Open Text Acquires Catalyst Repository Systems For eDiscovery Tech

Summary

• Open Text has acquired Catalyst Repository Systems for $75 million in cash.
• Catalyst provides an enterprise-grade eDiscovery and multi-matter management system for large law firms and corporate legal departments.
• OTEX management has identified the legal industry as poised for faster adoption of digital technologies to reduce costs and improve results.
• The deal for Catalyst enables the firm to offer a full suite of capabilities to the legal vertical, both within the U.S. and in Europe.
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Quick Take

Open Text (NASDAQ:OTEX) announced it has acquired Catalyst Repository Systems for about $75 million.

CRS provides eDiscovery software for the corporate legal industry.

Management believes the legal industry is poised to adopt advanced digital technologies to drive efficiencies and improve results.

With the deal, OTEX is able to offer large scale enterprises and top 200 law firms a full-featured, enterprise-scale legal eDiscovery and matter management system.

Target Company

Denver, Colorado-based CRS was founded in 2000 to help corporations and law firms reduce the total cost of discovery and take control over large-scale discovery and regulatory compliance.

Management is headed by CEO John Barr, who has been with the firm since 2016 and was previously VP Market Development/Integration at AppNexus.

Catalyst Repository Systems' primary offerings include:

• Search and Analysis
• Data Management
• Document Review
• Managed Services

Investors have invested $36 million in the company and include FTV Capital. Source: VentureDeal Venture Capital Database

Market and Competition

According to a market research report by Research and Markets, the global eDiscovery software for the legal industry market was valued at $10.8 billion in 2018 and is projected to reach $17.3 billion by 2023.

This represents a CAGR of 10% between 2018 and 2023.

The main drivers for this expected growth are the growing focus on reducing the costs of law departments while increasing the number of litigations, the need to adhere to regulation, and rapid adoption of mobile devices.

The Asia-Pacific region is projected to grow at the fastest rate due to the rapid adoption of digital technologies by small and medium enterprises.

Major competitive vendors that provide eDiscovery software include:

• AccessData
• Commvault Systems (CVLT)
• Conduent (CNDT)
• Deloitte
• IBM (IBM)
• Microsoft (MSFT)
• Fronteo (FTEO)

Source: Sentieo

Acquisition Terms and Rationale

Open Text disclosed the acquisition price and terms as $75 million in an all-cash transaction.

Based on Catalyst's TTM Revenue of $45 million, the deal represents a Price/Sales multiple of 1.67x.

OTEX didn't file a form 8-K or provide a change in financial guidance in conjunction with the transaction.

A review of the firm's most recent 10-Q filing indicates that as of December 31, 2018, it had $595.1 million in cash and equivalents and $3.94 billion in total liabilities, of which long-term debt represented $2.6 billion.

Free cash flow during the six months ended December 31, 2018, was $327.0 million.

So, it appears that the acquisition of Catalyst should present no financial hardship for Open Text.

OTEX acquired Catalyst to further build out its corporate eDiscovery platform capabilities.

As Open Text CEO and CTO Mark Barrenechea stated in the deal announcement,

The joint strength of OpenText and Catalyst confirms our position as a leading provider of eDiscovery technology and combines a powerful set of solutions to help corporate legal departments and law firms seize the opportunities of automation, digital transformation, AI and machine learning.

In the past 12 months, OTEX's stock price has risen 8.4% vs. competitor Adobe's (ADBE) increase of 32.3%, as the chart below indicates:

Source: Sentieo

Over the past nine quarters, Open Text has had an uneven record of both positive and negative earnings surprises.

Source: Seeking Alpha

Analyst ratings are largely positive although there is one 'Sell' outlier. The consensus price target is nearly $44 per share vs. the current stock price of $37.62 as of press time, implying an upside potential of 16.9% if the consensus target is reached, as the graphic indicates below,

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has also been uneven, although recently improved.

Source: Sentieo

So, according to management's investor presentation about the acquisition, it provides Open Text with an enterprise-scale set of capabilities that complements its existing portfolio as follows:

• Subject matter expertise in eDiscovery Managed Services
• Catalyst + Recommind + eDocs puts Open Text in a leading position to address the Legal vertical

OTEX management has identified the corporate legal and law firm vertical as an area of interest and has opportunistically acquired Catalyst to spearhead its expansion within that vertical by providing enterprises and larger law firms with a full suite of capabilities.

The firm believes the legal industry is poised for much greater adoption of digital and cloud-based technologies. In addition, it plans to expand its operations within Europe, grow its customer base among the top 200 law firms, and increase its penetration with large enterprise in-house counsel groups.

Along with the recent Liaison acquisition, Open Text is making significant and strategic acquisitions to expand its offerings in the managed services space for various verticals.

Assuming management doesn't dilute its focus, the deal represents a reasonable price paid to dramatically improve its offerings in the growing legal technology vertical.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.