Metastorm and IRIS management - pebbles with big ripples

$182m sounds like a lot. So does £112m. But compared to $3billion, let alone £30billion or £55bn - it's a small drop in a modestly sized pond. A bit like changing the business card to say "non-" in front of "Executive" - a small but significant change with ripples spreading.

The recent deal in which Opentext bought Metastorm only really makes sense if you see it alongside a range of deals such as the Complinet deal from Thomson Reuters recently. In both cases, the price paid was breathtaking. Neither is really big enough to affect the share price of the acquirors on their own unless market traders see them as symptomatic of something else - good or bad. But they are just the latest in a round of strategic bouts, which have kept the M&A headlines ticking along in a market which should by rights have been acquisitively dormant, and certainly not pushing deal benchmarks higher.

From a UK perspective, the small pebble is Metastorm's UK size. The big brand in the UK boils down to a business with less than £10m overall sales, most of which are overseas, and still less relating to purely legal clienteles. We typically do not map firms with less than £1-2m sales, and frankly Metastorm are borderline in this category in UK legal IT - although we have now relented and are including their profile in our market research profiles for Legal Technology.

The test seems to be - are you "legal" or are lawyers just a niche to you: "where do you live?" One of the strategic themes we keep banging on about is: "if we're an option to you, you're not a priority for me". For Complinet, in-house compliance teams were what they did; period. For Metastorm, legal was one of a range of industries they serve well, but they are a niched BPM specialist. Strategically if lawyers went south, they could migrate to bankers, pharmaceuticals, or a range of others - a "good thing"; but also a bad thing if you want true legal specialists. It is comparatively easy to see this degree of specialism in tax and accounting software - harder with legal practices, and harder still with GCs and in-company teams. But this is where the "strategic" premiums are being paid. Thomson Reuters (30bn) want SAP (51bn) and EMC (56bn) to see the lines in the sand, and others like Wolters Kluwer (5bn) are helping to draw the lines more clearly with players like Automony (4bn) and Opentext (3bn).

The other issue is VCs versus global trade. Cash is not something VCs get dewy eyed about - it is a commodity to them, so the main punch in M&A terms of Thomson, Reed, WK etc is neutralised. A surprising number of big IT names, ie Northgate and Ceridian for example are not only not listed, but VC held, as is Aderant. IRIS has been in VC territory for most of a decade. It must be immensely frustrtating for trade players not to be able to play with leaders and get the synergies proven, but that's life. Enough Big VC's, not least Hellman & Friedman, Hg Capital or Vista Equity Partners, are still convinced that this global spat has mileage to run and that they can see a way of keeping the exit multiples as high as possible. A range of smaller VCs in the UK are consistently snapping up smaller tech assets and perhaps it is only when one of these VCs hits a significant capital loss that this run will stall - but who's going to be the one to call it?

Meantime - can Lexis dna, Thomson Elite, or CCH/Sol6 shut down the operational freedom of IRIS, Aderant, etc? Will Tikit or Elite keep SAP/TCS at bay or Flosuite or FWBS hamper Metastorm?

We'll tell you when the score changes - the recent changes at the top of IRIS are symptomatic. IRIS legal's 2010 results are in their profile on the RBP site now. Merging the legal division with the enteprise one suggests they see two exits - a tax one, probably to one of the publishers, alongside an enterprise one to a global BPM/ECM player. A buyer for the whole is increasingly unlikely, and patience with on-sell breakups is not high or a favoured ploy by these big groups. For what it's worth, we think their assumption that legal technology is just another BPM niche is wrong - and yes, I'll shoot the next guy who explains to me that Sharepoint is really the messiah, not just a naughty boy.

So a c£2-3m firm acquired well up the tree by another US major group, has ripples far beyond its horizon. No doubt there will be some shadenfreude over changes at IRIS, but if they can still get a screaming exit multiple(s) - it's premature. It's a complex market with big stakes, and a lot of group think and gossip going around. RBP have just published their guide to M&A in this sector - reviewing the facts: see http://bit.ly/i66a9q