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Iron Mountain: Saving all those E-mails so You Don’t Have to
When last in trouble, Wall Street and most of Corporate America was effectively forced to retain virtually all documents and customer communications so regulators could cull through them in the event of suspected wrongdoing. The idea sounds fairly simple on paper—save everything: legal documents, forms, letters, emails, etc. Putting this idea into practice, however, is far more complex. Indeed, how exactly do you save everything?
The enormity of the task recently came to light when The Financial Crisis Commission asked Goldman Sachs (GS) to provide documents related to the panel’s probe. Although Goldman complied with the request, the commission wasn’t expecting some 2.5 billion pages of records. (That was billion with a “B.”) The commission made such a fuss about having been given so many pages of content that BusinessWeek created a rather humorous graphic showing what 2.5 billion (with a “B”) pages translates into. For example, it would take 159 years to print that number of pages on a laser printer. Once printed, one could cover 28,700 football fields with the documents that would weigh as much as 1,650 male elephants.
As funny as those statistics are, they give a very effective visual of an issue that is only going to grow in importance: how exactly do you save everything? If the issue were simply paper records, the task might be cumbersomely realistic, but paper isn’t the big problem. The digital sphere, where communications are often fast, furious, and copious, is the 800-pound gorilla (2.5 billion pages would equal about 32,250 800-pound gorillas, assuming BusinessWeek’s math is correct).
It’s understandable that regulators, legislators, and legal entities want all of this information. Indeed, “smoking gun” emails have been used in countless legal actions, including the infamous Henry Blodget’s emails that appeared to contradict his published research writings at Merrill Lynch, now a part of Bank of America (BAC - Free Analyst Report).
Then there was Frank Quattrone who worked as an investment banker at Morgan Stanley (MS), Deutsche Bank (DB), and Credit Suisse First Boston, now just Credit Suisse (CS), and helped to bring technology companies, such as Cisco (CSCO - Free Analyst Report) and Amazon.com (AMZN), public. At the other end of the spectrum from Blodget, Quattrone was accused, and eventually acquitted, of obstruction of justice when he supposedly told staff to destroy records.
Since the world is only getting more and more digital, it would seem that there is an investment opportunity here. Unfortunately, this business services space is fragmented. Generally referred to as Information Management Services, the service includes physical and digital information storage. (Providers also destroy documents, but the Frank Quattrone case seems to suggest documents should be digitized before they are destroyed.)
The largest pure play in the space is Iron Mountain (IRM). Cintas (CTAS) has a small unit devoted to the space, as well, but the unit is much smaller than Iron Mountain. There is also a large competitor from Australia, but even there the Information Management Services unit is small compared to Iron Mountain and, as with Cintas, which is best known for its uniform services, is part of a larger entity.
We expect Iron Mountain to benefit from the strong secular growth trend for its services. So, too, does Berkshire Hathaway’s (BRK-B) Warren Buffett, who has increased his firm’s holdings in the company over the last couple of quarters. Additionally, the company has started to return cash to its shareholders in the form of a dividend. This is a nice development and suggests that management sees both a bright future and enough sustainable business to maintain such a distribution. That said, the company has a decent debt load to bear, so isn’t without risk.
Investors who think the space has potential, but don’t want a pure play, might look to Cintas, where the rest of the company’s businesses can provide stability while the documents retention business expands. Cintas carries materially less debt, as a percentage of capital, than Iron Mountain, and has a long history of dividend increases. That said, the core business of providing uniforms took a hit in the recent recession and has yet to fully recover—proving that diversification has both benefits and negatives.
Those interested in more than just joking about document retention should take a closer look at Iron Mountain or, if more conservative, Cintas. Those not looking to make money should at least heed former New York State’s Attorney General Eliot Spitzer who once said, “Never talk when you can nod and never nod when you can wink and never write an e-mail, because it's death. You're giving prosecutors all the evidence we need.”