Software Hungry IBM Eats ECM Rival FileNet for $1.6 Billion

Published: August 17, 2006

by Timothy Prickett Morgan

In the past few weeks, IBM's Software Group has been on an acquisition binge, and last week it was still hungry. And so, Big Blue shelled out $1.6 billion in cash to acquire FileNet, one of its most significant rivals in the increasingly important enterprise content management (ECM) software business. With the acquisition, IBM is now better positioned to take on EMC, which bought its way into this market when it ate Documentum in October 2003 for $1.6 billion, and Open Text, which just bought rival Hummingbird for $489 million two weeks ago.

The IBM deal came as something of a surprise to many in the ECM field, but once Open Text made a play for Hummingbird, it looks like Wall Street suspected something might happen with FileNet. FileNet's stock was trading at just about $27 a share for the past few months, but started to rise in late July and rose even further in the wake of the Open Text-Hummingbird deal to kiss $36 a share. The stock gave back a little of those gains last week, but when IBM announced its all-cash deal this morning for around $1.6 billion, it was only a 1 percent premium over the trading price at the close of business on Wednesday. That doesn't sound like a very big premium, by that measure. And, it begs the question of whether IBM is willing to get into a bidding war if Oracle or some other player wants to sweep in and put more cash on the barrelhead.

FileNet was established in 1982, and got its start by creating a document image processing system called OSAR, which stored images on optical libraries. Soon after, the company announced a product called WorkFlo, which was an early attempt to automate the business processes relating to paper forms and documents. Shortly thereafter, the company pioneered the ability to store application-generated reports on Computer Output to Laser Disk (COLD) drives instead of on paper or microfiche. FileNet created a Windows-based workstation for document processing, forged early partnerships with ERP application players (notably SAP), and after the acquisition of Saros and Watermark, two niche players in image processing, as the millennium turned, it delivered the Panagon 2000 product line, which extended FileNet's reach out onto the Web. To bolster its Web content management offering, FileNet in 2002 acquired eGrail, and in 2003 it merged its various product lines to create FileNet P8, a true ECM product. With 4,300 customers, FileNet is one of the major players in the ECM arena. The company had sales of $421.8 million in 2005, and has nearly 1,700 employees.

IBM is, of course, no slouch when it comes to ECM, either, and Ambuj Goyal, general manager of the Information Management division within IBM's Software Group, said in a conference call with Wall Street analysts that Big Blue had 13,000 ECM customers. While IBM has big numbers--there are hundreds of thousands of companies that have deployed ECM solutions and dozens of midrange and high-end players, according to Monica Schnitger, senior vice president of market analysis at Daratech, which tracks ECM software--FileNet has an approach and some technical capabilities that IBM is going to need to take on EMC's Documentum and Open Text, among others. And Goyal was perfectly frank about what makes FileNet's solutions different and appealing to IBM.

For one thing, FileNet has spent years developing industry-specific solutions that have content management and workflow pre-built for specific industries, such as banking, healthcare, insurance, and so forth. Each industry has its own type of documents, its own regulations, and its own workflow, and FileNet has worked with its partners, resellers, and system integrators to cover a lot of industry bases. Moreover, FileNet P8 is an example of what Goyal called content-driven business process management, where the content (be it a claim, a Web page, an email, or whatever) is the thing that drives the workflow, while IBM's own content management products are more process-centric, relying on transactional information in ERP and other systems and Web services glue to control the creation of documents and transactions as work progresses through a company. (This was an over-simplification, since both companies have both kinds of products in their arsenal.) "By bringing these two together, we can address customer's BPM needs, regardless of if they come at BPM from a process-centric angle or a content-centric angle," Goyal explained.

What he did not explain--because he legally cannot until the deal is closed sometime in the fourth quarter, if someone doesn't try to steal FileNet away--is how the IBM and FileNet ECM products would be woven together. But he did say that IBM intended to continue to sell, support, and enhance both sets of products.

The issue that IBM, FileNet, EMC, OpenText, Interwoven, Vignette, Stellant, and others in the ECM space are trying to help customers solve is easy enough to explain, but very tough to do. Basically, 80 percent of the data that companies use in the course of conducting business is unstructured--meaning that it is not data stored in a relational database, but rather documents, images, Web pages, reports, and so forth, scattered all hither and yon. The ECM idea--what some people call Information Lifecycle Management--is to rein in all of this unstructured data so it can be centralized and controlled. In many industries, where compliance is a regulatory issue, ECM is getting a lot of traction. Maybe too much, and in too disorganized a fashion. Goyal explained in the call that 79 percent of the companies that IBM surveyed with ECM solutions installed have at least two different content repositories and that 25 percent have 15 or more repositories. Having built document repositories, now companies have to start making better use of them.

Lee Roberts, FileNet's chairman and chief executive officer, said that once this unstructured data is put into an ECM system, it can then be used to create sophisticated, document-driven applications--something that is perhaps a better fit for many industries than stovepipes of transaction processing systems. "We believe that, over time, companies will use content management as they have relational databases in the past," Roberts explained. Of course, relational databases are a key element of ECM systems, too, which is why IBM likes the concept, since it sells such databases and the systems that drive them.

The analysts at Gartner reckon that just over $1.4 billion in new ECM software licenses were sold in 2005, and they predict that the market is growing at just under 11 percent. Daratech pegs the ECM market at around $3.4 billion worldwide in 2005, and that figure includes software licenses and implementation services, but not the business process re-engineering that is often needed to make the best use of ECM products. (Otherwise, you are merely automating what could be bad or at the very least inefficient processes.) According to various sources, the multiple for services compared to license sales can be anywhere from 1.5 to 5 times the license sales, which means ECM--not counting the new systems sales it helps engender--could account for as much as $10 billion in business worldwide.

So it is easy to understand why IBM wants to acquire FileNet. But it is not so obvious why FileNet is keen on being acquired by Big Blue. "FileNet was doing a fine job on its own, and it will be interesting to see how IBM integrates FileNet's products with its own product line," says Schnitger. "I think this was a defensive move against the Open Text-Hummingbird acquisition--which, by the way, is not done yet, either."

Goyal said Roberts will stay on at IBM after the deal is done in the fourth quarter, assuming FileNet shareholders and government regulators approve the deal. Roberts will report to Goyal, and the current FileNet team will assist in the transition of FileNet from a public company to a piece of the Information Management division. All employees are expected to be retained as part of the acquisition.

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