Ovum: a smart buy that needs careful handling

Having spoken this week to Datamonitor and Ovum executives, Lighthouse has concluded that Datamonitor’s acquisition of Ovum is quite unlike those of most other analyst firms. While META and Giga both had uneven business performance, Ovum’s proven record of fast growth and improved financial results is reflected in the success of its own IPO. As a result, Ovum looks set to remain as a brand, rather along the lines of Butler and Verdict.

It’s rare to see two analyst firms with strong financials coming together: short-term opportunities for Datamonitor to rapidly release value from within Ovum are mainly limited to back-office operations. It’s not a turn-around acquisition, but an move to insulate both businesses against the endless round of consolidation and fragmentation by enlarging them. Putting Ovum together with its IT cousins, Butler Group and Datamonitor Technology, it will be part of a hi-tech research business that is double the size of Ovum now. We think it’s a smart buy, for seven key reasons.

  • 1) Market penetration: The market size is anything from $2.5bn (pure research, according to Outsell) to $11.5bn (full service, according to Gartner and is growing at around 9% per year. Currently no company outside Gartner, Forrester and IDC has more than 3% of the market. There is no major European-headquartered company with global reach, other than the Datamonitor/Ovum, and no analyst company whose approach starts from deep understanding of industry verticals (in the manner of the managements consultancies, which understand how technology supports business). There is a trend towards convergence between ICT providers and a trend towards consolidation and disruption in the ICT research space. Scale matters to centralised buyers of research in this market. However, because clients genuinely do want another significant competitor to the 3 companies mentioned above, they encourage the development of serious alternatives. That’s a trend that allows both Ovum and Datamonitor to see huge benefit in the additional scale this move offers.
  • 2) Acquisition History: This will be Datamonitor’s sixth acquisition in three years. All previous acquisitions have grown well, increased in profitability and retained the majority of their staff (unlike Gartner’s acquisition of META). All the knowledge gained in prior integrations could be applied to make this a success and hopefully this will be helped a little by Parslow’s experience in the acquisition and integration of Forrester and Giga. The head of Datamonitor Technology is ex-Giga and went on to be the Forrester EMEA VP of Sales: he has been through an integration from the acquiree’s perspective as well which all helps.
  • 3) Product fit: Ovum and Datamonitor have not competed with each other for clients (although Ovum has hired from Datamonitor). Both organisations have distinct product sets for distinct client and buyer needs. This makes the set of offerings potentially complimentary and clearly leads to cross-sell opportunities not just between the two IT businesses but in using Datamonitor’s presence in major industry markets as an facilitator for the Ovum brand to enter the enterprise space. The Ovum brand will be retained and invested in. From a content point of view Ovum has very strong Telecoms, Policy & Regulation and IT services content while DM has good IT services and industry content supported by very strong data and databases across the IT sector. This considerably strengthens the overall vendor proposition while allowing the combined companies to movemore quickly into the enterprise space (a strategy that was already reflected by Datamonitor’s acquisition of Butler Group and Ovum’s acquisition of Orbys). We also feel that the full IP value from Ovum’s acquisitions of RHK and Summit has yet to be delivered to clients.
  • 4) Geographic fit: Datamonitor has a strong presence in the US while Ovum has a stronger presence in AsiaPacific which allows both to leverage each other’s footprint. Clearly both are strong in EMEA. There is no intention to close any offices.
  • 5) IP: Datamonitor has invested very heavily in both data and its web/knowledge delivery platform over the last few years in addition to having large research facilities in both Manchester and Hydrabad to collect and analyse data. These capabilities will be open to Ovum and in return Datamonitor can leverage Ovum expertise in research methodologies, inquiry, client service and consulting.
  • 6) Perception: Datamonitor has broad awareness and respect across the group. However, in telecoms and IT Ovum has far better profile and higher influence. In this respect, Lighthouse deeply disagrees with other followers of the analyst landscape who feel that Datamonitor and Ovum are roughly equal in terms of awareness or exposure: Ovum’s exposure in Europe’s mainstream and ICT media is seven times greater than Datamonitor’s. However, awareness of the Ovum brand could increase even further through correctly leveraging Datamonitor’s wider industry presence.
  • 7) Key Metrics point of view: Datamonitor focuses heavily on sales growth, client loyalty and profitability. Both organisations have sales growth over 25% and client retention of over 85%. There is a difference in profitability but the economies of scale are part of this acquisition, as we discussed last week. Datamonitor also has a far wider range of go-to-market channels and partnerships which Ovum could take advantage of.

