It took less than a week post-close for the newly merged Dell EMC to announce the divestiture of EMC's Enterprise Content Division (ECD) to OpenText, the natural acquirer for ECD's large Documentum customer base. OpenText continues its growth by acquisition strategy, becomes the clear market revenue leader in the content management market, and gets some interesting new products – despite daunting product overlap.
M&A Announcement Highlights
On September 12, 2016 OpenText announced a definitive agreement to acquire Dell EMC's Enterprise Content Division (ECD) for $1.62 billion, 2.7x ECD's FY 2015 revenue of $599 million. The deal is expected to close in 90 to 120 days and is subject to regulatory approval.
OpenText has grown by acquisition from $410 million in GAAP revenue in FY2006 to $1.9 billion in FY 2016. Dell EMC ECD is OpenText's largest acquisition to date and puts it on track for $2.5+ billion in total revenue in FY 2017. The acquisition will be immediately accretive to earnings.
Barclays has committed to $1 billion in debt financing; mechanisms for the remainder to be determined. (OpenText has raised $1.4 million in debt over the past couple of years and has a good cash reserve; and its stock price jumped more than 9% at announcement.)
IDC's Point of View
Dell has been divesting non-core businesses to reduce the debt load from its $60 billion acquisition of EMC which closed on September 7, 2016; EMC ECD was understandably on the list of planned divestitures. ECD has predictably found a home with archrival OpenText which continues to play the role of consolidator for content management and adjacent markets.
M&A is OpenText's engine for growth and it uses acquisitions both to enter new markets (as was the case with GXS and Actuate) and to scale up existing businesses (its acquisitions of HP Inc.'s Marketing Optimization business unit and EMC ECD being the most recent examples).
This acquisition brings OpenText the large global Documentum customer base and will make OpenText the clear market share leader in the content management market (leapfrogging IBM), while further reinforcing its market position in customer communications management market, another market that is consolidating.
It gives OpenText a much stronger capture solution, brings it a packaged case management solution for rapidly building content-based applications (although OpenText already has multiple BPM products from previous acquisitions), gives it a mid-market ECM offering (although the old Hummingbird products arguably fill that niche). This acquisition brings OpenText a strong customer base in life sciences, healthcare, and US public sector; and adds to OpenText's strength in financial services and insurance, and energy and oil and gas.
We see interesting opportunities for OpenText around InfoArchive, one of the acquired products - an XML-based archiving solution for structured and unstructured information that helps customers sunset legacy applications by making information in decommissioned applications available for reporting. InfoArchive is increasingly sold as a platform for data aggregation for big data analytics. Given OpenText's desire to play a bigger role in analytics going forward, InfoArchive could provide a useful foundation.
Dell EMC LEAP could give OpenText a real jumpstart for its public cloud content management efforts. OpenText has relied, for the most part, on a managed cloud services strategy to address customer demand for cloud solutions. OpenText Core, a public cloud file sharing solution, was meant to grow into a cloud content platform but is well behind offerings from the likes of Box. LEAP, on the other hand, is a platform that combines content, rendering, capture, and other microservices, and this could get OpenText in the game for the cloud content platform of the future, provided it invests there.
Indeed, investment now becomes the big question for OpenText. Acquisitions of direct competitors build market share in a hurry and remove competitor friction and pricing pressure but they result in lots of product overlap. That's certainly the case here – and with the HP Inc. acquisitions earlier this year.
Product line redundancy is a major challenge for any vendor. It stretches development resources thin and makes it much more difficult to innovate – a process that has been a challenge for OpenText in the past.
Ironically, OpenText has spent the better part of the last 2-3 years rationalizing its sprawling product portfolio – identifying strategic products in each category, integrating them into suites, and building customer roadmaps for convergence.
This – and the HP Inc. acquisitions – put OpenText right back in that mode. We expect OpenText to be very preoccupied over the next couple of years redefining its product strategy and roadmap, and executing on it, as it seeks to rationalize its duplicative Web content management, digital asset management, customer communications management, and ECM solutions. It may, in fact, be impossible to converge some of these offerings.
OpenText says it hopes to monetize its acquisition of ECD by cross-selling its greatly expanded customer base (although the company has declined to provide statistics on customer base overlap). A key initiative will be marketing its analytics and discovery offerings (from its acquisitions of Actuate, Nstein, Recommind, and Daegis) to ECD customers. OpenText will need to take good care of them to protect its new annuity stream and maximize its cross-selling opportunities.