Category: mobile

HP: relentlessly reaching for Palm

Brenon Daly

Contact: Brenon Daly

As Hewlett-Packard prepares to report fiscal second-quarter results after the close of the market today, there’s already been an SEC filing related to the tech giant that has attracted a fair amount of interest. That document is the proxy statement for HP’s pending acquisition of mobile OS maker Palm Inc. The background on the deal shows that despite Palm being in a fairly vulnerable financial position, the company managed to attract significant interest.

Perhaps reflecting Palm’s dwindling cash and overall dimming outlook, the $1.2bn deal came together with almost unprecedented speed. It took just two months for the acquisition to transpire. The target – along with law firm Davis Polk & Wardwell and financial advisers Goldman Sachs and Qatalyst Partners – winnowed an initial list of 24 possible suitors to just six companies, including HP, in quick order.

According to the proxy, there were two primary bidders besides HP for Palm, along with other parties that were interested in all or just some of the vendor’s patents. HP initially offered $4.75 for each share of Palm, about one dollar less than the $5.70 per share that it ended up paying for it two weeks later. The reason for the bump? A bid of $5.50 per share from an unidentified suitor, referred to as ‘Company C’ in the proxy.

The German giant’s gamble

Brenon Daly

Contact: Brenon Daly

In the largest software transaction in more than two years, SAP plans to pick up mobility software and database vendor Sybase for a net cost of $5.8bn. SAP’s all-cash bid of $65 per share represents a 44% premium over the three-month average closing price for Sybase. More dramatically, SAP’s offer represents the highest price for Sybase stock in the target’s two decades as a public company.

The purchase, which is expected to close in July, represents a big bet by the German giant on the future of mobile applications. The two companies have partnered for more than a year, with SAP offering mobile CRM and Business Suite applications on Sybase’s Unwired Platform. Currently, mobile products account for one-third of revenue at Sybase, which started life as a database vendor. Within the database segment, Sybase also has an analytic database (Sybase IQ) that has been generating most of the growth in recent years.

At an enterprise value of $5.8bn, SAP is valuing Sybase at basically 5 times sales. (Sybase generated revenue of $1.1bn in 2009 and recently guided Wall Street to expect about 6% sales growth this year.) That’s roughly in line with the multiple SAP paid in its other large deal, the $6.8bn acquisition of Business Objects in October 2007. It’s not out of whack with SAP’s own valuation. The company trades at about 4 times sales, and that’s before any acquisition premium is figured in. Viewed another way, SAP trades at roughly 14 times cash flow, while it is paying 15 times cash flow for Sybase.

Palm’s down

Brenon Daly

Contact: Brenon Daly

Just two weeks ago, we wrote that we thought Palm Inc would be a tough sell because the cash-burning smartphone pioneer seemed mired in irrelevance, both to consumers and developers. OK, so we were a bit off on that. The company apparently appeared relevant enough to Hewlett-Packard for the tech giant to hand over more than $1bn in cash for Palm.

While Palm’s board has backed the deal, it appears to be a bit of a tough sell to the company’s shareholders, who have bid Palm stock above the offer since it was announced. From their perspective, anyone who bought the stock over the past year – with the exception of a period from roughly mid-March to mid-April – is underwater, despite the 23% premium offered by HP. Palm shares changed hands at twice the level of HP’s bid for most of January.

But then, valuing Palm has always been tricky, going back to its fitful birth on the Nasdaq as a spin-off from 3Com. (As a side note, HP’s pending pickup of Palm would reunite the smartphone company with its former parent, as HP just closed its purchase of 3Com three weeks ago.) When the tiny stake of Palm hit the market in early 2000, investors were pushing each other out of the way to get their hands on Palm (if you will). The company finished its inaugural day on the Nasdaq at a valuation of some $50bn – roughly twice as much as Apple was worth at the time. Today, Apple fetches a market cap of $250bn, while Palm just sold for $1.4bn.

Tangoe lines up for IPO dance

Brenon Daly

Contact: Brenon Daly

Back in January 2009, Tangoe made a small acquisition on its way to what we expected would be an IPO. Of course, neither the telecom expense management (TEM) vendor nor any other company was going to make it public in the first few months of last year. But with the recovery in the capital markets, Tangoe has indeed filed for its IPO, looking to raise $75m. The 10-year-old company plans to trade under the ticker ‘TNGO’ on the Nasdaq. We expect a fairly strong offering from Tangoe, which nearly doubled sales to $37.5m in 2008, and pushed that up another 49% to $56m last year despite the recession. See our full report on the company and the planned IPO.

