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EMC and Kazeon Deal Restores Hope for eDiscovery Technology Entreprenuers

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Wednesday, September 9, 2009

EMC and Kazeon Deal Restores Hope for eDiscovery Technology Entreprenuers

Having spent most of my career as a serial entrprenuer dealing in disruptive software technologies and market paradigm shifts, I was intrigued by the EMC acquisition of Kazeon. Not so much by the fact that EMC acquired Kazeon to round out it's "eDiscovery" or document management offering, but more by the rumored price of between $75M (source: blog post by Aaref Hilaly on September 1, 2009 titled, "EMC Acquires Kazeon For $75 million To Round-Out SourceOne Archiving & E-Discovery Solution".) and $150M (source: blog post by Eric Savitz September 3, 2009 on Tech Trader Daily titled, "Update: EMC Paying $150 Million For Kazeon Systems").

Given the continued world economic crisis that we all face on a daily basis, it is "reassuring" for us entreprenuers to know that you can actually realize an exit strategy of 10-20 times trailing revenues, with or without turning a profit, and you don't even have to be the leader in your market space.

Having written 20-30 serious business plans, pitched literally hundreds of investors from local angles to wall street hedge fund managers and raised my fair share of venture capital during the go go days of the dot com craze and beyond, 10-20 times trailing revenues might have been considered an "OK" deal. However, since the dot com crash, even through valuation negotiations and exit strategy discussions may start with 10 times trailing revenues (great expectations and a postivie attitude is a valued trait for technology entreprenuers), they realistically end up closer to some smaller multiple of projected profits. So, the Kazeon deal has created hope for us entreprneurs and our willing accomplishes on the investment side.

Having pitched all the arguments for what it costs to develope new technology, what the value is of an installed base of users and the financial tradeoffs of build vs. buy/acquire, I would have enjoyed being a party to this discussions. If for no other reason then to watch the dynamics of the competing interests. EMC obviously wanted this deal to happen. And, after $60M in investments by Redpoint Ventures, Clearstone Venture Partners, Menlo Ventures, Focus Ventures, JK&B Capital and Goldmanm Sachs, Kazeon was probably willing to listen. Given this, I wonder what the initial offers were, what EMC would have ultimately paid and what Kazeon would have ultimately accepted. Maybe $75M - $150M was the right number?

What this all means to EMC stockholders and how it advances the willingness of investors to inject more cash into the development of new eDiscovery technology or to fund additional rollups or integrations, remains to be seen. However, at the very least, it reminds us all that this is a very exciting time for eDiscovery technology entreprenuers.

Hopefully, Kazeon will prove to be a great acquisition for EMC, the purchase price will prove to be a real bargin and a new valuation benchmarck will have been born or maybe reborn.

The full text of Aaref's blog post on the EMC acquisition of Kazeon is as follows:

Large storage vendor buys small electronic discovery software company to round-out broader corporate initiative.” That was the story in December 2007, when Seagate bought e-discovery company Metalincs for its i365 solution; and, it’s the same story today as EMC announced its acquisition of Kazeon for its SourceOne archiving solution. The terms of the EMC-Kazeon deal were not disclosed, but sources with knowledge of the transaction tell me that the acquisition price is approximately $75 million. That’s slightly less than what Seagate paid for Metalincs ($82 million), and less than what FTI Consulting paid for Attenex ($88 million). But it’s well within the usual range of $50-100 million that most acquirers pay for technology that has not yet matured into a business.

The deal will come as a relief to Kazeon’s long-suffering shareholders. The company was founded in 2003 and, over the past 6 years, it raised over $60 million in equity financing, double the amount it usually takes successful software companies to reach profitability. But despite all that investment, revenue has been hard to come by. According to former Kazeon employees, the company’s revenue totaled only $7 million over the past 12 months. Perhaps as a result, there’s been a lot of management turnover, and last year the board retained a recruiter to find a new CEO. In light of all that, selling the company for $75 million, or 10 times trailing revenue, is a great outcome for Kazeon’s shareholders. It also provides some level of job security for Kazeon’s employees, many of whom have been offered retention bonuses to stick around.

On the other side of the coin, the deal also makes sense for EMC, which needed to flesh out SourceOne, its recent re-branding of the Email Extender archive. In launching SourceOne in April 2009, EMC described it as an integrated portfolio of products: SourceOne Email Management for email archiving; Discovery Manager for legal holds of email; Celerra and Centera for storage; and Discovery Collector for identifying and collecting data from desktops and file shares. EMC owned all of those products except one: Discovery Collector, which instead was to come from EMC Select Partner, StoredIQ. It is widely known that EMC tried repeatedly to acquire StoredIQ but was rebuffed. So instead, it purchased Kazeon (i.e., the Kazeon Information Server) so that it now owns all aspects of SourceOne and does not have to rely on partners.

Will this eDiscovery deal be successful? We will have to wait and see, but Seagate’s experience is not encouraging. A year after it acquired Metalincs, Seagate laid off most of the staff and hired UBS to help it sell what was left of the electronic discovery company. There have not been any takers.

The full text of Eric's post is as follows:

EMC (EMC) is paying $150 million to acquire Kazeon Systems, Tech Trader Daily has learned.
Yesterday, EMC announced the deal, but terms were not disclosed. A number of trade publications have reported the price tag on the deal as $75 million. But TTD has learned that the actual price was twice that much. The company said yesterday that the deal will not have a material impact on revenue or EPS for the quarter or the year.
Investors in Kazeon include Redpoint Ventures, Clearstone Venture Partners, Menlo Ventures, Focus Ventures, JK&B Capital and Goldmanm Sachs. The Mountain View, California company sells “eDiscovery” software, used for discovery and litigation support by large companies, law firms, legal service providers and consultants.

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