Category: media

Not ‘Finnish’ with M&A

Finnish cell phone giant Nokia launched its mobile file-sharing Ovi application last week, coming quickly on the heels of the rollout of Nokia Music and other high-profile offerings. Much like Google and its Android and Chrome products, Nokia used technology that it acquired to form the core of its recently launched products. Specifically, its file-sharing technology came when it picked up Avvenu late last year.

And more M&A may be in the cards. Nokia recently told us that it is bullish on making further acquisitions to boost its service offerings. The company is aiming to evolve from strictly a mobile handset maker to a service-oriented handset maker – and strategic acquisitions are expected to play a big role in this transformation. (Of course, Nokia isn’t the only hardware company looking to do deals to get out of its core commodity market and into a more profitable – and defensible – service offering. PC maker Dell has spent some $2bn over the past two years increasing its service portfolio, buying companies offering everything from storage to email archiving to remote services.) What services could Nokia look to add and what companies might it acquire to do so?

With its music, games and mapping services well established, Nokia’s lack of a video service is strikingly curious. We suspect the company will quickly move to fill this gap. Two potential targets come to mind. Startups kyte and Qik both specialize in mobile video, and have already gotten a lot of interest from big mobile companies. In fact, kyte has drawn money not only from large telcos such as TeliaSonera, but also from Nokia’s own investment arm, Nokia Growth. Another venture that was recently brought to our attention is a startup called ZoneTag. It’s a Yahoo Labs startup that does location-based photo tagging. The software was developed for Nokia phones with the support of Nokia research and we hear the two divisions have a very good relationship.

Nokia’s recent mobile software acquisitions

Date Target Deal value
June 24, 2008 Symbian $410.8m
June 23, 2008 Plazes $30m*
January 28, 2008 Trolltech $153.5m
December 4, 2007 Avvenu Not disclosed
October 1, 2007 Navteq $8.1bn

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Napster sings the blues

Napster, once hailed as the king of digital music, has fallen on hard times. Its stock is down 35% this year alone, and 55% from its 52-week high set in October 2007. Resulting shareholder ire forced the company to announce last week that it is seeking strategic alternatives to boost value, and it has hired UBS Investment Bank to lead the effort. Who might acquire the house that Shawn Fanning built?

Since relaunching as a legal music service in late 2003, Napster has been unable to turn a profit. The company pulled in $125m in revenue for the trailing 12 months ended June 30 from about 708,000 paid subscribers. Despite increasing revenue 15% year-over-year, the company had a negative EBITDA of $12.3m and subscriber count decreased from last quarter’s total of 761,000. The switch from stagnation to a drop in subscribers for the first time means that Napster will be unable to keep growing revenue. Consequently, that makes it doubtful that it will be able to achieve profitability. Nevertheless, with $36.9m in cash and $30.7m in short-term investments, Napster is an attractive target at its current valuation of $62.25m.

We previously speculated that SanDisk would attempt to acquire a proprietary music service of its own. But given its financial woes, as well as reported takeover negotiations with Samsung, we do not think it will bite. We believe Napster’s fierce competitor RealNetworks, the majority owner of the Rhapsody music service, is the most likely acquirer. Amid growing competition from Apple, which unveiled its iTunes 8 and a new line of iPods this week, and with digital music newcomers Amazon, Nokia and a few promising startups making waves, this is a much more plausible proposition. Last year Rhapsody picked up Viacom’s Urge, which had been struggling despite its high-profile association with MTV and Microsoft. RealNetworks has the cash, and has repeatedly told us it is bullish on acquisitions that spur growth. Given Napster’s current valuation and similar deals, we estimate that it will fetch around $80-100m in a sale.

Red-zone M&A

So-called ‘New Europe’ is emerging as an important Web 2.0 market. Revenue growth is steady in the mid- to high-double digits compared to low-double digits for the established US web portals. That hasn’t gone unnoticed by global companies scrambling to tap into these faster-growing markets. The latest example is the rumored sale of leading Czech Republic search engine and web portal Seznam. Goldman Sachs has reportedly been tapped to head the sale. Google, Microsoft and private equity shop Warburg Pincus are said to all be serious contenders, according to the Czech media.

