Unify Merges with Daegis: Transaction Comments

On June 22, 2010, Unify announced it would merge with Daegis, an e-discovery review firm. Here are some thoughts on the transaction:

  • According to Kurt Jensen, CEO of Daegis, revenues for calendar years 2007/8/9 were approximately $16M, $21M, and $23M, respectively, with profitability consistently between 25% and 35%.
  • Unify paid some $37M for Daegis. Of this, $24M is paid cash (debt financing from Hercules Technology Growth Capital). The balance is in Unify stock.
  • This is a price/TTM revenue ratio of around 1.5. This strikes us as a remarkably low price. Todd Wille, Unify CEO, comments that "Daegis is receiving a significant portion of the proceeds in Unify stock which is perceived to be undervalued and represents tremendous upside to the sellers." All the same, the ratio should please Unify shareholders.
  • Corporate legal departments want to bring as much of the e-discovery work in-house as they can, because of the high costs of outsourcing this work. There is thus intense pressure on review firms to reduce their charges. Generally, expect plenty of case management firms to be acquired over the next couple of years.
  • The strong profitability reported by Daegis is all the more striking given the price pressure. Partly this is because most of Daegis' software is home brewed, not licensed. Daegis believes additional factors are the breadth of the e-discovery processes that its software encompasses, and the provision of high-margin professional services.
  • In principle, Unify gains substantially by the merger:
    • Gets a position in the legal world, and the ability to market to the legal world.
    • Can get an interesting competitive edge by tightly integrating case management information and archiving. Such integration is hard and could end in tears.
    • It helps corporate legal departments bring more e-discovery work in-house.

... David Ferris

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