Two competitors in the enterprise search space have joined forces. U.K.-based Autonomy Corp. PLC announced it will acquire the larger U.S.-based Verity, Inc. for approximately $500 million. The companies said that their products are complementary and that the combination will provide customers with a broader and more powerful set of solutions that address the increasingly demanding requirements of information access. Industry observers attribute the deal to the increasingly competitive landscape, the promise of additional revenue and customer growth possibilities, and some cost-cutting advantages. The combined entity will be branded Autonomy and will maintain global headquarters in Cambridge, England, while Verity will become the base for U.S. operations. Mike Lynch, Autonomy's group CEO and co-founder, will continue as CEO of the expanded group. Anthony J. Bettencourt, CEO of Verity, will assume the role of CEO, Autonomy, Inc., the company's U.S. unit. The all-cash transaction requires shareholder approval and is subject to the customary regulatory closing conditions. The deal is expected to close in late 2005/early 2006.
Verity provides business search and process management software to more than 15,000 organizations, including companies of all sizes, from small and mid-size businesses to the Global 2000, as well as public sector organizations. Its business search products include Verity K2 Enterprise, Desktop Search, Enterprise Web Search, and Ultraseek, as well as a classifier, federator, and an extractor. Autonomy's customer base comprises more than 1,000 global companies and organizations. Autonomy's core IDOL technology provides a platform for the automatic categorization, tagging, linking, retrieval, and profiling of unstructured information.
While the market for enterprise search is growing quickly—estimated by IDC at more than 25 percent in 2004—even Verity has less than $150 million in revenue while Autonomy has only about $65 million. Susan Feldman, research vice president of content technologies at IDC (http://www.idc.com), said the enterprise search market has generally consisted of a plethora of relatively small companies. In a recent IDC "event flash," she wrote: "Can two Davids make one Goliath?" The market is now in ferment, with the small companies having to contend with each other and with larger software vendors like Microsoft, IBM, and Oracle entering new enterprise search products, as well as deal with the "Google effect."
She said the challenges look to be in integrating quite diverse company cultures and technically different search engines. It does give Autonomy a very good desktop search engine. In fact, she said, "It almost appears as if the merged companies will have an embarrassment of riches." The merger will create waves she predicted. "Autonomy's acquisition of Verity must give pause to other players in the enterprise search software market."
A recent analysis by reporter Doug Henschen (http://www.intelligententerprise.com) stressed that the deal represented "consolidation in the face of fierce competition." He explained that lower cost offerings from Google (its server appliance) and Microsoft (operating-system-embedded search tools) are "redefining enterprise search as a mainstream market."
Bob Boeri, the Info Insider columnist for EContent, focused on the need for the companies to look forward. "[I]f such a merger is to succeed, it will not be by continuing this blending of technologies into new products. Rather, they would do better to focus their R&D on new search capabilities supporting XML. OpenOffice already supports XML robustly, and Microsoft's Office 12 is aiming to re-engineer its office product internals around XML. 2006 also stands to be the year that the W3C's XQuery finally becomes a standard. Whoever is first to market with robust support for searching (and manipulating) the coming tide of XML-based office content will indeed change the face of the search industry. Waiting for mainstream adoption of XML has been like waiting for Godot, but if struggling search vendors are to beat the Google juggernaut, XML might (finally) be an opportunity to do it."
However, industry consultant Stephen Arnold, author of the " Enterprise Search Report" (published July 2005 by CMS Watch; http://www.cmswatch.com/Search/Report) and " The Google Legacy" (September 2005; http://www.infonortics.com), said: "This acquisition is not about technology. This is a deal that gets Autonomy a high-margin consulting revenue stream and customers." He said the deal is important because it positions the larger Autonomy/Verity combination solidly in the consulting space—where the margins are higher than in software licensing.
Arnold said that none of the enterprise search companies have been able to break through a "glass ceiling" of more than $250 million per year in revenue. He said: "With the purchase of Verity, the new company will have a chance to generate more revenue, putting growth pressure on Endeca and Fast Search and Transfer (FAST)." He added: "This was a clever idea on Mike Lynch's part, but Google is almost certain to chase both Autonomy and Verity customers, promising less transition hassle and lower costs."
In fact, 1 week after the Autonomy announcement, Google announced a "search replacement program" whereby any business that replaced its existing search solution with a Google Search Appliance (which starts at approximately $30,000) by the end of 2005 would receive a free Google Mini (worth about $3,000).
Arnold said the Autonomy-Verity deal will certainly make managers at Endeca and FAST have to reassess their business offerings. Endeca may have to expand its work flow offerings and FAST will have to look for higher margin sectors for its search technology. While not impossible, finding new revenues will be a challenge.
On the CMS Watch blog (http://www.cmswatch.com/Trends/Recent), Arnold wrote that the "Big 4" enterprise search vendors have now become the Big 3. He noted that FAST has been " nipping at Autonomy's heels of late." He added that FAST "might have to make some bold moves if the Autonomy-Verity deal goes through." In a telephone interview he explained that FAST is aware of the need for services and has been pushing its hosted services business—but consulting is different. "Maybe FAST will buy a consulting organization," he speculated. Convera doesn't focus on consulting either, he said. Convera has already announced its vertical search strategy.
If you're interested, CMS Watch has posted a vendor list of 33 of the "most significant" enterprise search companies, divided into eight categories (http://www.cmswatch.com/Search/Vendors). The "Big 4," soon-to-be 3, by the way, are described as: "Traditional, publicly-held enterprise search vendors with 6-figure pricetags and [a] variety of add-on modules."
So, the future seems to be fairly rosy in the marketplace for the new Autonomy-plus-Verity. But, don't count out IBM or Microsoft—or the possibility of further consolidation among the search companies. And, there's always that Google effect …