Seznam is closely held. Founder Ivo Lukacovic owns just over two-thirds of the company, with the rest held by investment firms Tiger Holding Four and Miura International. The 450-employee portal says it took in about $55m last year, up from about $30m the year before. Revenue is expected to reach $80m for the year. Seznam is reportedly being shopped around at a valuation of $900m. At a multiple of 11 times sales, that is a premium compared to a similar deal inked by Warburg Pincus last year. The buyout firm acquired Seznam competitor NetCentrum for $150m at a multiple of 6.5 times revenue. Nonetheless, compared to recent US Web 2.0 deals, the rumored valuation of Seznam is in line with, or at a discount to, market prices.

If a deal for Seznam gets done, the purchase will stand as one of the largest Internet deals ever inked in the former Soviet block. And as the Eastern European Internet market continues to grow, we believe so will the M&A activity from anxious companies trying to make an early land grab. Meanwhile, other search engines may look to go it alone. Yandex, a leading Russian portal, has reportedly been preparing for a US public offering for some time now, but an almost nonexistent IPO market may lead it to consider a sale, instead. We’re fairly certain that Google and Microsoft stand ready to provide the liquidity for either (or both) of these companies if the public markets can not.

Recent transatlantic search M&A

Date Acquirer Target Deal value TTM Revenues
July 18, 2008 Google ZAO Begun (Russia) $140m Not disclosed
May 26, 2008 Google 265.com (China) Not disclosed Not disclosed
January 8, 2008 Microsoft Fast Search & Transfer (Norway) $1.24bn $167.75m
December 4, 2007 Warburg Pincus NetCentrum (Czech Republic) $155m (reported) $24m (reported)

Source: The 451 M&A KnowledgeBase

Rise in social networking deals

After a trickle of deals in 2007, this year has seen a flood of acquisitions of social networking sites as buyers look to sell advertising and services around these properties. Acquirers have spent some $1.15bn already on networking sites, compared to just $95m in all of 2007. This year’s M&A was boosted by several key service providers making significant bets on the market, including AOL’s $850m purchase of Bebo and Comcast’s acquisition of Plaxo for an estimated $150m. (Both deals, we should note, are larger than last year’s collective tally for social networking sites.)

And it’s not just the obvious acquirers picking up these online sites. Mobile phone maker Nokia shelled out an estimated $30m for geo-social networker Plazes, while Hoover’s, primarily known as a business directory, bought into the Web 2.0 trend with its tiny $4.2m acquisition of Visible Path. Even Barry Diller went shopping in this market, with his IAC/InterActiveCorp’s purchase of Girlsense.com.

Despite the broad interest and appetite for social networking sites, we wonder if supply hasn’t outstripped demand. At last count, there were more than 130 networks of various stripes. With only two companies (Facebook and LinkedIn) likely to go public anytime soon, that leaves a slew of sites hoping to connect with buyers. Coming off a 1,200% increase in M&A from last year, we can only surmise that the number of deals – and, more important, the valuations handed out to the sites – is likely to come down.

Acquisitions of social networking sites

Period Deal volume Deal value
Jan.-Aug. 2008 20 $1.15bn
Jan.-Dec. 2007 9 $95.1m
Jan.-Dec. 2006 2 $5.1m
Jan.-Dec. 2005 1 $580m
Jan.-Dec. 2004 4 $129.8m

Source: The 451 M&A KnowledgeBase

eBay places bid

EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.

Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.

Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.

By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.

