ECM Report

On August 7, Interwoven (Nasdaq: IWOV) announced it will buy iManage (Nasdaq: IMAN) for $171 million in stock and cash. To most, the announcement should not have come as much of surprise. Interwoven and iManage have been operating as partners since earlier in the year and many believe there is significant synergy in the respective product lines. The following is my initial quick take on the merger and what it will mean for customers and investors.

Who is Interwoven?
Interwoven is a leader in the “Content Management (CMS)” software genre. Their suite of products exist to help organizations build and maintain internal or external web sites. Traditionally, development of these applications required the knowledge of a “webmasters” or technical folk with programming savvy. CMS systems bring the content contribution tasks back to where it belongs: in the hands of the subject matter experts. With Interwoven’s tools, these experts, whether internal or external, are able to build and maintain the content published on their web sites. Included are sophisticated collaboration tools and search engines as well as pre-built plugins such as form building that users can take advantage of with minimal effort.

Interwoven’s products are sophisticated and a newly redesigned user interface is garnering attention. However, many are now calling for an overhaul of aged plumbing, which has long been a thorn in the side of integrators. Interwoven is, by all accounts, considered to be an innovator and one the market leaders. It’s core competitors in the CMS space include Stellent and Vignette. It has some crossover competitors as well in FileNET and Documentum.

Who is iManage?
iManage’s core competency for years has been in “Document Management (DM)” sector. DM solutions give organizations the ability to easily organize, manage, distribute, and secure information assets that exist in the form of a standard electronic document such as those created from applications like Microsoft Office. Their success in the legal industry, a major user of DM solutions, is unparalleled. They pretty much dominate that market because their products are robustly architected yet easy to use… a  must when dealing with a largely novice user base. Their primary (and legacy) product line is heavily Microsoft-oriented. Roughly a year and a half ago, iManage launched a completely new, J2EE product line dubbed “WorkSite MP”. MP for Multi-Platform. More than just a J2EE version of their existing product line, WorkSite MP forked into it’s own, broader category of solution. In addition to document management, WorkSite MP was heavily designed around collaborative capabilities. Intricately architected, WorkSite MP, at least technically, represented a quantum leap. It took iManage out of the relatively niche DM space and broadened their appeal. It also led them squarely into direct competition with some relative heavyweights.

iManage’s primary competitors for years have been Documentum, Hummingbird, FileNET and OpenText. One thing to note here is that Interwoven and iManage, while not really competitors themselves, share some competition due to their competitors broader range of product offerings. The shared competition includes Documentum and FileNET, and to a lesser degree, OpenText.
 

Why Interwoven did the deal

The Value of Collaboration
Though Stellent and Vignette came from the WCM space, Documentum and FileNET, whose roots were in document management before adding content management, all have been venturing further and further into the “collaborative content management” space. Why, you ask? Simply put, this is burgeoning market with a high upside. Customers have realized that managing content is simply not sufficient. True benefits can be gained by extending content in an ad hoc fashion to all members of a team whether they are internal employees or external customers, partners or suppliers. The operative phrase here is “ad hoc”. Every extranet in the world has been built for this purpose. But most of these extranets have missed a key point of collaboration: regardless of whether it is a new project, a contract negotiation, or a marketing initiative, most collaborative efforts begin with a business user or manager, not in the IT department. The ability for any business user to quickly and easily build their own “team room” or “workspace” that exposes the critical content is crucial. Most extranets are simply not capable of this. Documentum’s aquisition of eRoom late last year, and, to a certain extent, Microsoft’s acquisition of Groove indicates that the players are realizing that collaboration is becoming a key component of larger solutions. iManage’s products place a premium on collaboration and document management, two things that Interwoven didn’t really do. So in a nut, the products are fairly complementary and should fit nicely.

By the Book
Financially, the message was pretty clear. Interwoven has struggled and have seen revenues decline for an extended period of time. iManage has weathered the current business climate rather nicely and have actually seen revenues steadily rise and saw a profit in the second quarter of this year. iManage is also heavily entrenched in the legal market, a place Interwoven says they would like to be. The terms of the deal were not bad either. Taking into account iManage’s revenue, the deal was very similar to that of Documentum/eRoom. Combine iManage’s steady growth, the anticipated product synergy, and the relatively good deal, I can imagine Interwoven saw this as a tremendous opportunity with timing being of the essence.
 

