Changes in the Legal Tech Market As Viewed Through Recent M&A Activity

Take, for example, Thomson's acquisition of Serengeti in late 2010. At its core, Serengeti could be described as a solution that corporate counsel can use to monitor, contain and cut law firm spend. With Thomson's acquisition of Serengeti, there appears to be some recognition that the 'power pendulum' has swung from law firms to in-house legal departments. In many respects, Thomson's subsequent acquisitions of Pangea3 (November 2010) and Practical Law Company (February 2013), both of which arguably provide corporate counsel a more cost-effective option for legal services and research, further promote the degree to which the pendulum has swung. Vista Equity's acquisition of Mitratech in October 2011 and Carrick Capital's $28 million investment in Axiom Law in February 2013, following earlier investments by such funds as Benchmark, JP Morgan and Greenhill, also support the notion that serving the needs of in-house legal departments is becoming a more attractive investment thesis.

At the lower end of the legal information market ' serving consumers, solo practitioners and small law firms ' the success of players like LegalZoom (funded by Polaris Ventures in 2007), as well as Google Ventures' investments in RocketLawyer (April 2011) and LawPivot (December 2011), the two of which combined in January this year, suggests there is an investment thesis around delivering more innovative solutions to address this market segment. In fact, these companies go beyond purely providing legal information ' they provide cheaper lawyer access to consumers and potential client development opportunities for lawyers.

Increasing Productivity

Considering the pressures law firms are experiencing, it is not surprising that private equity firms have looked to invest in companies offering solutions that improve law firms' work product generation efficiency, manage their expenses and better capture their billable time. Recent examples include IntApp (Great Hill Partners, December 2012), Aderant (Madison Dearborn/Vista Equity, November 2012), Microsystems (Concentric Equity, October 2012), Clio (Acton Capital, January 2012), Intelliteach (River Associates, March 2012), and Chrome River (First Analysis, April 2012).

In addition, both Aderant and Thomson's Elite business have executed upon consolidation strategies in this portion of the market. Since 2009, Aderant has added seven companies to its mix, including acquisitions of RainMaker (October 2011), CompuLaw (August 2011) and Client Profiles (August 2011). Elite has been active, too, with at least three acquisitions in 2011: Pilgrim Systems (December), FWBS (October), and Kleinmundo (February).

Relatedly, Counsel on Call, which provides both law firms and corporate legal departments a more flexible and quicker way to access a bench of experienced attorneys, received an investment from Claritas Capital in July 2012.

Divestitures

In addition to tracking where acquisitions have occurred and where investments have been made, it is also informative to look at where there have been divestitures in the legal market. Thomson's sale of BARBRI to Leeds Equity in July 2011 reflects the strain being felt in the law school market, where a law degree and bar passage no longer guarantee a job. And Thomson's recent divestiture of its law school print / book business ' Law School Publishing (Foundation Press) ' to Eureka Growth Capital in February 2013 reinforces its apparent departure from this segment of the market.

e-Discovery Market

In the e-discovery market, the divestitures by Lexis of its Applied Discovery business to Siris Capital in January 2012 and its November 2012 sale of its e-filing business, File & Serve, to CaseFileExpress, as well as Wolters Kluwer's sale of its Summation business to AccessData in 2010 (sold a stake) and in March 2013 (sold its remaining interest), are telling in their own right.

Certainly, the e-discovery market is attractively sized and growing; however, the associated hype is not as loud as it was several years ago. There has been significant consolidation in the business, particularly among the service/processing providers, e.g., Epic's acquisition of De Novo (December 2011), The Dolan Company's acquisition of DiscoverReady (November 2009), and DTI's acquisition of Providus (September 2012).

