Iron Mountain Buys E-Discovery Firm

Iron Mountain will shell out $158 million in cash to buy e-discovery company Stratify Inc. by the end of the year, if shareholders and regulators approve.

Iron Mountain announced the deal as part of its third-quarter earnings report this morning. It has had a partnership with Stratify since January 2007, and execs say the relationship fared well among enterprise customers from the start.

"Customers have been asking us for this... It's a white-hot market, by all accounts a billion-dollar market... We're seeing estimates between $4 billion and $12 billion in the next few years," said Iron Mountain president and COO Bob Brennan during today's earnings conference call.

The Stratify purchase will continue Iron Mountain's acknowledged plan to build its services roster through acquisition. Indeed, the buy will bring to $500 million the total Iron Mountain has spent on acquisitions so far this year.

Other buys include ArchivesOne, a records management company in Connecticut, and RMS Services, a Boston-based records management firm that specializes in converting paper files to digital format for hospitals. Both of those acquisitions, along with some smaller companies acquired this year, cost Iron Mountain $340 million.Stratify, a profitable privately held firm founded in 1999 and headquartered in Mountain View, Calif., is predicted by Iron Mountain to be on track for $30 million revenues this year. It has around 110 customers and 185 employees, about half of whom reside in Bangalore, India. Iron Mountain says Stratify's profit margin is now between 20 percent and 30 percent, but the new parent plans to improve on that. Earnings from Stratify, however, will be minimally accretive to Iron Mountain's earnings in the first quarter of full ownership, execs say.

All Stratify employees and locations in Mountain View, Boston, and Bangalore will be retained, Iron Mountain says. Ramana Venkata, CEO and founder, will stay on as part of the Iron Mountain Digital division, which is headed by John Clancy.

The Stratify acquisition is part of Iron Mountain's strategy to grow its digital services business, which now accounts for roughly 6 percent of its overall sales, which were $702 million last quarter, up 5 percent sequentially.

Iron Mountain thinks it has an edge in the e-discovery market. "A $30 million leader shows this is a fragmented market with an awful lot of scrimmaging. We believe we are unique because we are the custodian of information today." Iron Mountain's ability to organize data from paper through ultimate destruction in the information lifecycle will position it well, Brennan maintains.

At least one analyst agrees. "Iron Mountain's acquisition makes a lot of sense. People using Iron Mountain will really benefit," says David Ferris, president and senior analyst at Ferris Research. He sees the e-discovery market as at least $100 million if one counts software only, and potentially much larger than the $4 billion Iron Mountain execs were citing on today's call. "If you count in lawyers' fees, they're getting $400, $500, or $600 an hour just to look through documents," Ferris says.In Ferris' view, while there are lots of specialized tools out there to help various parts of the e-discovery process, the closest competitor so far to the Iron Mountain/Stratify combination is Zantaz, which was acquired by automation supplier Autonomy for $375 million in July 2007.

What lends strength to Iron Mountain's position are Stratify's applications, which not only sift and search email, scanned documents, and electronic files for specific items, but map out relationships among threads and document groups, which attorneys can review when preparing for litigation.

Just a handful of players offer similar data organization capabilities to Stratify's, including Attenex, Clearwell, and MetaLINCS, though nearly every storage, email management, and archiving vendor claim to have some e-discovery features.

Stratify also offers a key element Iron Mountain sees in its strategy "capture, store, and make useful" information -- the Stratify Digital Repository. While not a huge part of Stratify's business right now, Iron Mountain promises to make it bigger.

At least one industry observer thinks the repository will be key to Iron Mountain's future in digital services. "It's potentially a very good move on the part of Iron Mountain," says James K. Wagner Jr., a lawyer and co-founder of DiscoverReady LLC, a discovery management firm based in New York City. "Most of their ongoing repository design issues relate to how you get data back out [from storage]."While Wagner's firm potentially would compete with Iron Mountain, he agrees with the larger company's assessment of the litigation services market. "It just continues to heat up. It's been heating up for the last five to ten years, and it continues to be of tremendous interest. The question is when and how will major players get involved. Zantaz and Iron Mountain have already made their moves."

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