Why iManage did the deal
While it is acknowledged that iManage’s products are some of the best around, they have struggled to make significant headway in markets not named “legal”. They were simply never able to duplicate their dominance of that vertical in any other industry. It’s not that their products don’t fit other verticals, they have some excellent wins and happy customers in many industries. Instead,  for various reasons, they had a difficult time executing their plan to enter those other verticals in a large way.

In the legal industry, where they dominate, I would imagine they still found themselves with a different, yet equally difficult challenge. Every day that goes by, the market gets more and more saturated. Yes, there are only so many “document management” systems to be sold to a relatively static industry. But I am speaking of a slightly different kind of a saturation. The legal industry is pretty unique in that the types of solutions they implement are fairly standard across the industry. Pick just about any two firms and you’ll find the big three solution types; case management, a time/billing/accounting, and document management. iManage could have made a nice living continuing to service their existing and loyal client base within the framework of their DM deployments. To continue to be truly successful, however, iManage needed to find new upsell capabilities. As I mentioned, this is easier said than done. There just aren’t many new types of solutions being deployed outside of the big three. About the only new initiatives being embarked upon are extranets where the big three solutions are being extended to clients and external counsel. Enter content management. Unless iManage wanted to write their own or partner with someone else, their ability to continue to capitalize on their existing market leader status was dependant on this type of deal. Of the big three legal solutions, document management really is the only horizontally focused solution. There isn’t the same value add for a case management system or time/billing system vendor to look for content management partners. But CM/DM/collaboration can be a powerful team in the legal industry and many others as well.

iManage faced another potential difficulty looking into the future. They have made clear who they consider their competitors to be: Documentum, OpenText, FileNET, and Hummingbird. Each of these vendors offer something that iManage alone did not. They all offer much broader product suites. iManage’s products are considered to be excellent, but they just don’t have the reach that their competitors have. This limitation made it difficult for iManage to crack into the larger deals in non-legal industries. Customers of large-scale deployments are increasingly looking to partner with vendors that have a history of offering an expansive suite of products that can be reused across the organization. There is tremendous added value in using a single solution many times over. iManage’s suite, while growing, still does not have the expansiveness of the established industry veterans.

The timing of this deal, I would surmise, is not at all unrelated to Documentum’s acquisition of eRoom last year. From a product perspective, they certainly offer a compelling story. They faced serious challenges of product integration as will Interwoven. And while they got a fairly thin integration out the door rather quickly, the tighter integrations will continue to be rolled out. It is now nearly ten months after the initial acquisition and those roll outs will likely begin to happen soon.

iManage could have continued to be a niche player with a more finely focused product suite. Ultimately, however, this would have limited their ability to grow over the long-term. The nature of the industry today is such that their products are probably more complementary of a larger solution than they are of being the total solution.
 

Challenges
While their appears to be synergy between the Interwoven and iManage product sets, there are, of course, challenges abound. Technically, the products must be more tightly integrated. Their partnership formed earlier this year resulted in a fairly simple, but useful integration. That may be enough for some, but ultimately, I would imagine Interwoven would like to fully assimilate iManage’s functionality into their core offering. Today, the products exist as separate products with a link between the two. iManage should bring a lot to the architectural table.

Assuming that the technologies can be complentarily integrated, which is not a small task in its own right, Interwoven faces its largest challenge in executing a sales plan. CMS solutions have traditionally been considered “infrastructure” initiatives. Hence, they are typically initiated and driven by corporate IS departments. Collaboration and document management solutions, however, have traditionally been initiatives executed by the executives or managers of departments where the productivity gains are going to be seen. The technical sale versus the line-of-business sale are very different. Integrating these two models is going to be a key to the success of the merger. The product is obviously important, but getting the message out and being able to speak to the business value propositions are even more critical.

Certainly, Interwoven’s existing customers will benefit greatly from the added product offering. But Interwoven faces a challenge when it comes to iManage’s existing client base. iManage’s clients are, on the whole, very loyal and happy. As they map out their product integration strategy, Interwoven must be aware that many of iManage’s customers are happy because of iManage’s niche, value approach. If the new, integrated products don’t offer something similar to that of iManage’s existing suite at a similar price point, they could run the risk of alienating iManage’s current customers.
 

Overall
For Interwoven, this was an opportunity to acquire some solid products and a good customer list. In the short-term, it may help slow their bleeding. In the long-term, couple a fully integrated product suite that takes existing customer needs into account with some creative sales strategies, Interwoven should be able to offer an extremely compelling solution. If the potential that exists is executed upon correctly, both Interwoven’s and iManage’s customers alike should benefit from the expanded product offering.