Enterprise 2.0

Enterprise 2.0
M&A Proposal
Timothy B. Jones
Sloan Fellow 2007

December 31, 2012

© 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 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
Corporate Commerce Intelligence Database
search systems systems Media offloading
• Market intelligence
systems
• Intranets and • Search merchandising • Public news • Data warehouse
portals • Customer intelligence syndication
• Customer self- • Application logs
• Multimedia search
Search solutions

• Collaboration service/help • Surveillance • Data transformation
• Expertise location • Customer analytics • Proprietary research
Enterprise search platforms

• IP Protection • Data caches
and publications
• ECM repositories • Campaign • Fraud detection
management • Libraries
• Knowledge • Discovery
management • Call center
enablement • Quality mgmt.
• Enterprise
applications • Info. risk mgmt

Search subsystem

Connectors

Databases Enterprise
Files
applications


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

Intellectual
Property Excaliber
$

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 • US Department of Homeland
• Institute of Financial Services Security
(ifs) • US Department of State
• Intel Corporation • FBI
• Oxford University Press (OUP) • CIA
• Proquest • NSA
• Skoda Auto • FDA
• Sony Corporation of America • DOD
• Telefonica • Sandia Labs
• Telefónica O2 Czech Republic • NASA
• United Kingdom Atomic Energy • DOE
Authority (UKAEA)
• Unilever


NASA
PROBLEM
• 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

• 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 Labs
PROBLEM
• Needed a solution to convert their video libraries to
digital format; that could be indexed for search

• 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
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 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 Weaknesses
• Public sector footprint • Declining enterprise search
revenues
• Categorization and KM
• Lacks structured data search
focus story
• Cross-language search • Shifting focus away from
enterprise search
• Lacks modern management
tools
• Reporting tools are absent



Convera best fit
Corporate Commerce Intelligence Database
search systems systems Media offloading
systems
• Intranets and • Search merchandising • Market intelligence • Public news • Data warehouse
portals • Customer intelligence syndication
• Customer self- • Application logs
• Multimedia search
Search solutions

• Collaboration service/help • Surveillance • Data transformation
• Expertise location • Customer analytics • Proprietary research
Enterprise search platforms

• IP Protection • Data caches
and publications
• ECM repositories • Campaign • Fraud detection
management • Libraries
• Knowledge • Discovery
management • Call center
enablement • Quality mgmt.
• Enterprise
applications • Info. risk mgmt

S V C D A V C D A S S A V C D A S V C D S A
Search subsystem

Connectors

Key Requirements
S Security D Delivery
V Visibility A Architecture Databases Enterprise
Files
applications
C Control


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% • 5 year Rev Growth -16.42%
• Operating Margin¹ -750.62% • Qtr Rev Growth (yoy) 33.30%
• Profit Margin¹ -744.53% • Rev (ttm) $17.61M
• ROCE¹ -145.90% • Rev/Head $134k
• ROA¹ -131.43% • Gross Profit (ttm) $13.74m
• Current Ratio 7.24 • EBITDA (ttm) -27.53M
• Quick Ratio 7.24 • License % Rev 50%
• Service % Rev 12%
• Maintenance % Rev 38%

1. - 5 year accumulated
*Sources: WSJ, Yahoo Finance, As of 10/31/06

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
Utilize information to make better
E2.0 Applications
decisions and improve performance

Text & Audio
Text Search Video Search
Categorization Asset Management
Organizes information to make it
Profiling Editing more accessible
Publishing

Video & Image
Access and monitor information
Enterprise Content repositories
EDMS • GroupWare • RDBMS • File Systems
• Web • XML • Video • Image

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
THE AUTHOR WROTE
YOU SEARCH FOR
“Rapidly expanding
“Fast growing
credit unions”
banks”

material
unions” and all other relevant
“Rapidly expanding credit
RETRIEVALWARE RETURNS

Result
Complete 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

Intellectual
Property
Newco
$
Royalty
Split


Option #1 as JV/Teaming

Intellectual
Property

Newco
Stock
$


Option #1 as Management Buy Out
Intellectual Property

Management
(RetrievalWare Division)

$/Revenue Share

Intellectual Property

Management
Forms
Stock/$/
New Company
Revenue Share © 2007 MIT Sloan School of Management

Option #1 Newco - to - IPO
Share- Share- Share-
holders holders holders

Spin-off

IPO
Stock IP Mgmt

Newco Newco Newco

Share-
holders

Newco

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 Plan
Newco


Potential Newco Team
Newco
• 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


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

Perl/PHP
Perl/PHP Web
Applications

Enterprise Applications

MySQL
MySQL
Small-Medium
Business Applications

Apache
Apache Service Layer

Database

Operating System Linux
Linux


Replace traditional RetrievalWare
release process with Agile Development
Mobile and Wireless
Multiple Slices enable
Agile Development fast, constant releases
methodology: Develop
a Vertical “Slice” of
Web and ensure compatibility
with previous releases =>
the complete stack, Applications The “Perpetual Beta”
then release to
customers for
acceptance Enterprise Applications

Small-Medium
Business Applications

Service Layer

Database

Operating System

R1 R2 R3

Newco Markets
Newco

• 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 Competitors
Newco

• Microsoft
– Sharepoint Search
• Google
– Google Search Enterprise
• IBM/Yahoo
– Omnifind
• Oracle
– Secure Enterprise Search 10g
• FAST
• Autonomy
• Endeca
• Vivisimo


Competitive Analysis


Newco 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


Potential Future Acquisitions
• Vivisimo
– Clustering Technology
• MIT DIG (Decentralized Information Group)
– Tim Berners Lee
– Potential In-licensing of IP


Newco Exits
Newco

• 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


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