With all the fear currently residing in the market, consolidation is being widely discussed. The topic of consolidation is often thrown about as if deals are started and closed over a weekend. This is not the case, which is why attrition is end result for most companies struggling to make it in the knowledge services industry. In contrast to Wall Street consensus, content management providers may be more likely candidates to consolidate the LMS/LCMS space than the large enterprise software providers. LMS/LCMS technology has more value to the content management companies due to the synergies between their enterprise applications and the administrative, delivery, personalization and authoring tools contained in the LMS/LCMS applications.
The reasons content management vendors are driving consolidation of the knowledge management platform include:
- Due to the scale, the acquisition of an LMS vendor would have more financial impact on the business models of a content management provider than an enterprise software provider. Also, content management providers have a pressing need to accelerate profitability and to strengthen customer relationships and long-term growth prospects.
- Several content management providers have more than $100 million to effect consolidation and expand their product offerings. Broadening their offerings would enable the content management vendors to provide close to an end-to-end solution.
- A broader offering would reduce confusion in the marketplace, validating the complete knowledge management platform. A broader offering could possibly stabilize pricing and would offer long-term up-sell opportunities to vendors that can communicate the value of an integrated platform to customers.
- Niches of the knowledge management industry are too small to interest the enterprise software players. They will only own industry-leading companies with north of $100 million in revenues and profitability and CAGRs greater than their own business models.
- Although several enterprise software providers have grassroots LMS efforts in process, their products can be seen as category fillers as opposed to best-of-breed solutions. It is apparent that the enterprise software players will continue to struggle near term with internally grown offerings until market forces push the decision process or a leader separates itself from the pack.
Although this reasoning is logical, the merger-and-acquisition process is wrought with challenges that could prevent the best deals from getting done. The potential buyer must decide whether it is more beneficial to build the application in-house or to buy to accelerate time to market. The “build versus buy” decision will play a key role in the trigger of industry consolidation. If the buy decision is made, the acquisition target must meet top-line and profitability requirements to ensure an accretive deal. Acquirers who are capital-constrained can ill-afford any dilution, which inhibits deals from being consummated. Furthermore, the vendors that would be attractive to buyers lack revenue visibility, profitability and realistic valuation parameters. Finally, a tremendous amount of attrition needs to take place to ferret out the leaders, which would aid the market share gains and profitability necessary to jump-start consolidation.
Initial indications that this theory may have some validity include recently announced relationships between Docent and Interwoven and between Plateau Systems and Documentum. Each deal establishes interoperability between e-learning applications and enterprise content management applications. In the long term, this relationship may be the first step toward the fulfillment of the thesis that content management providers could be key consolidators within the e-learning infrastructure space. However, due to the build-versus-buy mentality, the lack of profitability and the poor IT spending environment, consolidation of the LMS/LCMS space will be delayed by several quarters. Sometime in late 2002 or early 2003, the industry may see the first such transaction. If and when the enterprise software providers begin to consolidate the space, PeopleSoft is most likely to be the early mover.
Peter L. Martin, CFA, is a managing director in the Equity Research department of Jefferies & Company Inc., providing in-depth coverage of the knowledge services industry.
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