $3.60/shr 5 consecutive quarters of negative EBITDA Market Cap. ~ $190 Million 179 employees, ~90 in R&D TTM Revenue ~$17M, est. revenue ~21M for FY 2007 CA include $37M Cash,$4M A/R $4M in LT Debt 65% Held by institutions; largest institutional holders are Allen and Co., and Legg Mason Opportunity Trust (Bill Miller) Allen & Co has effective voting control As of Jan 30, hit 52 week low
© 2007 MIT Sloan School of Management Key Financial Metrics* Gross Margin¹58.48% Operating Margin¹-750.62% Profit Margin¹-744.53% ROCE¹-145.90% ROA¹-131.43% Current Ratio7.24 Quick Ratio7.24 5 year Rev Growth-16.42% Qtr Rev Growth (yoy) 33.30% Rev (ttm)$17.61M Rev/Head$134k Gross Profit (ttm)$13.74m EBITDA (ttm)-27.53M License % Rev50% Service % Rev12% Maintenance % Rev38% *Sources: WSJ, Yahoo Finance, As of 10/31/06 1. - 5 year accumulated
© 2007 MIT Sloan School of Management Financial observations Strong Maintenance stream as % total revenues implies cross selling/channel penetration opportunity Negative margins appear to come from non-license related expenses Profitability is being lost in non-RetrievalWare associated expenses High Services costs, which suggest a need to move away from software installation to another business model –Hardware Appliance(pizza box) –Software Appliance (e.g., rPath) Too many distributed locations (UK only generates $5M rev) Source: Convera 2006 Annual Report
© 2007 MIT Sloan School of Management Convera Technology
© 2007 MIT Sloan School of Management RetrievalWare: Architectural Overview Source: Convera
© 2007 MIT Sloan School of Management Benefits of RetrievalWare Information Infrastructure EDMS GroupWare RDBMS File Systems Web XML Video Image Enterprise Content Categorization Profiling Text Search Text & Audio Asset Management Editing Publishing Video Search Video & Image E2.0 Applications Organizes information to make it more accessible Access and monitor information repositories Utilize information to make better decisions and improve performance Source: Convera
© 2007 MIT Sloan School of Management Convera RetrievalWare enables Enterprises to leverage internal content Source: Convera
© 2007 MIT Sloan School of Management RetrievalWare supports complex Text and Concept Search for E2.0 Bridges the gap between knowledge seeker and knowledge provider YOU SEARCH FOR Fast growing banks RETRIEVALWARE RETURNS Rapidly expanding credit unions and all other relevant material THE AUTHOR WROTE Rapidly expanding credit unions Result Complete and accurate results Source: Convera
© 2007 MIT Sloan School of Management RetrievalWare Differentiator: Integrated Visual Search Source: Convera
© 2007 MIT Sloan School of Management Technology Summary Despite the concerns of some analysts, the RetrievalWare 8.2 product has a number of significant features –Video Search with Visual RetrievalWare –Web services architecture and support for Service oriented architecture (SOA) –Domain specific semantic networks (finance, pharma, energy) based on 15 years of development –Unix, Linux, and Windows support –Synchronization engines that automatically signal updates to databases (Oracle, SQL Server, Informix, ODBC) –Web spider for accessing intranet data –Support for Java Services, J2EE, and Web Services APIs Improves integration with enterprise applications These features are less relevant for internet search, but critical for intranet applications Additional development of these features could be outsourced to significantly update their capabilities with a lower cost structure than Converas
© 2007 MIT Sloan School of Management Deal Proposal
© 2007 MIT Sloan School of Management Deal Option #1 Option #1: Acquire the RetrievalWare product Enable Convera to focus on the web/advertising opportunity with TrueKnowledge Spin off of relevant R&D, sales and support personnel into Newco Repair support/service relationships with major channels Stabilize the core Enterprise Search capability that will be part of a larger SLATES offering Leverage Homeland/Global Security base to move into financial services vertical Compliance, Treasury, Asset/Portfolio Management
© 2007 MIT Sloan School of Management Deal Option #1 - continued Newco to license product back to Convera for royalty (e.g., OpenVision/Control Data NetBackup deal) High End Offer: Offer 3X Revenues; 2006 revenues estimated at $21M(largely in RetrievalWare sales)=> valuation range high end of $63M Low End Offer: Using Bear Stearns (Joe Difucci and Philip Alling) model of Enterprise Value/Maintenance range of 3.5- 5.1x… Maintenance revenues FY 2006 were $8.036M=> implies a valuation range of $28.13M to $41M Total Deal Range~$28-63M
© 2007 MIT Sloan School of Management Deal Option #2 Option #2: Approach Management to go Private Objective would be to rationalize operations, and refocus company on the larger Enterprise 2.0 opportunity (e.g. SLATES) Create a Hosted Search capability competitive with Google, yet focused on Enterprises as well Assuming 15% premium on Market Cap, or 10X Revenues Total Deal ~ $220M
© 2007 MIT Sloan School of Management Option # 1 Newco Intellectual Property $ Royalty Split
© 2007 MIT Sloan School of Management Option #1 as JV/Teaming Newco Intellectual Property Stock $
© 2007 MIT Sloan School of Management Option #1 as Management Buy Out Management ( RetrievalWare Division) Intellectual Property Management Forms New Company Intellectual Property Stock/$/ Revenue Share $/Revenue Share
© 2007 MIT Sloan School of Management Stock Share- holders Newco Mgmt IP Spin-off Newco Share- holders Newco IPO Share- holders Share- holders Newco Option #1 Newco - to - IPO
© 2007 MIT Sloan School of Management Acquisition Process Conduct due diligence on company, products, IP –Key concerns: technology competitiveness, IP ownership, support Competitive Assessment Customer/channel checks Future Market potential assessment Model Transactions –BEA acquisitions of Tuxedo,Weblogic –OpenVision acquisition of Control Data NetBackup suite OpenVision acquired Dirty Dozen development team, and product, Control Data became reseller and paid royalty to OpenVision Prepare Offer to deliver on/around Feb 28 th Earnings announcement –Make subject to updates in price based on annual performance Seed business plan development to be led by TBJ
© 2007 MIT Sloan School of Management Key Questions: Intellectual Property Does Convera have legal title to all its IP? What is Convera doing to protect its IP against infringement? What, if any, IP currently generates income? How much? Does existing IP requiring further development to have commercial utility? Has an independent 3 rd party provided a valuation of any of the IP? If not, are there comparables in other public companies? Now that Converas business focus has changed, how much of the companys IP has a direct use and application for the existing business?
