Enterprise 2.0

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M&A prosposal to Warburg Pincus to spin out Convera Search assets. Ultimately Convera Search was acquired for $18M by FAST and served as basis of Microsoft acquisition of FAST for $600M.

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Enterprise 2.0

  1. 1. Enterprise 2.0M&A ProposalTimothy B. JonesSloan Fellow 2007December 31, 2012 © 2007 MIT Sloan School of Management
  2. 2. 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 © 2007 MIT Sloan School of Management
  3. 3. Enterprise SW vs. Enterprise 2.0 Existing Workflow Automation New Workflow Creation © 2007 MIT Sloan School of Management Source: Nitin Karandikar
  4. 4. Enterprise 2.0 and SLATES Source: Dion Hinchcliffe, 2006 © 2007 MIT Sloan School of Management
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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 researchEnterprise 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 Source: Forrester Research 2006 © 2007 MIT Sloan School of Management
  9. 9. What buyers should look for in search platforms• Visibility• Control• Delivery• Architecture• Security Source: Forrester Research 2006 © 2007 MIT Sloan School of Management
  10. 10. Gartner Magic Quadrant:Information Search Source: Gartner Group 2006 © 2007 MIT Sloan School of Management
  11. 11. Forrester Wave: Enterprise Search Source: Forrester Research 2006 © 2007 MIT Sloan School of Management
  12. 12. 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 © 2007 MIT Sloan School of Management
  13. 13. Formation History Intellectual Property Excaliber $Stock Stock © 2007 MIT Sloan School of Management
  14. 14. is the only company to search paper,electronic documents, database files,images, and video from a single platform! © 2007 MIT Sloan School of Management
  15. 15. 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
  16. 16. 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 © 2007 MIT Sloan School of Management
  17. 17. 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 © 2007 MIT Sloan School of Management
  18. 18. 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. © 2007 MIT Sloan School of Management
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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 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 the marketplace. We believe Converas intellectual property is strong, but its credibility amongcommercial 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 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, 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 © 2007 MIT Sloan School of Management
  23. 23. ConveraStrengths 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 Source: Forrester Research 2006 © 2007 MIT Sloan School of Management
  24. 24. 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 researchEnterprise 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 Source: Forrester Research 2006 © 2007 MIT Sloan School of Management
  25. 25. 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
  26. 26. 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 © 2007 MIT Sloan School of Management
  27. 27. 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
  28. 28. Convera Technology © 2007 MIT Sloan School of Management
  29. 29. RetrievalWare: Architectural Overview Source: Convera © 2007 MIT Sloan School of Management
  30. 30. 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 repositoriesEDMS • GroupWare • RDBMS • File Systems • Web • XML • Video • Image Source: Convera © 2007 MIT Sloan School of Management
  31. 31. Convera RetrievalWare enablesEnterprises to leverage internal content Source: Convera © 2007 MIT Sloan School of Management
  32. 32. RetrievalWare supports complex Text and Concept Search for E2.0 Bridges the gap between knowledge seeker and knowledge provider THE AUTHOR WROTEYOU 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 © 2007 MIT Sloan School of Management
  33. 33. RetrievalWare Differentiator:Integrated Visual Search Source: Convera © 2007 MIT Sloan School of Management
  34. 34. 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 © 2007 MIT Sloan School of Management
  35. 35. Deal Proposal © 2007 MIT Sloan School of Management
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. Option # 1 Intellectual Property Newco $ Royalty Split © 2007 MIT Sloan School of Management
  40. 40. Option #1 as JV/Teaming Intellectual Property Newco Stock $ © 2007 MIT Sloan School of Management
  41. 41. 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
  42. 42. Option #1 Newco - to - IPO Share- Share- Share- holders holders holders Spin-off IPOStock IP Mgmt Newco Newco Newco Share- holders Newco © 2007 MIT Sloan School of Management
  43. 43. 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 © 2007 MIT Sloan School of Management
  44. 44. 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? © 2007 MIT Sloan School of Management
  45. 45. Newco Business PlanNewco © 2007 MIT Sloan School of Management
  46. 46. 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 © 2007 MIT Sloan School of Management
  47. 47. 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
  48. 48. 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
  49. 49. Replace legacy technology layers with lower cost alternatives Mobile and WirelessPerl/PHP Perl/PHP Web Applications Enterprise Applications MySQL MySQL Small-Medium Business Applications Apache Apache Service Layer Database Operating System Linux Linux © 2007 MIT Sloan School of Management
  50. 50. Replace traditional RetrievalWarerelease 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 © 2007 MIT Sloan School of Management R1 R2 R3
  51. 51. 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 © 2007 MIT Sloan School of Management
  52. 52. Newco Competitors Newco• Microsoft – Sharepoint Search• Google – Google Search Enterprise• IBM/Yahoo – Omnifind• Oracle – Secure Enterprise Search 10g• FAST• Autonomy• Endeca• Vivisimo © 2007 MIT Sloan School of Management
  53. 53. Competitive Analysis © 2007 MIT Sloan School of Management
  54. 54. 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 © 2007 MIT Sloan School of Management
  55. 55. 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
  56. 56. 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 © 2007 MIT Sloan School of Management

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