Speaking of M&A, Paul Carman of the strategic advisory group Xamcor presented at the event. (Full disclosure, Spencer is one of the principals of Xamcor and DIR Editor Ralph Gammon has developed some content for the Xamcor Web site). “I have been working in M&A in this market for 15 years now,” said Carman. “And right now is probably as good an opportunity as I’ve seen for companies looking for exit strategies and getting good valuations.”
I have to agree with Carman. Since April, in a space of less than six months, DIR has counted eight significant acquisitions in the capture/ECM space, as well as two equity investment announcements. This is somewhat unprecedented unless you go all the way back to the late 1990s when Lason, F.Y.I., and ImageMax were competing to roll up service providers. But, as Carman pointed out, those were mostly smaller acquisitions, and while the market for service providers is currently hotter than it has been since that time, we’ve also recently seen quite a few ISV acquisitions. [The latest is Toledo-based DocuSphere, an A/P-focused imaging and workflow specialist that was acquired by e-invoicing network provider Tungsten Corporation. Vendors combining paper capture and e-invoicing in a single solution is currently a popular trend in the purchase-to-pay/AP space.]
The reason for this somewhat sudden ramp-up in M&A activity is not exactly clear, but I think is has something to do with Spencer’s view that this is a maturing mainstream market. If you remember, when HSA launched its conference 10 years ago, it was projecting a 15% CAGR five years out. A decade later, the five-year projected CAGR has been nearly halved. As a result, it is harder for capture companies to grow organically, so increasingly they are looking for acquisitions to drive greater growth rates.
In addition, as capture software products mature, there is less differentiation that can be achieved through innovation. Don’t get me wrong, there is plenty of great R&D going on in areas like semantic and natural language understanding, but the current technology available probably solves the bulk of users’ capture needs. I don’t think this could be said 10 years ago. I mean, what more can we do with invoice capture, for example? So, instead of investing in R&D, I think we are seeing more profits being put toward M&A as it offers better returns.
That said, there is quite a bit of investment that could be made to move capture software to the latest technology platforms, like the cloud and mobile devices. These areas haven’t proven to be sure things yet, so there is still some hesitation by many vendors to fully commit to them. Per McBrien’s suggestion, M&A represents one avenue for adding new technology platforms without having to develop them yourselves. This is a route being taken by some more mature ISVs like TIS and Kofax.
Finally, despite its relative maturity, capture is not nearly as mature as its sister market—printing. It seems that MFP manufacturers would love 8% annual growth rates. They see document capture as a way to improve their growth and margins and as a result are targeting companies in this market like never before. And one thing about printing hardware vendors, they typically have deeper pockets than traditional document capture players. MFP vendors are definitely a major contributor to this trend toward more M&A in our market.