Tangoe focuses on lifecycle management for fixed and mobile communications and more recently mobile device management. As a TEM provider, Tangoe has more than 350 companies using its expense management tools and services. The Orange, Connecticut-based vendor has pushed into the mobile communications space with the purchases of Traq Wireless in March 2007 and InterNoded in January 2009. Traq provided wireless expense management, helping Tangoe expand its lifecycle management for mobile as customers moved more of their communications off fixed lines. Offering deeper management and monitoring of these mobile devices, InterNoded gave Tangoe the ability to provision, secure and remotely wipe devices used by its customers.

Disconnected at Palm

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Palm Inc has lost a key set of hands. In an SEC filing Friday, the troubled company said that the head of its software and services, Michael Abbott, will be cleaning out his desk by the end of this week. (No word yet if he’ll also have to give back his smartphone.) The departure is significant because Abbott was responsible for building third-party developer support for Palm’s smartphone platform, which has lagged well behind the developer communities for Apple’s iPhone and Google’s Android OS. It also underscores one of the key problems at Palm, which we explored in more depth in a recent report.

Specifically, Palm has precious little to show for its efforts to stay relevant in the mobile world. Here’s our back-of-the-envelope math: the company will spend in the neighborhood of $300m on sales and marketing and another $200m on R&D for the current fiscal year, which ends next month. (The levels are basically annualized totals from the first three quarters of the current fiscal year.) We would also add that they are significantly higher than spending levels at rival vendors. For instance, Palm spends 2.5 times more on R&D (as a percentage of revenue) than Blackberry maker Research In Motion.

Adding together sales and marketing plus R&D spending at Palm, we get about $500m, compared to projected revenue of about $1.1bn. And what does the company have to show for that half-billion-dollar outlay? Palm’s already tiny slice of the smartphone market actually got smaller this fiscal year. And yet, despite that dismal return on investment – not to mention a key executive departure – speculation continues to swirl that Palm will get snapped up. Most often, HTC, Lenovo or even Motorola are named as suitors for Palm. However, in our report, we note key reasons why those vendors wouldn’t be interested. For our money, Dell still seems the most-logical buyer of Palm.

Nokia browses for an advantage

Contact: Jarrett Streebin

In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.

Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.

Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.

This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.

Wayfinder finds its way to a decent exit

Brenon Daly

Contact: Brenon Daly

Even in write-offs, it’s not impossible for companies to come out ahead. That’s what we were thinking when we saw the news that Vodafone pulled the shutter down on the Wayfinder Systems business that it acquired a little more than a year ago. Of course, in the year since the second-largest wireless operator picked up the turn-by-turn navigation vendor, a lot has changed in that market. Most notable, it’s gone from a paid service to a free offering, thanks to Google and, more recently, Nokia.

That development has erased hundreds of millions in market cap from the two main suppliers of traditional navigation devices, Garmin and TomTom, and turned them into laggards on Wall Street. (Since Google announced in late October that it was adding free turn-by-turn navigation to a small number of Android devices, Garmin stock has shed 5% and TomTom has flat-lined, while the Nasdaq has posted a 12% gain.) Given the pressure that’s been felt by those two giants – both of which garner more than $1bn in annual revenue – we have to wonder if Wayfinder isn’t pretty content with selling the business back in December 2008.

It isn’t hard to see a scenario in which a tiny company ($14m in trailing revenue) that traded on an obscure stock exchange (the Nordic Growth Market) would have been deeply wounded – even fatally so – by the commoditization of its business. (That’s what happened to Nav4All, for instance.) Instead, Wayfinder managed to sell the business for about $30m, representing a 200% premium and a decent valuation of two times trailing sales. The alternative strikes us as pretty bleak. Had it not done the deal, Wayfinder could very well have been in the process of winding itself down. As it was, Vodafone wound it down, but at least Wayfinder and its backers pocketed a bit of money before that.

No recession for mobile advertising M&A

-Contact Thomas Rasmussen

Following Google’s purchase of AdMob in November, we predicted a resurgence in mobile advertising M&A. That’s just what has happened and, we believe, the consolidation is far from having run its course. Apple, which we understand was also vying for AdMob, acquired Quattro Wireless for an estimated $275m at the beginning of the year. At approximately $15m in estimated net revenue, the deal was about as pricey as Google’s shopping trip for its own mobile advertising startup. And just last week, Norwegian company Opera Software stepped into the market as well, acquiring AdMarvel for $8m plus a $15m earnout. We understand that San Mateo, California-based AdMarvel, which is running at an estimated $3m in annual net sales, had been looking to raise money when potential investor Opera suggested an outright acquisition instead.

