Category: divestitures

Sales of tech assets are on the rise

-by Thomas Rasmussen, Yulitza Peraza

At a time when both M&A volume and deal values have declined dramatically, the relative volume of asset sales continues to rise. There are two main contributors to this. First, companies are under increasing pressure to focus on their core operations, so they’re looking to divest underperforming business units. And second, cash-burning startups often find their venture backers unwilling to sink more money into them, resulting in wind-down sales of the intellectual property they had developed.

For the first quarter of 2008, the volume of asset sales represented some 15% of total announced transactions. That number doubled in the first quarter of 2009 and has even inched up a bit in April. About one out of every three transactions announced so far this year has been an asset sale.

For all the talk of unbridgeable valuation gaps, however, we would note that the buyers often get a sharp markdown on the price of the assets. Consider Artistdirect’s acquisition of SafeNet’s MediaSentry unit this month. SafeNet, which originally paid $20m for the division in 2005, wanted the MediaSentry assets off its books before the end of the first quarter, and Artistdirect’s new management was happy to fork over less than $1m for the unit. We understand that the deal closed within a few weeks. Or look at semiconductor startup Nethra Imaging, which picked up the assets of Ambric for an estimated $1m this month. Ambric had received an estimated $30m in funding, but when investors refused to step up with another round, the startup had little choice but to sell.

Asset sales spike

Period Volume of asset sales, as % of overall M&A
April 1-24, 2009 32.4%
Q1 2009 31.8%
Q4 2008 19.9%
Q3 2008 17.4%
Q2 2008 16.2%
Q1 2008 15.8%
Q4 2007 13.7%

Source: The 451 M&A KnowledgeBase

EBay unwinds and adds on

Brenon Daly

Contact: Brenon Daly

For a company that essentially matches buyers and sellers, eBay has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket, the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

The acquisition of a chunk of Gmarket, which is eBay’s first purchase since November, comes as the company also moved to unwind a pair of previous purchases. In the more straightforward of the two, eBay said it will sell StumbleUpon back to the founders of the online bookmarking site. The divestiture comes two years after eBay paid $75m for the property.

We would note that the deal is actually the second sale of an online bookmarking site in the past month. In mid-March, LookSmart divested its Furl property to Diigo, picking up an undisclosed chunk of equity in its privately held rival. While neither transaction performed as the acquirer had hoped, LookSmart did indeed look smarter than eBay because it paid only $1m for its flier on Furl, compared to the $75m that eBay handed over for StumbleUpon.

Rather than go the same route of divesting to former owners, eBay hopes to find a whole new set of buyers for its planned unwinding of Skype. It plans to spin the VoIP vendor to public market investors next year. (We’ll withhold comment on the rather unconventional ‘dual track’ that eBay has now set up for Skype. Just as we’ll withhold comment on the fact that ‘Skype’ rhymes with ‘hype.’)

If it’s lucky, eBay may see the division valued at about half of the $4.1bn that it spent on Skype (including earnouts) back in September 2005. EBay has already acknowledged that it overpaid for Skype, writing down some $1.4bn of the purchase price. While reports have indicated that Skype’s initial founders may be trying to repurchase the company from eBay (a la StumbleUpon), it appears those talks have ended. Still, we could very well see Skype getting snapped up in a trade sale before it hits the public market next year. In a mid-October report, we noted that any of the telcos or even Nokia might be interested in owning the largest VoIP provider.

eBay deal flow

Year Deal volume Deal value
2009 0* $0*
2008 4 $1.5bn
2007 3 $385m
2006 2 $75m
2005 7 $5.1bn

Source: The 451 M&A KnowledgeBase *Excludes purchase of controlling stake of Gmarket

Will mobile payment startups pay off?

-Contact Thomas Rasmussen, Chris Hazelton

In 2006 and 2007, mobile payment startups were a favorite among venture capitalists. The promise of dethroning the credit card companies by bypassing them had VCs and strategic investors throwing hundreds of millions of dollars after such startups. During this time, a few lucky vendors managed to secure lucrative exits. Among other deals, Firethorn, a company backed with just $14m, sold to Qualcomm for $210m and 3united Mobile Solutions was rolled up for $70m as part of VeriSign’s acquisition spree. Recent prices, however, haven’t been anywhere near as rich. Consider this: VeriSign unwound its 3united purchase last month, pocketing what we understand was about $5m. Similarly, Sybase picked up PayBox Solution for just $11.4m, while Kushcash and other promising mobile payment startups have quietly closed their doors.

