Fragmented e-discovery space to see spike in dealmaking

BANGALORE (Reuters) - In mid-2000, as the dotcom boom was peaking, executives of information protection firm Iron Mountain Inc noticed an interesting trend while doing PC back-up and e-mail archiving for their clients.

Customers were increasingly demanding a system that would help them search and retrieve documents from complex file back-ups for producing as evidence in litigation, internal investigations and regulatory inquiries.

Nine years since, the technology, known as electronic discovery, has spawned a highly fragmented $3 billion industry, and the bigger players are now eyeing acquisitions to broaden their customer base.

“There are many smaller players with revenue, but not many with critical mass. Some have decent products. So the business is ripe for consolidation,” Sidoti & Co analyst David Gold said.

In the nascent years of e-discovery, Iron Mountain responded to its customers by offering existing solutions. Later, in 2007, when it found that time was ripe for serious investments, it got aggressive with the acquisition of e-discovery firm Stratify.

Along with Iron Mountain, several other companies like FTI Consulting, Epiq Systems and Guidance Software and privately held firms such as consulting giants Ernst & Young, KPMG, Deloitte and PricewaterhouseCoopers, are competing for a bigger share of the market.

In the last five years, the market saw as many as 18 acquisitions, according to technology research firm Gartner.

Recent ones include business advisory firm FTI Consulting’s deal for Attenex and Seagate Technology’s acquisition of MetaLINCS.

Larger players such as IBM, EMC Corp and Symantec Corp operate in the technology platform solution segment of e-discovery.

An increasingly litigious society, growing number of regulations and a mountain of digitally stored information are the trends working in favor of e-discovery, Iron Mountain Chief Executive Bob Brennan said in an interview.

E-discovery software revenue -- generated from new licenses, upgrades, subscriptions and hosting -- will more than double to $1.94 billion in 2012 from 2008, estimates Gartner analyst Tom Eid.


E-discovery market may be offering a very complex landscape due to the sheer number of players in the fray, but it is the same complexity that is pushing existing players to cut more deals and bag the position of the market leader.

“There are a few larger players, but there is no category killer just yet. So there is still opportunity for companies such as Iron Mountain to become the big player,” said Sidoti & Co’s Gold.

Analysts believe it is important for companies to focus on acquisitions that are technology specific and build a complete platform at this point in time, than go in for roll-up acquisition that targets a rival’s turf.

Companies will not be able to gain considerable market share through roll-up acquisitions presently because of the fragmented market, and any such action would be a “very risky process,” analyst Mark Schappel of Benchmark Co said.

“We will consider acquiring technology that rounds out our core capabilities and integrates well with our technology,” Guidance Software CEO Victor Limongelli said.


The past few years have seen many large firms spending millions of dollars in penalties for their sloppy document handling.

A high-profile example is that of Morgan Stanley, which had to cough up more than $29 million since 2002 to resolve regulatory probes.

The years that followed saw regulations getting stringent on e-discovery and an amendment in December 2006 made it mandatory to include electronically stored information in initial disclosures.

“E-discovery is something that organizations have to do these days, regardless of other technological investments,” said John Bace, an analyst with Gartner.

“A U.S. company with more than $1 billion in revenue has, on average, 305 lawsuits pending simultaneously,” said Robert W. Baird & Co analyst Andrea Wirth, quoting an industry study.

With e-discovery carrying the compulsory tag, companies have started realizing the importance of keeping an e-discovery vendor close at hand to tackle any eventualities quickly and in a cost-effective way.

“There is a move towards more proactive information management inside the enterprises these days,” Stratify General Manager Ramana Venkata said.

“I just came back from two large trade shows on e-discovery and, I got to tell you, people are still planning to spend money on e-discovery solutions versus other areas,” Gartner’s Bace said.