Moreover, the primary strategics in the legal industry have reduced their e-discovery exposure or made smaller investments (e.g., Thomson's acquisition of CaseLogistix in July 2010), and they appear to be focusing on that segment of the market where the associated tools and solutions are actually used by lawyers. The remainder of the market seems to be divided into two segments: 1) The technology segment, where strategics like IBM (acquisition of StoredIQ, February 2013), Symantec (acquisition of Clearwell, June 2011) and EMC (Kazeon, September 2009) seem to view e-discovery technologies as components of a much larger information management solution and where CIOs or CTOs (versus in-house legal departments) have a material say in ultimate purchasing decisions; and 2) The services segment, where companies like Huron, FTI, Epic and DTI continue to drive consolidation, and scale and client revenue diversification matter.

The Courts Segment

Finally, there has been recent acquisition activity in the courts segment of the legal industry, including The Daily Journal's purchase of New Dawn Technologies last December and Thomson's acquisition of LT Court Tech in April 2012. Although the volume of deal-flow is less, dynamics in the court segment ' significant budgetary pressure, aging workforces and continued caseload growth ' should drive continued M&A and investment.

M&A Categories

While by no means exhaustive, the above evidences the level of M&A activity in the legal market over the past several years. This activity can be bucketed into seven categories, and I believe that M&A and investment should continue in these categories for the near future ' because change in the legal market is underway.

1. Legal Solutions v. 2.0

This is perhaps best summarized by Mike Suchsland, CEO of the Thomson Reuters' Legal Division: 'We have decided that our long-term vision is not information, it is software tools, solutions, ways to enable attorneys to practice in a more cogent way '.'

2. The Pendulum Has Swung in The Direction of Corporate Counsel, Away from Law Firms

Stricter review and management of outside legal spend, and more willingness to consider using technology and alternative types of legal service models are trends that should drive further M&A and investment in this market segment.

3. New Solutions and Models Will Continue to Take Root at The Smaller, Lower End of the Market

Consumers applying some degree of DIY to their legal needs, as well as small law firms looking to generate new business while lowering their expenses, will drive transformation, disintermediation and efficiencies in this segment of the legal market.

4. Law Firms Need to Maximize Work Generation and Client Satisfaction While Curtailing'Expenses

The days of law firms passing through to their clients the costs of their information assets, as well as looking for their clients to subsidize the apprenticeship of junior associates, are numbered (if not over). Already under billing scrutiny (and likely exacerbated by the recent DLA Piper overbilling issue), law firms need to work smarter and operate more efficiently, with the transition to this new paradigm being aided by technology and the outsourcing of certain services, including actual legal services.

5. Changes in the Legal Market Are Having an Adverse Impact On Law Schools and Their'Graduates

Legal marketplace changes have not been good for law schools, law grads or the companies that serve them. Divestures in the market segment confirm this and it is not clear when (or if) things will return to where they were pre-Great'Recession.

6. A Significant Portion of the e-Discovery Market Is Really a Subset of a Much Larger'Information Management'Market

While consolidation among the service players should continue as geographic reach, scale and price increasingly differentiate vendors, M&A activity around e-discovery technologies will likely remain the domain of the larger providers of broader information management solutions.'

7. Judicial Administration

No shortage of cases, but fewer resources to handle them. While the current economic recovery should begin to lessen state budget issues, it is unlikely that state and local courts will be able to adequately address their workload with existing resources. Innovative technological solutions should provide some fix in this market ' particularly, solutions that allow courts to do the same amount of work with less while also lowering the cost of solution acquisition (i.e., SaaS versus enterprise license model) or provide courts models that generate revenue for them ' at least enough to cover solution adoption expense.

Paul Vander Vort is a Managing Director at Cascadia Capital, a boutique investment bank specializing in sell-side M&A and capital raises. He is part of the firm's Information Technology Practice Group, where he focuses on companies in the Compliance & Legal Solutions sector. Vander Vort previously headed Business Development and M&A for the Legal Division of Thomson Reuters.'

Over the past few years, especially since the onset of the 'Great Recession' and even now during what appears to be an economic recovery, there has been increased talk about meaningful changes to the legal market. While there are a number of ways to analyze these changes, one interesting approach is to look at acquisition and private investment activity in the legal market over that same time period.

