aiimALERT: Captaris Fronts Open Text as Newest Acquisition

Open Text Corporation (NASDAQ:OTEX) (TSX: OTC), a provider of Enterprise Content Management (ECM) solutions, and Captaris, Inc. (NASDAQ: CAPA), a provider of software products that automate document-centric processes, announced a definitive merger agreement last week in which a wholly owned subsidiary of Open Text will acquire Captaris for approximately $131 Million. Captaris's software products include document and data capture solutions that let customers convert paper documents to digital content, and manage associated processes. The acquisition is aimed at expanding Open Text's partnership offerings by creating tighter integration with Open Text's invoice management solutions that work with SAP and Oracle. Captaris also offers business information and delivery solutions built on the Microsoft .NET framework which integrate, process and automate the flow of content (see press release).

Other commentary that I've seen is only focusing on single issues rather than the big picture of this acquisition.

There are (at least) 4 components to this acquisition:

1. Adding more "front-end" to Open Text's native capabilities
2. Tighter integration to MOSS/SharePoint
3. Acquisition of content recognition technology
4. An inexpensive acquisition for Open Text, and exit strategy for Captaris

On it's surface... Front-end meet back-end!

The press release mentions that "Captaris's technology will strengthen Open Text's ECM solutions by providing another on-ramp for integrating content into our ECM solutions" which, interestingly enough, is our focus for Q4 2008 Market IQ, namely the on- and off-ramps of content.

Now of course it's not as if Open Text doesn't have front-end content creation or capture already, whether "user generated" in a 2.0 style interface, via their RedDot Web Content Management, or in other interfaces. The Captaris acquisition is very specifically aimed at tightening up the digital capture of paper content in the form of fax content (their RightFax solution), and the full process of invoice management, which (for Captaris customers at least) tends to be paper-heavy, and it's a classic imaging scenario. Until paper is entirely gone, all organizations need SOME strategy and capability to convert to digital as early in the process as possible.

Next up - Tighter integration to MOSS/SharePoint.

Open Text is betting quite a lot on the rising tide of Microsoft in the world of ECM (see my presentation "Who's the Boss, MOSS?" - over 4,000 views), and this again ties to item #1. They have a specific business unit that is built entirely to be the back-end records repository (think long-term archiving, lock-in, recurring revenue) for MOSS content. Captaris is reported to have strong integration in this area (notably, the Captaris RightFax Connector for Microsoft SharePoint Server 2007 and Captaris Single Click Entry), which, if executed well, helps Open Text to continue their anticipated growth in this area. Open Text already has some integration in this area, but this extends and tightens that integration.

Almost nobody is mentioning this next item - Acquisition of content recognition technology

In January of this year, Captaris acquired Oce Document Technologies GmbH (ODT), a company that specialized in document capture, text recognition and document classification. These capabilities serve to add the intelligence to capture to make any digital image more than mere "dumb" pixels, and into data-enriched documents that you can actually find and manage once they have been inserted in a repository and/or workflow/process environment. There is some hint that not only does this part of the acquisition add to the technical capabilities of Open Text as a whole, but that competitors of Open Text who are licensing the underlying engine now have one less differentiator from Open Text, and becomes a competitive blocking move as a result.

Lastly - An inexpensive acquisition for Open Text, and exit strategy for Captaris

I don't normally comment on the financial implications of acquisitions, as I'm not a financial analyst, so in this I'll defer to analysis provided in the article

A Good Deal for Captaris and Open Text—but Impact on Seattle-Area Innovation Is Less Clear by Gregory T. Huang at xconomy:

"Captaris, a $90 million public company, eked out $220,000 in net income last year, down from nearly $4 million the year before, and it seems like that inability to grow may have forced their hand in seeking a buyer."

Sounds like a similar story to the acquisition of FAST by Microsoft earlier this year. FAST, being beaten down in the Norwegian Stock Market after some shady financial reporting (and retractions), became a more affordable acquisition for Microsoft, and a way for Microsoft to innovate (as always) through acquisition. Of course paying less than more for an acquisition is always a sound move - and the financial analysts seem to believe this is a solid move on both sides.

I will say that I disagree however with CMS Watch analyst Alan Pelz-Sharpe, quoted in a PCWorld article (Open Text to Buy Captaris ) as saying "Over time, Open Text could become "more of a holding company than an ECM firm," he suggested."

Unless all other companies that have a history of acquisitions (EMC, Oracle, Microsoft, etc.) would be categorized in the same manner, I don't see why Open Text would be called out as a holding company rather than ECM firm. The integration amongst the components only seem to be growing tighter, rather than looser, which a holding company strategy would lean towards. Open Text has not (of late) pursued the more typical Cisco style of acquisition and re-branding that they once did, but many of the acquisitions they have made in recent years have had quite strong brand recognition in themselves. It would be bad business to cut and run on the brand front, and in this regard, they are no different than EMC, who still maintains Documentum, Captiva, RSA, and many others as named brands/families.