© 2007 MIT Sloan School of Management Newco Business Plan Newco
© 2007 MIT Sloan School of Management Potential Newco Team Operating –Former CTO of Excalibur and Convera –Former CTO, SSA Global –VP Sales of Oracle Health Care + sales team –VP of West/Central Region, Google Enterprise Division –Former CTO of OPNET –MD, Head of Generali Portfolio Management –CTO/VP Product Management of ClickCommerce –VP of Yahoo Content Services –Former CFO of publicly traded company –CFO of European software company –CEO of European Ebusiness consultancy –Federal Sales Director, NetSec –New England Sales Director, SunGard –Southeast Sales Director, Oversight Systems Board of Directors –Gen. Wesley Clark (ret) Former NATO Commander –Hon. Art Money, Former Asst. Sec. of Defense, C³I Board of Advisors –Prof. Andrew McAfee, HBS –Prof. Erik Brynjolfsson, MIT –Prof. Michael Cusumano, MIT Newco
© 2007 MIT Sloan School of Management Post-Acquisition Game Plan Surround RetrievalWare product with architectural add-ons to create SLATES product Cross-Sell SLATES into existing customer/channel base in Defense/Intelligence vertical Migrate to 1-2 adjacent verticals; establish deep" presence via specific taxonomies –Banking/Financial Asset Management/Compliance Migrate business model from license sales to 3 – yr subscriptions Institute appliance-based (hw/sw) delivery to reduce sales cycle –Compete directly with Google Search Appliance but with greater credibility in defense/intel community + 1 other vertical Goal: Generate $200M in revenue in 5 years => Enterprise value of $600m-$1B+
© 2007 MIT Sloan School of Management Technology Migration Plan Move from legacy technology to LAMP stack –Linux, AJAX, MySQL, PHP –Use of Open Source technologies Outsource development of migration to select partners
© 2007 MIT Sloan School of Management Replace legacy technology layers with lower cost alternatives Mobile and Wireless Web Applications Enterprise Applications Small-Medium Business Applications Service Layer Database Operating System Apache Perl/PHP MySQL Linux
© 2007 MIT Sloan School of Management Mobile and Wireless Web Applications Enterprise Applications Small-Medium Business Applications Service Layer Database Operating System Replace traditional RetrievalWare release process with Agile Development Agile Development methodology: Develop a Vertical Slice of the complete stack, then release to customers for acceptance R1 R2 R3 Multiple Slices enable fast, constant releases and ensure compatibility with previous releases => The Perpetual Beta
© 2007 MIT Sloan School of Management Newco Markets Enterprise/Information Search Vertical Market Search –Defense/Intelligence –Financial Services –Pharma –Life Sciences and Biotech –Energy –Industrial Video/Archival Search –Media Storage and Archival Newco
© 2007 MIT Sloan School of Management Newco Competitors Microsoft –Sharepoint Search Google –Google Search Enterprise IBM/Yahoo –Omnifind Oracle –Secure Enterprise Search 10g FAST Autonomy Endeca Vivisimo Newco
© 2007 MIT Sloan School of Management Competitive Analysis
© 2007 MIT Sloan School of Management Competitive Advantages Mature product with established channels and partners In depth knowledge of main competitors strategy ( esp. Google) Extensive network in Homeland Security and Defense Background in Enterprise computing vs. Consumer internet services Newco
© 2007 MIT Sloan School of Management Potential Future Acquisitions Vivisimo –Clustering Technology MIT DIG (Decentralized Information Group) –Tim Berners Lee –Potential In-licensing of IP
© 2007 MIT Sloan School of Management Newco Exits Cash Flow Breakeven w/in 5 years @$200M run rate (10X current revenues) M&A –Hardware Vendors IBM, Sun –Software platform, storage, security vendors SAP, SAS, EMC, Symantec, Oracle, Microsoft –Industry consolidators L-3, GE, Northrop Grumman IPO Newco
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