As we understand it, the Ovum business will not change in 2007. In our opinion, any group-wide review of Datamonitor’s services offering and positioning will retain the Ovum brand: remember, for example, that tiny Computerwire still exists as a brand four years after its purchase by Datamonitor. The benefit to clients will primarily be felt in the ‘back office’: immediate access to infrastructure and research, and eventually significant collaboration across the research, analysis and consulting organisations of the group. This is something which is already happening between Butler and Datamonitor Technology, where shared and common research agendas help establiush both demand- and supply-side side market views.

In our opinion, the poor understanding in the AR community of Datamonitor’s ICT businesses will be hard to shift. The firm limits the degree to which it publicises named analysts, which makes it rather opaque.

It has an Enterprise IT service which focuses on developing and executing IT strategy, vendor selection and product procurement; and education and market awareness in selected key areas (principally IT Services, Mobility, Enterprise Apps, BI, Security, Content Management, and the Desktop).

However, it has a much larger vendor business focused on opportunity identification and prioritisation (help for sales & marketing teams on which market, why, which segment within that market, where customers are in adoption cycle etc.). It also advices on Go-to-Market execution (messaging, pricing, support tools), partner selection (a some channel selection support) and competitive landscape and assessment. This is an area in which Ovum has been cautious!

Of course, Datamonitor’s strength is outside high tech. More than two thirds of its revenue comes from sales of business research and analysis into verticals. The whole technology approach is driven by the firm’s unique understanding of the industry areas which comes through knowledge and support from the other business units (Financial Services, Energy, Consumer & Retail, Automotive & Logistics and Healthcare). In that sense, Datamonitor has the potential to really challenge the largest analyst houses. Datamonitor is focused on helping clients to understand the business drivers, processes and issue areas and how technology can help support and relate to that. This business-driven approach is quite distinctive; only Forrester can seriously approach it. Most other analyst firms are technology driven. Typically that means that even Datamonitor’s vendor business does not overlap with Ovum’s. Datamonitor works with sales and market intelligence in vendor organisations, whereas Ovum works with executives, product managers and corporate communicators. This is one reason why Datamonitor shows up less on surveys of vendors and AR departments, as Datamonitor’s focus is on sales enablement rather than AR or product development.

Generally, therefore, we have pretty positive set of expectations for the success of the merger.

This expectation is also underpinned by a partial convergence in management cultures between Datamonitor and Ovum. Ovum has, for a number of years, benchmarked its financial ratios against Datamonitor’s. Both firms were rather different in the 1990s, when I worked at Ovum. The gap between the firms seemed to reflect gaps in the cultures: Ovum had air conditioning, free fruit and weekly massages; Datamonitor had Thomas Hobbes. Some Ovum staff were anxious after Fiona Glennon joined the firm in 2003 after working for Datamonitor in New York and for its partner, Reuters Business Insight. Her rise through the firm, from Business Development Director to COO, partly reflects the way in which Ovum has adapted itself to the kind of commercially-minded priorities that Datamonitor has used. Our bottom line is this:

  • While the operations of the firm will continue to adapt, Datamonitor shareholders need the analytical and consultative approach of Ovum to be maintained and deepened.
  • There are a number of long-term opportunties for Datamonitor, Ovum and Butler to work together. A large part of the premium that Datamonitor is paying reflects those future opportunities. A wider product set gives all the units of the broader Datamonitor group far wider access into both end-user organisations and vendors.
  • There are substantial benefits for Ovum. Datamonitor is far stronger in primary research methods, including the collection of market data. Ovum is perhaps stronger at forecasting, but Datamonitor’s 100-plus team in Hydrabad gives Ovum access to a huge base of data and a large base of expertise in developing analysis primarily from highly structured data.
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