This article focuses on the corporate elearning market. More specifically, we offer a brief industry definition, the segment’s size and anticipated future growth, the critical success factors and key M&A trends that Mirus believes all middle market players must internalize. The article’s primary objective is to provide interested parties some strategic food for thought and suggested course of action. Mirus views the fact that there are recent transactions, albeit at relatively low valuations, despite an anemic M&A market, as proof that industry leaders are moving rapidly to distance themselves from the pack. But more importantly, smaller to mid-sized players will need to make their cases as to why they deserve a seat at the rapidly consolidating corporate elearning table before the music stops and there are no seats remaining.

Industry Overview

With knowledge being the primary resource for the new economy, we begin to understand why industry research firm IDC projects that the Corporate elearning market is expected to grow to approximately $11B in size by 2003. Strong evidence that elearning is on the rise and will continue to grow can be found in a recent elearning survey conducted by Taylor Nelson Sofres, a leading international market research agency. Of the approximately 50% of respondents that have already implemented elearning initiatives, 85% plan to increase its usage within the next twelve months, with an additional 33% of organizations surveyed planning to implement elearning within 3 years. The penetration numbers improve with size, with 63% of larger organizations (10,000 + employees) reporting current elearning initiatives. Initiatives at large corporate early adopters have focused primarily on organizational training and performance management.

The e-Learning market consists of three distinct categories: content, services and delivery. Content or courseware represents off-the-shelf titles that provide training on a variety of general topics and customer specific content that must be custom developed. Services represent the outsourcing of e-Learning content development, implementation or consulting to third parties and delivery refers to the technology to host, deploy, manage and track e-Learning users and content. While industry data varies, content is consistently sited as the largest segment, with services being identified as the fastest growing.

Key Trends and Critical Success Factors

A snapshot of both pure play elearning public market performance and recent M&A transactions reveal key trends and critical success factors that should be considered by middle market companies looking to maximize survivability and shareholder returns, including:

• Numbers Don’t Lie: The players that generate the most robust ROI and quickest payback are being rewarded with rapidly growing customer bases and relative market insulation. For instance, Centra Software’s, (Nasdaq:CTRA), straight forward and quantifiable value proposition of exchanging costly travel with more cost-effective, real-time online virtual classrooms, enabled the firm to land 87 new Q3 customers, a sample of which include: Cadbury Schweppes, Exxon Mobile, IAMS, Tyco, and Toyota. Centra’s relative immunity to the general elearning market downturn can be seen in exhibit one.
• The One With The Most Chips Wins: Due to general market volatility and the crowded, yet nascent corporate elearning segment, branded, market leaders are expected to command dominant marketshares and the largest market capitalizations as customers look for stable partners. Early-stage niche technology providers should look for strategic investment and/or business development opportunities with larger dance partners, which increasingly, are turning to creeping acquisitions to mitigate risk, as we saw with Maritz Inc. recent acquisition of Librix Learning LLC.
• Content Is King: Several green field content creation and management opportunities are rapidly emerging in response to the accelerating growth  the demand for technology to create and manage reusable learning objects. The superior market performance of content pure play Skillsoft (Nasdaq: SKIL) reflects this trend, as seen in exhibit one.
• One Stop Shop: to be competitive, vendors are being forced to offer integrated and complete learning solutions that span all three corporate elearning market segments. Additionally, vendors are being asked to accommodate delivery through both an ASP-based model as well as a “behind the firewall” intranet-based solution, to satisfy security concerns at larger fortune 500 companies. The five acquisitions executed by Saba Software and Smartforce over the last 6 months support this consolidating trend.
• Buyers Market: The few industry leaders that still have currency are taking advantage of the current buyers market, acquiring complementary technologies and customers on the cheap, as evidenced by Smartforce’s three stock-based acquisitions that had an average price tag of approximately $3MM. Expect industry leaders like Centra, Skillsoft and Smartforce to utilize their precious currencies to continue the elearning landgrab through acquisition.
• Outside Looking In Players Enter Market: The relatively significant budgets of large corporate early adopters are attracting large outside looking in players, such as Sun Microsystems, which entered the training and performance management systems with its acquisition of privately-held, Canadian-based LMS provider Isopia. Expect other outside looking in players to follow suite as the market continues to consolidate. Mirus believes that horizontal business collaboration players like Polycom will look to acquire corporate elearning players with material revenues that lack robust synchronous collaborative functionality.

EXHIBIT 1

Recent Transactions

• Maritz Inc. acquired Librix Learning LLC – Oct-01, transaction value not disclosed
• Plato Learning, (Nasdaq: TUTR) acquired TeachMaster Technologies- Sept –01, $2.75 MM, cash, stock and earn-out
• Digital Think, Inc. (Nasdaq: DTHK) acquired LearningByte International – Aug-01 $60MM, stock, P/S 8.57
• Smartforce (Nasdaq: SMTF) acquires SkillScape – Aug-01, $5.2MM, stock
• Smartforce (Nasdaq: SMTF) acquires IMPAXselling.com – Aug-01, $2.7MM, stock
• Sun Microsystems, (Nasdaq: SUNW) acquired ISOPIA – June-01, transaction value not disclosed
• Saba Software (Nasdaq: SABA) acquired Ultris –Jun-01, $14.1MM, stock
• Vivendi Universal (NYSE: V) acquired Houghton Mifflin (NYSE:HTN) – June-01, $2.2B, stock
• Centra (Nasdaq:CTRA) acquired Mindlever –May-01, $11MM, cash/stock
• Smartforce (Nasdaq: SMTF) acquires icGlobal- April-01, $2.0MM, stock
• Saba Software (Nasdaq: SABA) acquires Human Performance Technologies April-01, transaction value not disclosed
• Click2Learn (Nasdaq: CLKS) acquires Intelliprep- April-01, $4.4MM, stock

If you would like to discuss consolidation and mergers and acquisitions in the corporate elearning space, please contact Peter Alternative at 617-338-1333.