Information Resources

For years, the leading providers of legal information resources have been permanent fixtures within law firms, but with increased pressure to generate revenue and reduce expenses, driven by clients' more critical review of their legal bills, law firms have looked for ways to contain (or cut) their spend with such providers ' whether by reducing the print component of their libraries, moving to a single source for legal information and/or using cheaper or free legal information resources for some amount of research. As a result, particularly over the last several years, these leading providers have looked to diversify (partially through acquisitions) the types of solutions they offer to law firms, as well as whom they serve in the legal market. The number of new legal market solution providers has also increased, as has the level of institutional investment in the market.

Take, for example, Thomson's acquisition of Serengeti in late 2010. At its core, Serengeti could be described as a solution that corporate counsel can use to monitor, contain and cut law firm spend. With Thomson's acquisition of Serengeti, there appears to be some recognition that the 'power pendulum' has swung from law firms to in-house legal departments. In many respects, Thomson's subsequent acquisitions of Pangea3 (November 2010) and Practical Law Company (February 2013), both of which arguably provide corporate counsel a more cost-effective option for legal services and research, further promote the degree to which the pendulum has swung. Vista Equity's acquisition of Mitratech in October 2011 and Carrick Capital's $28 million investment in Axiom Law in February 2013, following earlier investments by such funds as Benchmark, JP Morgan and Greenhill, also support the notion that serving the needs of in-house legal departments is becoming a more attractive investment thesis.

At the lower end of the legal information market ' serving consumers, solo practitioners and small law firms ' the success of players like LegalZoom (funded by Polaris Ventures in 2007), as well as Google Ventures' investments in RocketLawyer (April 2011) and LawPivot (December 2011), the two of which combined in January this year, suggests there is an investment thesis around delivering more innovative solutions to address this market segment. In fact, these companies go beyond purely providing legal information ' they provide cheaper lawyer access to consumers and potential client development opportunities for lawyers.

Increasing Productivity

Considering the pressures law firms are experiencing, it is not surprising that private equity firms have looked to invest in companies offering solutions that improve law firms' work product generation efficiency, manage their expenses and better capture their billable time. Recent examples include IntApp (Great Hill Partners, December 2012), Aderant (Madison Dearborn/Vista Equity, November 2012), Microsystems (Concentric Equity, October 2012), Clio (Acton Capital, January 2012), Intelliteach (River Associates, March 2012), and Chrome River (First Analysis, April 2012).

In addition, both Aderant and Thomson's Elite business have executed upon consolidation strategies in this portion of the market. Since 2009, Aderant has added seven companies to its mix, including acquisitions of RainMaker (October 2011), CompuLaw (August 2011) and Client Profiles (August 2011). Elite has been active, too, with at least three acquisitions in 2011: Pilgrim Systems (December), FWBS (October), and Kleinmundo (February).

Relatedly, Counsel on Call, which provides both law firms and corporate legal departments a more flexible and quicker way to access a bench of experienced attorneys, received an investment from Claritas Capital in July 2012.

Divestitures

In addition to tracking where acquisitions have occurred and where investments have been made, it is also informative to look at where there have been divestitures in the legal market. Thomson's sale of BARBRI to Leeds Equity in July 2011 reflects the strain being felt in the law school market, where a law degree and bar passage no longer guarantee a job. And Thomson's recent divestiture of its law school print / book business ' Law School Publishing (Foundation Press) ' to Eureka Growth Capital in February 2013 reinforces its apparent departure from this segment of the market.

e-Discovery Market

In the e-discovery market, the divestitures by Lexis of its Applied Discovery business to Siris Capital in January 2012 and its November 2012 sale of its e-filing business, File & Serve, to CaseFileExpress, as well as Wolters Kluwer's sale of its Summation business to AccessData in 2010 (sold a stake) and in March 2013 (sold its remaining interest), are telling in their own right.

Certainly, the e-discovery market is attractively sized and growing; however, the associated hype is not as loud as it was several years ago. There has been significant consolidation in the business, particularly among the service/processing providers, e.g., Epic's acquisition of De Novo (December 2011), The Dolan Company's acquisition of DiscoverReady (November 2009), and DTI's acquisition of Providus (September 2012).

