© 2007 MIT Sloan School of Management June 2, 2014 Enterprise 2.0 M&A Proposal Timothy B. Jones...

© 2007 MIT Sloan School of Management

April 10, 2023

Enterprise 2.0 M&A ProposalTimothy B. JonesSloan Fellow 2007


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 2nd 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


Enterprise SW vs. Enterprise 2.0

Existing Workflow Automation New Workflow Creation

Source: Nitin Karandikar


Enterprise 2.0 and SLATES

Source: Dion Hinchcliffe, 2006


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


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


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)



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

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What buyers should look for in search platforms

• Visibility• Control• Delivery• Architecture• Security



Gartner Magic Quadrant:Information Search

Source: Gartner Group 2006


Forrester Wave: Enterprise Search



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 Intel’s Media Services Team


Formation History

ExcaliberIntellectu

al Property

Stock

$

Stock


is the only company to search paper, electronic documents, database files, images, and video from a single platform!


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)


Why Convera?

• The Company’s 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; Convera’s 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

• Convera’s 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


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


NASAPROBLEM

• NASA’s Johnson Space Center is using Convera’s 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.


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


Sandia National LabsPROBLEM• 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


Convera Partners/Channels

• Perot Systems• BT• CapGemini• Siemens Business Services• Fujitsu Services• IBM• LogicaCMG• General Dynamics• HP• Lockheed Martin• Northrop Grumman• SRA


Analyst Assessments“Convera has recently announced its transition to a new product line. This is a critical move for

thecompany, which has a large government customer base and cash in the bank, but an extendedhistory 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 themarketplace. 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 damagedby 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 verylittle of its future plans for enterprise search and, in the past year, has seen declining marketpresence. 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 searchoffering 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, andEndeca. Given the company’s shift in strategy, Forrester thinks it’s unlikely that Convera will

carry this product forward in any competitive way.”

- Matthew Brown, Forrester Research, June 2006


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



Convera best fitE

nte

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ea

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pla

tfo

rms

Se

arc

h s

olu

tion

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Connectors

Search subsystem

Intelligence systems

• Market intelligence

• Customer intelligence

• Surveillance

• IP Protection

• Fraud detection

• Discovery

• Quality mgmt.

• Info. risk mgmt

S V C DA

Commerce systems

• Search merchandising

• Customer self-service/help

• Customer analytics

• Campaign management

• Call center enablement

SV C D A

Media systems

• Public news syndication

• Multimedia search

• Proprietary research and publications

• Libraries

S V C DA

Database offloading

• Data warehouse

• Application logs

• Data transformation

• Data caches

S A

Corporate search

S V C D A

• 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



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


Key Financial Metrics*

• Gross Margin¹ 58.48%• Operating Margin¹ -

750.62%• Profit Margin¹ -744.53%• ROCE¹ -145.90%• ROA¹ -131.43%• Current Ratio 7.24• Quick Ratio 7.24

• 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 % Rev 50%• Service % Rev 12%• Maintenance % Rev 38%

*Sources: WSJ, Yahoo Finance, As of 10/31/061. - 5 year accumulated


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


Convera Technology


RetrievalWare: Architectural Overview

Source: Convera


Benefits of RetrievalWare Information Infrastructure

EDMS • GroupWare • RDBMS • File Systems • Web • XML • Video • Image

Enterprise Content

Categorization

Profiling

Text Search

Text & AudioText & Audio

Asset Management

EditingPublishing

Video Search

Video & Image 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


Convera RetrievalWare enables Enterprises to leverage internal content

Source: Convera


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”

ResultComplete and accurate results

Source: Convera


RetrievalWare Differentiator: Integrated Visual Search

Source: Convera


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 API’s

• 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 Convera’s


Deal Proposal


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


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


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


Option # 1

Newco

Intellectual

Property

$Royalty

Split


Option #1 as JV/Teaming

Newco

Intellectual Property

Stock$


Option #1 as Management Buy Out

Management (RetrievalWare Division)


ManagementForms

New Company


Stock/$/Revenue Share

$/Revenue Share


Stock

Share-holders

Newco

MgmtIP

Spin-off

Newco

Share-holders

Newco

IPO

Share-holders

Share-holders

Newco

Option #1 Newco - to - IPO


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 28th Earnings announcement– Make subject to updates in price based on annual performance

• Seed business plan development to be led by TBJ


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 3rd party provided a valuation of any of the IP? If

not, are there comparables in other public companies?• Now that Convera’s business focus has changed, how much of the

company’s IP has a direct use and application for the existing business?


Newco Business PlanNewco


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


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+


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


Replace legacy technology layers with lower cost alternatives

Mobile and Wireless

Web Applications

Enterprise Applications

Small-Medium Business Applications

Service Layer

Database

Operating System

ApacheApache

Perl/PHPPerl/PHP

MySQLMySQL

LinuxLinux


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”


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


Newco Competitors

• Microsoft– Sharepoint Search

• Google– Google Search Enterprise

• IBM/Yahoo– Omnifind

• Oracle– Secure Enterprise Search 10g

• FAST• Autonomy• Endeca• Vivisimo

Newco


Competitive Analysis


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


Potential Future Acquisitions

• Vivisimo– Clustering Technology

• MIT DIG (Decentralized Information Group)– Tim Berners Lee– Potential In-licensing of IP


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

© 2007 MIT Sloan School of Management June 2, 2014 Enterprise 2.0 M&A Proposal Timothy B. Jones...

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