UK's Autonomy buys US' Interwoven

The deal goes against the grain for the software industry - it's normally US companies that buy their European counterparts. It will boost Autonomy's North American presence, offer cross-selling opportunities into a growing compliance market and could also spark off more consolidation this year.

Interwoven isn't cheap, but recent form justifies the price tag

This all-cash deal is expected to close in the second quarter of 2009. Autonomy is paying $16.20 per share, a 37% premium over its closing price of $11.84 the day before the deal was announced. But that's partly because Interwoven has been trading well recently - the company expects revenues to grow 10% in its fourth quarter.

The move comes at a financially bullish time for Autonomy, which saw its fourth quarter net profits more than double. That explains why at a time of global credit crunch Autonomy was able to secure a new revolving $200 million credit facility from Barclays that helped to fund the deal.

And since Autonomy is a highly cash generative business, it's natural that it puts that money to work - in the same way that it bought Verity for $500 million back in 2005. For Interwoven this price is just reward for a profitable turnaround of fortunes and its recent efforts to refocus its business on e-discovery through its Discovery Mining acquisition.

Deal puts IDOL's capabilities into sharper business focus

Autonomy is as much drawn to Interwoven's strengths in the legal and compliance sector as it is to its CM technology. It's an area that Autonomy has been focusing on, now offering products aimed at compliance with legal and regulatory obligations that are built on its IDOL (Intelligent Data Operating Layer) server.

Autonomy clearly feels a need to sharpen the business relevance of its technology platform - a historic problem for the company that stems from the broad positioning of IDOL as a generic "˜e-discovery' platform.

It is also sharpening its focus on regulated legal and compliance market: since Autonomy's software helps companies to keep a handle on growing mountains of documents, emails, presentations, phone calls, voice mails, videos, etc, it is well suited for this.

In addition, many US companies are now coming under increased pressure and scrutiny through toughening regulatory compliance burdens that force companies to manage their data assets in a more disciplined way.

Cross-selling opportunities

Autonomy will be keen to scale cross-selling opportunities for its IDOL technology into Interwoven's 4,600-strong client base - which includes over 70% of the top legal firms in the world.

Interwoven content management customers will benefit through a better understanding of the meaning (that is, business context) of content stored in their repositories. However, there is some serious integration work to do first to leverage IDOL's auto-tagging capabilities to the content management process.

Fortunately Autonomy has a good track record in integration through the work it did on the ZANTAZ and Meridio product lines. There are also opportunities to leverage IDOL in the 100,000-odd websites and corporate intranets that Interwoven's software manages, as well as to combine it with Autonomy's Etalk customer interaction software and Digital Safe solutions.


Expect more consolidation

Autonomy's acquisition of Interwoven whittles away the number of potential takeover targets in this sector and might well spark off a fresh wave of consolidation activity. SAP and Open Text are the most likely movers and shakers, while Vignette is the company most likely to come under the acquisition spotlight.

Indeed, Autonomy's swoop might well pave the way for a graceful exit for Open Text, which seems to be a natural target for SAP - even though SAP has also invested in CM firms Alfresco (open source) and India's Newgen. SAP and Open Text have been close partners for years, and SAP is believed to be on the lookout for a CM capability to counter acquisitions by Oracle (which acquired Stellent) and IBM (which bought FileNet).

Madan Sheina, Principal Analyst