Moreover, the primary strategics in the legal industry have reduced their e-discovery exposure or made smaller investments (e.g., Thomson's acquisition of CaseLogistix in July 2010), and they appear to be focusing on that segment of the market where the associated tools and solutions are actually used by lawyers. The remainder of the market seems to be divided into two segments: 1) The technology segment, where strategics like IBM (acquisition of StoredIQ, February 2013), Symantec (acquisition of Clearwell, June 2011) and EMC (Kazeon, September 2009) seem to view e-discovery technologies as components of a much larger information management solution and where CIOs or CTOs (versus in-house legal departments) have a material say in ultimate purchasing decisions; and 2) The services segment, where companies like Huron, FTI, Epic and DTI continue to drive consolidation, and scale and client revenue diversification matter.

The Courts Segment

Finally, there has been recent acquisition activity in the courts segment of the legal industry, including The Daily Journal's purchase of New Dawn Technologies last December and Thomson's acquisition of LT Court Tech in April 2012. Although the volume of deal-flow is less, dynamics in the court segment ' significant budgetary pressure, aging workforces and continued caseload growth ' should drive continued M&A and investment.

M&A Categories

While by no means exhaustive, the above evidences the level of M&A activity in the legal market over the past several years. This activity can be bucketed into seven categories, and I believe that M&A and investment should continue in these categories for the near future ' because change in the legal market is underway.

1. Legal Solutions v. 2.0

This is perhaps best summarized by Mike Suchsland, CEO of the Thomson Reuters' Legal Division: 'We have decided that our long-term vision is not information, it is software tools, solutions, ways to enable attorneys to practice in a more cogent way '.'

2. The Pendulum Has Swung in The Direction of Corporate Counsel, Away from Law Firms

Stricter review and management of outside legal spend, and more willingness to consider using technology and alternative types of legal service models are trends that should drive further M&A and investment in this market segment.

3. New Solutions and Models Will Continue to Take Root at The Smaller, Lower End of the Market

Consumers applying some degree of DIY to their legal needs, as well as small law firms looking to generate new business while lowering their expenses, will drive transformation, disintermediation and efficiencies in this segment of the legal market.

4. Law Firms Need to Maximize Work Generation and Client Satisfaction While Curtailing'Expenses

The days of law firms passing through to their clients the costs of their information assets, as well as looking for their clients to subsidize the apprenticeship of junior associates, are numbered (if not over). Already under billing scrutiny (and likely exacerbated by the recent DLA Piper overbilling issue), law firms need to work smarter and operate more efficiently, with the transition to this new paradigm being aided by technology and the outsourcing of certain services, including actual legal services.

5. Changes in the Legal Market Are Having an Adverse Impact On Law Schools and Their'Graduates

Legal marketplace changes have not been good for law schools, law grads or the companies that serve them. Divestures in the market segment confirm this and it is not clear when (or if) things will return to where they were pre-Great'Recession.

6. A Significant Portion of the e-Discovery Market Is Really a Subset of a Much Larger'Information Management'Market

While consolidation among the service players should continue as geographic reach, scale and price increasingly differentiate vendors, M&A activity around e-discovery technologies will likely remain the domain of the larger providers of broader information management solutions.'

7. Judicial Administration

No shortage of cases, but fewer resources to handle them. While the current economic recovery should begin to lessen state budget issues, it is unlikely that state and local courts will be able to adequately address their workload with existing resources. Innovative technological solutions should provide some fix in this market ' particularly, solutions that allow courts to do the same amount of work with less while also lowering the cost of solution acquisition (i.e., SaaS versus enterprise license model) or provide courts models that generate revenue for them ' at least enough to cover solution adoption expense.

Paul Vander Vort is a Managing Director at Cascadia Capital, a boutique investment bank specializing in sell-side M&A and capital raises. He is part of the firm's Information Technology Practice Group, where he focuses on companies in the Compliance & Legal Solutions sector. Vander Vort previously headed Business Development and M&A for the Legal Division of Thomson Reuters.'