Significant eBay acquisitions, 2005 – present

Date Target Deal value
January 28, 2008 Fraud Sciences $169m
May 30, 2007 StumbleUpon $75m
January 10, 2007 StubHub $310m
April 24, 2006 Tradera AB $48m
October 10, 2005 Verisign (payment gateway business) $370m
September 12, 2005 Skype $2.57bn
June 1, 2005 Shopping.com $678m

Source: The 451 M&A KnowledgeBase

Beijing: unsporting laws on M&A

Brenon Daly

The opening of the 2008 Beijing Summer Olympics today has the world’s sporting eyes on China. Of course, global dealmakers had their sights on the large (and growing) Chinese markets long before Beijing landed the Olympics. However, as my colleague Anita Cheung notes, those efforts suffered a setback last week when China passed the latest and strictest set of regulations on foreign investment and M&A in 15 years.

The new regulations give the federal government more control over direct foreign investment and take off the table virtually any acquisition of a Chinese company by a foreign firm. Chinese regulators cite national security and antitrust concerns for these recent actions. This is a distressing development for the idea of a global M&A marketplace. While other countries have certainly used regulation to block ‘sensitive’ acquisitions, few have succeeded with a blanket policy blocking essentially all deals.

In the months before these new regulations took effect, several US media and technology companies were able to ink purchases of Chinese companies. For instance, Hearst Business Media acquired ee365.cn, a technology news website for engineers, last month. Also, CNET acquired Beijing-based 55BBS.com in June, while Google picked up Chinese search engine 265.com one month before. And deals aren’t just being inked by US companies. In June, one of Australia’s largest telecommunications companies, Telstra, picked up a controlling stake in two large Chinese Internet companies, Norstar Media and Autohome/PCPop.

Rather than those transactions being models for future M&A activity in China, we would expect to see more deals break down because of politics. In other words, more deals like February’s aborted $2.2bn leveraged buyout of 3Com, which was led by Bain Capital, with minority participation by Chinese networking equipment vendor Huawei Technologies. In that proposed transaction, US regulators got all worked up over the possible threats to US national security of having partial Chinese ownership of 3Com’s TippingPoint Technologies business. The fear was that the Chinese might be able to spy on the US by using TippingPoint’s intrusion-prevention system to gain access to networks. As silly as that seems, it was enough to sink the deal. And unfortunately, China seems to have adopted that as policy.

Recent foreign deals in China

Date Acquirer Target
July 2, 2008 Hearst Business Media ee365.cn
June 27, 2008 Telstra Norstar Media; Autohome/PCPop
June 17, 2008 CNET 55bbs.com
May 26, 2008 Google 265.com

Source: The 451 M&A KnowledgeBase

Ailing AOL no closer to a sale

Although CEO Jeff Bewkes and his Time Warner (TWC) cohorts put a positive spin on the company’s second-quarter results Wednesday, we’d sum up the call as bafflingly uneventful. The company highlighted gains in its TV and movie operations, while remaining virtually silent on its plans for AOL’s legacy Internet access business. If anything, the news concerning the ailing AOL division worsened, with Time Warner indicating that the AOL split is not set to occur before early 2009. The lack of urgency on the part of Bewkes amid declining AOL subscriber count and revenue is extremely disheartening.

Subscriber count at the legacy AOL division fell to 8.1 million subscribers from 10.9 million a year ago. This continues the trend of a year-over-year decline of an average 20-25% since 2003. For the first time in AOL’s history, revenue from advertising tops revenue from its subscription business ($530m and $491m, respectively). Operating income for the AOL division is $230m, one-third of which we estimate comes from subscriptions. This is in contrast to Earthlink (ELNK), which has seen its operating income steadily increase quarter-over-quarter for the past year. EarthLink’s operating income from its most recent quarter was $64m, despite having only 3.3 million subscribers. Clearly, AOL is failing to properly make money from its subscribers. We suggest the company turn the business over to someone who can do that as soon as possible.

Fortunately, there appears to be a suitor for the AOL legacy business. EarthLink CEO Rolla Huff has said he’s ready to discuss a deal. Time Warner should take him up on that immediately. If AOL’s subscriber base continues to decline (and there is no reason to believe it won’t), by the time Bewkes is ready to negotiate a sale, it will be in the six million range. Our advice to Bewkes: Put together a deal book on AOL and get out of the subscription business while you can.

