We recently returned from the LegalTech 2007 conference in New York City and saw some major changes in the industry versus 2006. EDiscovery and litigation technology have been big growth areas, as evidenced by the number of companies present. Every inch of exhibition space was taken, and walking the floor was more hectic than walking a 5th Ave department store during the January sales. Not only did the attendance indicate the rapid growth stage of the industry, it solidified the notion that eDiscovery is hot and on the minds of big technology players and entrepreneurs alike.
An Evolving Customer Base
We believe the fundamental change among vendors is their target audience. Many of the large vendors have expanded their focus from merely reaching out to law firms to expanding into the general enterprise, espousing the virtues of enterprise-wide “preparedness”. What is interesting is that it’s not merely the serial litigation offenders in industries such as tobacco and biotech that are maintaining a state of litigation readiness – it’s becoming far more pervasive in mid-to large public companies. This has opened the eyes of the larger technology vendors, including the large database and content management companies, as they now see the legal vertical as another channel in which to sell an expanded base of products. For example, companies like EMC have launched an eDiscovery solution based around their enterprise-wide storage offering, integrating email archiving, content management software and tiered network storage platforms.
Implications for M&A Activity
We believe this is likely to spur an even faster pace of consolidation in the space over the next 6-18 months. But with so many vendors out there, many are likely to be left without a dance partner unless they can differentiate themselves from both a service and technology perspective. For example, while a myriad of service providers showed decent cash flow and profitability, few will be able to generate the premium multiples that their owners are expecting. Distinguishing the best of class, technology-enabled innovators from the me-too players will be paramount to driving value. On the software side, the key remains having a scaleable product that will work with the more comprehensive platforms in the market. Another key feature we saw that was receiving some buzz included companies that handle discovery in multiple languages. While there was little else that was
groundbreaking on the software side at the conference, consolidation will accelerate as companies focused on one component of the discovery process – such as workflow management or search – will find themselves snapped up by larger players who are building end-to-end solutions.
In many ways, the conference reminded us of the “irrational exuberance” days of the Internet, where many saw a large market opportunity, but failed to establish a permanent foothold in the burgeoning sector. We anticipate more vendors are likely to keep entering the space, but those with an established presence and key customer base, including those that have attracted the in-house counsel of enterprises, are most likely to catch the acquisitive eye of the major vendors and service providers.
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FocalPoint is an independent investment bank, specializing in mergers and acquisitions, private placements (both debt and equity), and financial restructurings. The firm’s primary focus is on middle-market companies with revenues between $10 million and $250 million in a diverse range of industries.