Migrated from eDJGroupInc.com. Author: Barry Murphy. Published: 2011-12-29 10:31:20  Yesterday, EPIQ Systems announced its acquisition of De Novo Legal for $68 million.  It’s a 2011 transaction, but look for it to be indicative of something to expect in 2012 – service providers getting bigger and broader geographic coverage via acquisition.  While huge acquisitions on par with HP’s purchase of Autonomy or Symantec’s purchase of Clearwell are certainly a possibility, the real action is more likely to be in the service provider business.eDJ forecasted service provider roll-ups in our 2012 Trends document, saying “eDJ does not see an acquisition of the scale of HP/Autonomy occurring in 2012, but does believe there will be several roll-ups of regional service providers to become more competitive with the likes of Kroll Ontrack.  The way for a service provider to achieve scale is through a more national network.  The venture capital community will be heavily involved in these roll-ups.”One reason that a service provider will buy another is simply to get bigger – more customers and more revenue.  Traditionally, it’s been very difficult for service providers to get over certain revenue humps, e.g. the $30 million mark and then the $60 million mark.  In EPIQ’s case, De Novo will provide a 30% – 40% revenue increase for the eDiscovery business and should be accretive for 2012.  But, acquisition is not simply about revenue growth; service providers also need strategic geographic locations for data centers in order to win certain business.  In the EPIQ case, “De Novo has document review centers in key strategic locations in the United States and is among the largest providers of managed review and staffing services.”  That sets EPIQ up to better compete in the future.The service provider business is an interesting one to watch.  Service providers are important because of the expertise they bring to bear in a market that is immature in best practices.  With labor arbitrage, service provider can extend this expertise across multiple clients in a cost-effective manner.  To date, there has not necessarily been one dominant player in the market.  There are large companies with robust market presence such as DTI, Kroll Ontrack and Lexis Nexis Applied Discovery.  There are Big 4 consulting firms with service provider businesses like KPMG and Deloitte.  There are players with solid reputations like BIA, CaseCentral, DaegisFios, and Planet Data.  And, there are literally hundreds of regional providers with solid revenue and profits.  Essentially, it’s a market ripe for roll ups so that providers can compete for global, national, and regional business while scaling to handle matter of all sizes.Another reason that eDJ believe acquisitions are likely in the service provider business is interest from the venture capital and private equity communities.  eDJ interacts frequently with VC and PE clients.  Traditionally, they are focused on software investments because of the higher multiples that can be achieved come time for a market exit.  But, over the past several months, the interest has shifted more to the services business despite the lower multiples.  There is still money to be made and there is a ton of opportunity in the eDiscovery service provider market.

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