alt.legal: eDiscovery Too Big To Fail?
Consolidation is the name of the game in eDiscovery right now, and free-flowing capital enabled investors to look at making quick plays in the largely fragmented industry.
2015 has been a year of M&A like no other year before, partially fueled by interest rates staying low and the deep capital available in the market. Deal volume in 2015 is nearing $5 trillion, the highest deal volume in history and up from around $3.5 trillion 2014.
And check with any of your friends at big M&A shops—they may not remember the last month they billed less than 250 hours. I know several M&A attorneys billing in excess of 350 in several months this year, an unfathomable amount. So the best M&A firms will probably see some record-setting revenues this year. One firm, for the first time in history, will break the $1 trillion mark in announced M&A deals.
In the alt.legal world, our businesses are directly affected by hyper M&A markets, as many of our businesses are owned by capital investors or public shareholders. Legal services providers and legal tech companies are more susceptible to the availability and inexpensiveness of capital. Thanks to the excellent (non-comprehensive) inventory aggregated at Complex Discovery, we can get a decent look at the year in review. You should click on that link. It’s pretty interesting.
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Highlighted Transactions
- The largest transaction reported by Complex Discovery was Lexmark (yes, the beige printer company) purchasing Kofax for $1 billion. Kofax has a big suite of technology, which includes “first mile” information and data solutions. Not hot and heavy eDiscovery, but it counts. There’s a few of these quasi-eDiscovery transactions in the list.
- The first big real eDiscovery acquisition was Microsoft’s purchase of Equivio for approximately $200 million in January. Equivio had been shopping for a buyer for some time, so to see a big traditional software player who hasn’t done much in the legal technology space make this type of big-dollar acquisition was a major deal. But Microsoft’s plan was not to jostle for position and market share in eDiscovery. Rather, the plan was to take Outlook and Office 365 eDiscovery tools and “make these vital tools even more intelligent and easy to use.” The acquisition continues to fuel speculation that eDiscovery will move away from a data treatment assembly line model to something that happens where the data resides. Sort of sounds like the “first mile” solutions that were part of the Kofax value proposition.
- Inventus made two acquisitions – Unified OS, Ltd., and Kooby, LLP – and then yesterday announced it will be purchased by RPX Corporation for an estimated $232 million (although that transaction is expected to close in January 2016). Inventus is more of a traditional eDiscovery player, running a robust Relativity operation with some customizations. Unified OS, Ltd., gave them a global and managed services dimension. Kooby gave them a captive software development platform for further advancement. The just-announced RPX acquisition? Clearlake Capital Group, the current owners of Inventus, is very straightforward about it: “a buy and build platform strategy to lead consolidation in the eDiscovery market.” Whether this is a blueprint as to how a company should get into eDiscovery will remain to be seen, but one gets the sense that this has been a profitable two-and-a-half-year venture for Clearlake.
- DTI, fresh off of a 2014 shopping spree that saw it buy Applied Discovery, Falcon Discovery, and Hudson Global, purchased major eDiscovery player Merrill Corporation in June. Last year, before going to get Falcon, Hudson and Merrill, DTI was recapitalized by OMERS, a Canadian private equity fund.
- Epiq purchased Iris Data for $134 million in May. Iris and Epiq have similar target markets and offerings, but Iris provided Epiq a dimension around managed services and subscription revenue. Epiq and Iris are both big players, but decision-making at Epiq – including passing on a go-private offer of over $1.1 billion back in 2014 – has fallen under some debate among shareholders. And by “some debate,” I mean that a big shareholder is now suing Epiq over it.
- Consilio, in the same vein, is also making big news in 2015. After Shamrock Capital took a majority stake in August, Consilio has made three acquisitions in the span of four months: Backstop, a “predictive coding innovator” that Consilio was already using; Proven Legal, a UK-based edisclosure (British for eDiscovery) Relativity shop; and Huron Legal, a competitor in the eDiscovery space and probably a pure consolidation and scale play.
Trending In The Market
Consolidation is the name of the game in eDiscovery right now, and free-flowing capital enabled investors to look at making quick plays in the largely fragmented industry. First, we see big players buying big players, like Epiq acquiring Iris. But new market entrants are bringing some serious cash to the table, accelerating consolidation even more. Inventus, DTI and Consilio are following a similar pattern—an investor jumps in, gains control of the company, then goes on a tear of acquisitions aimed towards global footprint, scale, and technology.
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In a market as fragmented as eDiscovery, consolidation is likely to happen, and there’s a good bit more of it ready to hit. I’m betting that increasing direct revenues from corporate legal departments, often from national or multinational clients, is putting pressures on regional players to gain a wider footprint. There’s also a level of risk management in geographic expansion, given the highly confusing state of Safe Harbor and EU data privacy.
Consolidation is also happening across specialties. While some full-service providers of technology and services were acquiring other full-service providers, we also see companies attempting to fill gaps and balance their offerings.
Finally, even as we see the top and top-middle of the market consolidating to grow as a matter of range of services, scale and footprint, disruptive innovation is still happening, although it’s more at the fringes. Companies like Logikcull and CS Disco are smaller, newer players that received injections of investment, and they are trying to do things somewhat differently. When a company like Microsoft acquires Equivio, it can hardly be viewed as an “at the fringes” type of move, but Microsoft is not taking the approach of acquiring its way into being a full-service player. They have creative plans for Equivio and will continue to cook it up under the radar.
What does that leave us with, if both of these trends continue? We’ll have a smaller number of very large traditional eDiscovery players, and we’ll have a handful of companies – either startups or traditionally non-legal players – advancing technology with what will have to be fresher innovation.
What It Means For Attorneys
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For your advanced eDiscovery practitioners, the market moving towards consolidated powerhouses and disruptive innovators will be a positive shift, as they will be capable of doing more either way. But for your average litigator, it may be that not much changes, at least not right away.
In the longer term, consolidation should lead to more transparent competition and economies of scale that lead to more competitive costs and clearer innovation paths for clients. It also means that entry costs for the industry are higher, and startups or new entrants need to bring the investment and the firepower to really be disruptive. The days of setting up a local Relativity server and calling yourself an eDiscovery shop with hopes to be regionally competitive? Those days are waning.
Ed Sohn is a Global Director at Thomson Reuters’ award-winning legal outsourcing company, Pangea3, which employs approximately 1,000 full-time attorneys globally. After five and a half years as a Biglaw litigation associate, Ed spent over two years in New Delhi, India, managing hundreds of Indian attorneys and professionals in delivering high-value managed legal services. He now focuses on developing integrated technology and outsourced legal solutions. You can contact Ed about e-discovery, managed legal services, theology, chess, Star Trek The Next Generation, or the Chicago Bulls at edward.sohn@thomsonreuters.com.