AOL ISP divestitures

Announced Target Acquirer Deal value Price per subscriber
Oct. 2007 Albanian ISP business Telekom Slovenije $5.6m $2,489
Oct. 2006 UK ISP business Carphone Warehouse $712m $339
Sep. 2006 French ISP business Neuf $365m $730
Sep. 2006 German ISP business Telecom Italia $878m $366
Dec. 2005 Argentinean ISP business Datco $1m $67
Feb. 2004 Australian ISP business Primus $18m $200

Source: The 451 M&A KnowledgeBase

Steady flow of online video deals

Emerging online video markets have been keeping investors and acquirers busy, with Google making the latest move through its recent purchase of tiny startup Omnisio. The California-based startup, which received seed funding from Y Combinator, launched in March and offers an online video editing widget that enables users to slice and mash existing online videos, add text and audio commentary and create proprietary slideshow presentations. Google plans to integrate Omnisio’s technology and its three Australian ex-pat founders into its YouTube platform.

In the past two years, companies have spent more than $7bn on more than 50 deals in the (broadly defined) online video space. The largest of these was Google’s purchase of YouTube for $1.65bn in October 2006. Rival Yahoo has also been active. It picked up video sharing site Jumpcut two years ago, as well spending $160m for video distribution platform Maven Networks earlier this year and a total bill of nearly $1bn for related advertising networks BlueLithium and Right Media in 2007.

Meanwhile, traditional media bigwigs are also banking on online video and advertising markets. In March, News Corp and NBC launched their $100m joint TV venture, Hulu, just month after picking up Chinese startup Mojiti, which serves as the TV streaming platform for Hulu. Although professional video streaming services such as Hulu are expected to be able to secure ad dollars quicker than user-generated video sites, it’s still early in that market.

One market where we see tremendous opportunity is for ad-based mobile services. Consider nine-year-old MobiTV, which has been streaming to mobile devices since 2003. Operating on a subscription-based revenue model, MobiTV claims profitability. Last year, the company received $100m in its latest round of VC funding, and is actively looking to use that cash to buy its own advertising network. In this crowded and bustling marketplace, the top Internet and media behemoths would do well to pay attention to well-footed upstarts like MobiTV.

Selected online video deals

Date announced Acquirer Target Deal value
July 30, 2008 Google Omnisio $15m (reported)
Feb. 12, 2008 Yahoo Maven Networks $160m
Sept. 12, 2007 Hulu Mojiti not disclosed
Oct. 9, 2006 Google YouTube $1.65bn
June 27, 2006 Yahoo Jumpcut not disclosed

Paid for potential

Expanding its operations into US markets, UK media giant Guardian News & Media – publisher of The Observer and The Guardian – picked up B2B blog network ContentNext Media earlier this month. Founded in 2002, ContentNext is the creation of ex-Silicon Alley Reporter managing editor and business journalist Rafat Ali. Its ad-supported online network includes the content-centric blog paidContent.org, mocoNews.net, ContentSutra.com and the UK version of paidContent.

We understand that ContentNext, which now employs 23 people, sold for around $30m, and we estimate the company was running at $4m in trailing revenue. For financial advice, ContentNext tapped Mark Patricof, managing director at MESA (Media & Entertainment Strategy Advisors), marking MESA’s third M&A advisory in online media this year. To date, ContentNext has kept its finances in the family. In 2006, the blog network raised its first and only round of financing, for less than $1m. Interestingly, its first and only investor also happens to be private equity patriarch Alan Patricof through his VC outfit Greycroft Partners.

Still, a 7.5x trailing revenue multiple had us scratching our heads at first, especially considering that the content network fetches only one million page views per month. But, looking closer, we see the deal being more about future potential and figure that an additional earnout is likely. In addition to a larger geographic reach for both publications (ContentNext will continue to operate independently), potential revenue from conferences also drove the deal. Further, ContentNext was not out shopping itself, but looking for a second round of funding, and we understand the deal was very ‘friends and family’ in nature. Judging from laudatory comments Rafat Ali and Simon Waldman, director of digital publishing, make about each other online, this certainly seems to be the case.