Last week, Belgian phone company Belgacom took a 40% stake in mobile payment provider Tunz. Tunz has taken in a relatively small $4m in funding since launching in 2007, but with VCs sidelined, we believe this investment was a strategic cash infusion to keep alive the company behind Belgacom’s mobile payment strategy. It may well be a prelude to an outright acquisition. With valuations clearly deflated and venture capitalists nowhere to be seen, we believe mobile service providers are set to go shopping for payment companies. Who might be next?

Yodlee, mFoundry and Obopay are three companies that have made a name for themselves in the world of mobile banking and payments. Each has secured deals with the major banks and wireless companies, but still lacks scale. Further, all of them are facing increased competition from deep-pocketed and patient rivals such as Amazon, eBay’s PayPal and Google’s CheckOut. Still, we believe they are attractive targets for wireless carriers or mobile device makers, who are increasingly on the lookout for additional revenue streams.

In fact, Obopay received a large investment from Nokia last week as part of its $70m series E funding round. Nokia’s portion is unclear, but Obopay tells us the stake gives Nokia a seat on its board. (Additionally, we would note that this investment comes directly from Nokia, rather than its venture arm, Nokia Growth Partners, as has typically been the case). This latest round brings Obopay’s total funding to just shy of $150m. Although we wonder about the potential return for Obopay’s backers in a trade sale to Nokia, the mobile payment vendor would clearly be a great complement to Nokia’s growing Ovi suite of mobile services. (We would also note that Qualcomm put money into Obopay and considered acquiring the company, but instead went with Firethorn.) Likewise, Yodlee and mFoundry’s roster of strategic investors and customers reads like a short list of potential buyers: Motorola, PayPal, Alltel (now Verizon), along with other large banks and wireless providers. Yodlee says it has raised more than $100m throughout its 10-year history, and mFoundry has reportedly raised about $25m.

Not ad(d)ing up

-Email Thomas Rasmussen

Contrary to our pronouncement last year, the online advertising industry is in a tough spot at the moment. Venture funding for these companies has been shut off as the slumping demand for Web-based advertising has hit the sector harder than it anticipated. (At least it’s not as bad as the regular advertising market. As one VC quipped recently, “While the online ad market has caught a cold, the offline ad market has caught pneumonia.”) Still, the decline in the space has created numerous opportunities for buyers looking to pick up scraps.

One such company having a field day in the current environment is Adknowledge. Just this week, the company picked up the advertising business of struggling MIVA for the bargain price of $11.6m. The division has estimated trailing 12-month revenue of about $75m, down sharply from $100m a year ago. The acquisition came after Adknowledge tucked in two small social networking ad networks for less than $2m, much less than the more than $4m the two raised in venture capital. Furthermore, Adknowledge, which has raised an estimated $45m, tells us that it is still shopping.

Of course, it’s not all gloom and doom for the online ad market. One area where there’s actual growth – and at least the promise of rising valuations – is in online video advertising. VCs have put hundreds of millions of dollars into this sector. Their bet: More Web surfers will increasingly look to online videos for information and entertainment. Granted, it’s still a small space. (Consider the fact that YouTube probably contributed only a few hundred million dollars of revenue to Google’s total revenue of $21.8bn in 2008.) Still, the promise is there. Also encouraging VCs in this market is that the online ad giants (Google, Microsoft, AOL and so on) may well need to go shopping to get video ad technology. We recently published a more-thorough report on that, matching potential buyers and sellers.

Spring cleaning

Brenon Daly

Contact: Brenon Daly

For many tech companies, it’s time for a bit of spring cleaning. Specifically, there’s been a fair amount of sweeping out of corner offices. Last week saw Time Warner turn over the reins of its struggling AOL unit to a former Google sales executive. (Yes, we share the puzzlement around Tim Armstrong’s move.) Today, Internap Network Services got a fresh face at the top as wheeler-dealer Eric Cooney had his first day as chief executive at the beaten-down networking company. And in just two weeks, John Thompson ends a decade-long run as CEO of Symantec, turning over the security and storage giant to current COO Enrique Salem.

Amid all these moves, we wonder if the sweeping changes in companies’ executive suites will be accompanied by some sweeping out of companies’ portfolios. In the case of AOL, we’re pretty sure that the new appointment will hasten a sale of the unit. (My colleague Thomas Rasmussen noted last summer the concerning ‘lack of urgency’ at Time Warner over AOL, even as subscribers continued to plummet.) When Symantec announced last November that Salem would take the top spot, we speculated that NetBackup, Symantec’s backup and recovery unit, could find its way onto the auction block.