These transactions underscore the fact that mobile advertising will play a decisive role in shaping the mobile communications business in the coming years. For instance, vendors can now use advertising to offset the costs of providing services (most notably, turn-by-turn directions) that were formerly covered by subscription fees. Just last week, Nokia matched Google’s move from last year by offering free turn-by-turn directions on all of its smartphones. Navigation is only the beginning for ad-based services as mobile devices get more powerful and smarter through localization and personal preferences.

While traditional startups such as Amobee will continue to see interest from players wanting a presence in the space, we believe the next company that could enjoy a high-value exit like AdMob or Quattro will come from the ranks that offer unique location-based mobile advertising such as 1020 Placecast. The San Francisco-based firm, which has raised an estimated $9m in two rounds, is a strategic partner of Nokia’s NavTeq. As such, we would not be surprised to see Nokia follow the lead of its neighbor Opera by reaching across the Atlantic to secure 1020 Placecast for itself.

freenet: getting paid to sell

Brenon Daly

Contact: Brenon Daly

In a time when nearly all divestitures are done on the cheap, freenet’s recent sale of its mass-market hosting business Strato generated an unexpectedly rich return for the German telco. In fact, freenet more than doubled its money in the five years that it owned Strato. Back in December 2004, freenet handed over $177m ($107m in cash, $70m in equity) to German network equipment provider Teles for Strato. When freenet shed Strato to Deutsche Telekom (DT) two weeks ago, it pocketed $410m. (Arma Partners advised freenet on the divestiture.)

On top of that return, of course, freenet will hold on to the cash that Strato generated while owned by freenet. That’s not an insubstantial consideration, given that Strato ran at an Ebitda margin in the mid-30% range. We understand that Strato was tracking to about $50m in Ebitda for 2009, up slightly from about $46m last year. Revenue at Strato was also expected to show a mid-single-digit percentage increase in 2009, despite the tough economic conditions in freenet’s home market of Germany. DT’s bid values Strato at roughly 3x trailing sales and nearly 9x trailing Ebitda. That’s a solid valuation for corporate castoffs, which typically garner about 1x trailing sales and maybe 4-5x Ebitda.

Freenet’s divestiture of the Strato hosting business to DT comes a half-year after it sold its DSL business to United Internet, a sale that was also banked by Arma. The company has been looking to shed businesses as a way to pay down the debt that it took on for its $2.57bn acquisition of debitel in April 2008. Since that landmark deal, freenet has focused its operations on mobile communications, and had been reporting the DSL and Strato businesses separately. We understand that there may be additional divestitures by freenet, but they will be smaller transactions for more ‘ancillary’ businesses.

Navigating a decent exit

Brenon Daly

Contact: Brenon Daly

When we last checked in with Networks In Motion (NiM) two weeks ago, we noted that the turn-by-turn navigation vendor had just been stepped on by the not-so-gentle giant, Google. As it turns out, NiM’s valuation got stepped on a bit, too. The Aliso Viejo, California-based company sold itself Tuesday to TeleCommunication Systems for $170m. Terms call for TeleCommunication to hand over $110m in cash and $20m in shares, along with a $40m note. Raymond James & Associates advised TeleCommunication Systems while Jefferies & Co advised NiM on the transaction, which is expected to close by the end of the month.

The offer values NiM at 2.3 times 2009 revenue and 1.7x the company’s projected sales for next year, according to our understanding. NiM’s expectation of $100m in sales in 2010, representing 33% growth, strikes us as a bit aggressive. The reason? Google has started giving away a turn-by-turn navigation product for select Android devices that run on Verizon Wireless, the only network on which NiM currently offers its service. Although the threat of Google completely wiping away NiM’s business is grossly overblown, we suspect that it did put some pressure on the price of the company. NiM’s early focus on feature phones gave competitors such as TeleNav an early lead on smartphones such as BlackBerry and Windows Mobile. According to one rumor, T-Mobile and NiM had been close to a deal earlier this year. Without the ‘Google overhang,’ we could imagine that NiM would be selling for quite a bit more than the $170m that TeleCommunication Systems is slated to pay.

That said, it’s actually a decent exit for seven-year-old NiM. Although it’s getting an admittedly so-so multiple for its business, the company is providing a solid return for its backers, largely because it didn’t raise much money. It drew in a total of less than $20m, with Mission Ventures and Redpoint Ventures as early NiM backers and Sutter Hill Ventures joining in the third – and last – round of NiM funding in March 2006. (There was also some money from unnamed strategic investors.) Unlike rival TeleNav, NiM was unlikely to go public because of concerns about competition from Google. (TeleNav, which put in its IPO paperwork a month ago, isn’t immediately threatened by Google because the latter’s service isn’t yet available on TeleNav’s networks, AT&T and Sprint.) A solid (if not spectacular) trade sale of NiM in the face of growing competition from Google isn’t a bad bit of navigation for the startup at all.