In what appears to be a bungled press launch, EMC (owner of Documentum) has announced the acquisition of Rotterdam based XML vendor, X-Hive.
Why do I say bungled? Because one of my Google alerts caught this eWeek story on Saturday before I could find an official press release on either companies’ website or the wire services. And I found stories on Gilbane and CMS Watch announcing the deal as well. (And it’s now end of day Monday and I’ve still not seen any official indication of this on either site.)
First, let’s look at the numbers. The terms of the deal were not disclosed, so we don’t have much to work with, but they did say that X-Hive currently employs 25 people. With that, plus some standard ratios and basic math, we can work up a valuation estimate.
Assuming sales/employee/year in the broad range of $200K to $300K yields annual revenues of $5.0M to $7.5M. Since X-Hive is 11 years old and employs 25 people, it’s safe to assume the average growth rate has been quite low over the company’s history. But, let’s be charitable and assume that they were getting some traction with their recent s1000d initiative, so let’s guess they were growing from at 25% to 50% over the past few years.
That, plus a look at EMC’s historical deals, suggests a valuation of 2 to 5 times annual revenues, implying a valuation range of $10M to $37.5M. Eyeball correcting that, and knowing the company is venture-backed, suggests to me a range of $25M to $50M. If I had to guess one number in the range, I’d say $35M.
Next, let’s analyze strategy. X-Hive has three primary product lines.
My strategic concern with X-Hive has always been focus. While the offerings are layered on each other, the reality is you have a 25-person company in the Netherlands conducting war on three fronts. All three categories in which the company competes are highly competitive, and X-Hive has approximately 8 people working per category. That strikes me as way below critical mass.
Perhaps controversially, I believe that X-Hive’s strategy in moving towards aviation was divergent from EMC’s interest. It’s well known that Documentum has poor XML handling. While X-Hive was heading off to aviation, I think that EMC was looking to improve its XML capabilities. But I think EMC has taken a more tactical than strategic approach.
Why? If you think about it, EMC has an interesting problem. While they have strong positions in the storage and ECM layers of the stack, they have no presence at the database layer, which is controlled by the MOI (Microsoft, Oracle, and IBM) oligopoly. What’s worse, the MOI are rising up from the database level and attacking Documentum on its home turf — e.g., Microsoft’s increasing investment in SharePoint, Oracle’s purchase of Stellent, and IBM’s FileNet acquisition.
A creative strategy for EMC would be to play defense at the ECM layer by playing offense at the database layer (which in this context includes relational database, enterprise search, and content server technology), by integrating best-of-breed technologies at that level and then attacking with a strong unified data/content database story.
But I think EMC views XML the same way that Oracle viewed BI – as a tactical, tick-box item, and not as a strategic opportunity.
Let’s talk about that some more. As you may know, I was part of the executive team that took Business Objects from $30M in 1994 to nearly $1B in 2004 when I left to join Mark Logic. Over an approximately 15-year period, a $1B company was built directly underneath the nose of Oracle, one of the most viciously competitive companies in high-technology.
What’s more, Oracle had competing products (Reports, Discoverer) from day one. Business Objects was founded by a marketing director and a sales manager from Oracle France, after they unsuccessfully ran the idea up the corporate flagpole at Oracle, so the company was on Oracle radar from day one. Thus, I can derive the non-existence of Business Objects from first-principles quite easily. But – and here’s the catch – it does exist, and today it’s about a $1.5B company.
So how in the world did that happen? My take:
• Oracle never saw BI as strategic. For them and many other companies, “tool” was a four-letter word, and BI a tick-box category to be avoided. Consequently, Oracle’s best people never worked on BI.
• Oracle was distracted. Its repeated failings in the much larger applications (e.g., ERP, CRM) market were a constant source of distraction. There were always bigger fish to fry.
• The market structure lent itself to independents. Most customers had multiple DBMSs and ERP/CRM systems and wanted BI as a unifying layer across that underlying chaos – this lent credence to players who could credibly claim agnosticism across the lower layers.
The result? Oracle made disposable BI products that were good enough to throw-in free on a purchase order as a discounting alternative, but not good enough to be seriously considered by someone who viewed BI as strategic. In effect, Oracle skimmed the sludge from the bottom of the market, leaving the cream for vendors like Business Objects and Cognos.
That’s my belief for how things will work out with EMC, Documentum, and X-Hive. By taking this approach to both EMC’s database-layer problem and Documentum’s XML problem, they are (in my humble opinion) screaming “tick box” and not strategic.
Finally, in the event that I’ve gotten it wrong and EMC really does believe that they are going to attack Oracle, Microsoft, and IBM at the database layer with (1/3rd of) 25 folks in Holland, then I’d say that I think they’re tilting at windmills, if you’ll pardon the pun.