But what about today’s appointment at Internap? We wonder if the new leadership might not take a fresh approach to its underperforming content delivery network (CDN) unit. Internap’s big move into CDN came in October 2006, when it paid $217m in stock for VitalStream Holdings. Internap has acknowledged that it overpaid for the company, writing down a chunk of the purchase price.

And, as my colleague Jim Davis noted in a Tier1 report last week, the performance of Internap’s CDN business has lagged that of its rivals. In fact, Internap’s CDN unit has posted revenue declines for three straight quarters. We would hasten to add that the company’s just-appointed CEO has a solid M&A record behind him. In his previous post as head of Tandberg Television, Cooney oversaw a number of acquisitions before selling the company to Ericsson in early 2007. Could he be planning some dealmaking around Internap’s CDN business?

Paper trade

Brenon Daly

Contact: Brenon Daly

To get a sense of just how tough the M&A environment is right now, consider LookSmart’s divestiture Monday of online bookmarking property Furl. When we last spoke with the company a year ago, it was hoping to pocket a few million dollars for Furl. Instead, it ended up trading it for paper.

In return for giving up ownership of Furl, LookSmart scored an undisclosed slice of equity in privately held Diigo. (We would estimate that LookSmart picked up maybe 10-15% of Diigo, which offers online bookmarking and annotation services.) The outcome may not be as lucrative – or as liquid – as LookSmart had hoped, but at least it didn’t initially overpay for Furl. LookSmart handed over less than $1m in stock for the startup in the September 2004 acquisition.

The planned sale of Furl ran into trouble as some of the marquee social bookmarking deals foundered as the market became overcrowded. (We would point to Yahoo’s purchase of Del.icio.us for an estimated $35m in December 2005 and eBay’s $75m acquisition of StumbleUpon in May 2007 as examples of deals that underperformed.) But mostly, the planned divestiture ran into a grizzly bear of a market. Over the past year, LookSmart itself has lost three-quarters of its market capitalization and is now valued on the Nasdaq at just half of the cash that it holds in the bank.

LookSmart slims

Divestiture Announced Market Deal value
Furl March 2009 Social bookmarking Traded for undisclosed amount of equity in privately held Diigo
Net Nanny January 2007 Web filtering Not disclosed
FindArticles November 2007 Information retrieval $20.5m

Source: The 451 M&A KnowledgeBase

Cutting the ties that bind

Brenon Daly

Contact: Brenon Daly

As the business prospects for this year continue to deteriorate, companies are increasingly looking to shed underperforming divisions. VeriSign, for example, has already divested two units so far this year and still has a handful of others on the block. As drawn-out and money-losing as divestitures can be, it’s almost always preferable to the alternative of actually hanging on to the struggling businesses. At least that’s the view from Wall Street, which rarely dings a company for pruning.

We’ve been thinking about this in recent weeks as we’ve seen the projections for PC sales in 2009 get pulled back again and again. The bearish outlook has caused most PC makers to overhaul their strategies for selling boxes. For instance, Lenovo has scaled back its expectations for selling PCs in Europe and North America, and will instead focus on its home Chinese market, particularly the rural sector. The shift essentially undercuts the need for IBM’s PC business, which Lenovo picked up four years ago. (IBM took payment for the divestiture in cash and stock, booking a pre-tax gain of about $1bn.)

Of course, it’s hard to know how that division would have fared if Big Blue hadn’t shed it. And, it’s virtually impossible to calculate how much of a drag PCs, which accounted for about 10% of IBM’s sales, would have been on the overall company’s performance. But consider this: Since IBM closed the divestiture in mid-2005, Dell shares, which stand as the closest proxy to the PC industry, have lost 75% of their value and are trading at their lowest level since 1997.

Divesting at any costs

Brenon Daly

Contact: Brenon Daly

We recently noted how VCs are having to settle for scrap sales as they go through a bit of portfolio clean-out. But, hey, at least the value destroyed in each of the companies is only in the tens of millions of dollars. Companies that have been recently cleaning out their own portfolios in the form of divestitures have been eating hundreds of millions of dollars. Even billions of dollars.

Last week, two companies were in the news for what we would consider ‘divest at any cost’ transactions. First up, Motorola unwound its two-year-old purchase of Good Technology. After paying about $500m in November 2006 for Good, we would guess that Motorola almost certainly received less than $50m in selling the mobile messaging infrastructure vendor to privately held Visto. (At least there was something left to sell. The same can’t be said of Intellisync, which Nokia bought three years ago for $354.3m but recently said it will be shuttering.)

More dramatically, Nortel Networks looks likely to pocket just two pennies for every $1,000 that it handed over for Alteon WebSystems in mid-2000. (Keep in mind, however, that Nortel paid the $7.8bn total is stock, not cash.) The bankrupt telecom equipment vendor has put Alteon on the block, and the reported frontrunner is Israel-based Radware, which has put forward a bid of some $14m. (Since Nortel filed for Chapter 11, Alteon is being sold under an auction process run by the bankruptcy court, and other bidders could emerge.) As a final thought on both the Motorola and pending Nortel divestitures, we would note that both castoff divisions are landing in other companies, rather than a buyout shop.

Seven down, five to go for VeriSign

-Contact Thomas Rasmussen

After accounting for a dime of every dollar spent on M&A in 2008, divestitures appear likely to be a thriving business again in 2009. They accounted for 11% of the total M&A spending last year, up from 7% in 2007. And respondents to our annual Corpdev Outlook Survey said they were twice as likely to expect the pace of divestitures to increase than decrease this year. This is especially true for larger companies, some of which have overindulged on M&A throughout the years.

In the world of tech divestitures, there is no better example of this than VeriSign. The naming and encryption giant has been working toward selling off billions of dollars worth of properties that ousted CEO Stratton Sclavos picked up during his multiyear shopping spree. The company announced its first divestiture of 2009 last week, the sale of its European messaging division 3united mobile Solutions. That move follows the sale of its remaining stake in Jamba in October 2008 and the divestiture of its inCode communications and post-pay billing divisions in November and December, respectively.

For those of you keeping score, VeriSign has now completed seven deals, with five still to go. But as is becoming grudgingly apparent to the company and many others in the same position, this is easier said than done. The current economic environment is not exactly ideal for divestitures or spinoffs. And shedding the remaining parts, especially its bloated communications and messaging divisions, has proven to be quite a challenge for the company since they most likely command a much higher price tag, likely in the hundreds of millions of dollars. VeriSign says there are strategic buyers, but the closed credit market and general economic anxiety are severely hampering potential deals.

A chronicle of VeriSign’s seven divestitures

Date Acquirer Unit Note
February 2009 Sinon Invest Holding 3united Mobile Solutions Acquired for $66m in 2006
December 2008 Convergys Post-pay billing business
November 2008 Management buyout inCode Wireless Acquired for $52m in 2006
May 2008 MK Capital Kontiki Acquired for $58m in 2006
April 2008 Melbourne IT Digital Brand Management Services business Sold for $50m
April 2008 Globys Self-care and analytics business
June 2007 Sedo.com GreatDomains.com business

Source: The 451 M&A KnowledgeBase

Small-time means good time for M&A

-Contact Thomas Rasmussen

Smaller shoppers are increasingly perusing the proverbial deal aisle. As our 2008 Corpdev Outlook Survey conducted in December indicates, 2009 looks to be the year of small-time shoppers. When we delved further into the data to try to get a feel for what corporate development officials from various companies are thinking, we observed an interesting trend: While large firms said they were more likely to do divestures than acquisitions, small companies were significantly more bullish on M&A. (For our purposes, we classified small firms as those with fewer than 250 employees and large firms as those with 2,500 or more employees). In fact, it seems that large acquirers are a bit more wary of the economic realities than their smaller rivals, with some even leaving the market entirely. Corporate development officials at large companies were twice as likely to say the current economic recession is ‘very likely’ to depress deal flow compared to their brethren at small companies.

Anecdotal evidence of this trend reinforces that sentiment. Take Pegasus Imaging Corp, a privately held, employee-owned company founded in 1991 that is recognized for its host of enterprise and consumer-imaging products but mostly for its JPEG-imaging compression technology. After having been out of the market since acquiring its competitor TMSSequoia four years ago, it picked up Tasman Software and AccuSoft’s imaging business last week for an estimated combined cash value of about $30m. The small, privately held shop told us that the current environment is ripe for M&A, and we expect the two acquisitions to be the first of many this year. Meanwhile, serial shopper Avnet may be slowing down, despite having just announced its first deal of the year (last week, the mid-cap company spent an estimated $30m for Nippon Denso Industry, an electronics distributor based in Tokyo). Avnet announced six deals worth $385m in 2008, but recently indicated to us that it will take a much more cautious approach to shopping this year.

Industry makeup of respondents

Industry Percentage
Infrastructure software 32.0%
Applications software 21.3%
Systems/hardware/semi 13.3%
Other 9.3%
Mobile 8.0%
Networking 6.7%
Services 5.3%
Telecommunications 4.0%

Source: The 451 Group Tech Corpdev Outlook Survey, December 2008