Category: mobile

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.

Companies venture lightly into investments

Brenon Daly

Contact: Brenon Daly

A little more than a half-year after striking an initial partnership, Concur Technologies recently led the second round of a $4.6m funding for RideCharge, a startup that allows users to book and pay for taxis over mobile phones. John Torrey, Concur’s head of business development, told us the company, which provides an on-demand employee spending management offering, isn’t interested in being in the content business, so an acquisition wouldn’t have made sense. Concur, which holds some $210m in cash, has done three acquisitions but has been out of the market since mid-2007.

Concur’s investment comes despite a sharp tail-off in corporate VC in the years since the Bubble era. While several tech giants have continued to support their venture wings – including Intel, EMC and SAP, among others – most other companies have wound down their venture operations. And, based on our survey of corporate development officers late last year, they don’t expect to get back into the venture business. Some 36% said they planned to do fewer minority investments in 2009, compared to 22% who expect to do more investments this year.

Interplay between M&A and IPO

Brenon Daly

Contact: Brenon Daly

With the IPO calendar essentially blank right now – and likely to stay that way as long as the Nasdaq keeps lurching downward – companies that are both of size and mind to go public are using the pause to do a little shopping of their own. These transactions tend to be smaller plays, typically rounding out the company’s existing portfolio. (We would contrast these tuck-in deals with the larger consolidation plays that companies make so they can get big enough to paper their S-1. Of course, those deals only work when the public market is receptive. For instance, Convio acquired a rival that was about half its size in hopes of bulking up and going public. It pulled its IPO paperwork last August.)

Last summer, we noted that NetQos inked a small buy on its way to what we expect will be a larger sale of its equity to the public, whenever the market returns (it was the first deal by the network performance management vendor in some two-and-a-half years). In a similar situation, Tangoe last week announced that it was picking up mobile device management startup InterNoded.

The deal, which was Tangoe’s third purchase in less than two years, certainly wasn’t done to boost revenue. InterNoded posted sales of about $4m in 2008; meanwhile, Tangoe is anticipating about $60m in 2009. Tangoe has raised some $20m in VC, along with an undisclosed slug of debt. But the company, which is running in the black, doesn’t appear to have any immediate plans to raise capital (even if that were possible right now). We understand that it hasn’t met with bankers, much less held a bake-off.

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

North of the border disorder

Brenon Daly

Contact: Brenon Daly

The ‘storm’ caused by Research in Motion’s ‘bold’ play for Certicom looks likely to linger a bit longer. The Blackberry maker originally launched its unsolicited offer for Certicom a month ago, but the cryptography vendor has nixed it. (Certicom also lined up TD Securities to help it fend off the unwanted attention from the fellow Canadian company.) RIM’s bid, which values Certicom at some $52m, was originally slated to expire next week but has been extended through the end of the month.

With this unsolicited offer, RIM joins a growing list of big-name tech firms that have used this once-taboo M&A strategy. Over the past year, firms using unsolicited offers include Microsoft, EMC, Electronic Arts and Cadence Design Systems, among others. If RIM does manage to secure Certicom, it will mark the company’s second recent deal, after some two years out of the market.

Recent Research in Motion deals

Date Target Deal value Rationale
December 2008 Chalk Media $18.4m Mobile content
December 2008 (announced) Certicom $53.2m Encryption
November 2006 Epoch Integration Not disclosed Network management
March 2006 Ascendent Systems $14m* VoIP networking

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

Buyer’s market

Brenon Daly

Contact: Brenon Daly

It’s a sign of the (dismal) times when an acquirer can offer a 250% premium for the shares of a target, and the stock is below where the company started at the beginning of 2008. (It’s just that kind of year.) That was the case with Vodafone’s $29m offer for Wayfinder Systems, a Swedish company that trades on the hometown Nordic Stock Exchange. According to terms, the British wireless giant will hand over 12 Swedish crowns ($1.44) for each share of Wayfinder, which traded above 13 Swedish crowns back in January. The pairing makes a ton of sense, since Vodafone can use Wayfinder’s GPS technology to offer location-based services. Wayfinder currently has some 2.5 million subscribers.

Given the beaten-down equity markets across the globe, we expect deals like this to be much more prevalent in 2009. The reason? Shareholders have been burned too many times this year by corporate boards that reject offers, saying a bid ‘undervalues’ the company, only to see their share price get clubbed for months on end. (For more details on that, just ask any Yahoo shareholder.)

Although valuations in the private market typically lag those in the public market, the ‘correction’ in how much startups will sell for next year is expected to be severe. According to our ongoing survey of corporate development officers, nine out of 10 say they expect valuations of private companies to decline in 2009. Specifically, 42% say valuations will ‘decline substantially,’ with 45% saying they will ‘decline somewhat.’

M&A ramp-up for Facebook?

-Contact Thomas Rasmussen

Facebook’s rumored offer for micro-blogging site Twitter had the Web all atwitter recently. The $500m bid was reportedly rejected because it came in the form of a stock swap, with Facebook inflated to the infamous $15bn valuation that the social network got in Microsoft’s investment a year ago. Judging from our talks with insiders throughout the year, everyone knows this is a ludicrous valuation. Still, we wonder why some people – including big media – are still bandying this around, and more to the point, why Facebook thought Twitter would buy into the valuation. (More realistically, bringing the valuation down to earth, the offer amounts to $100-130m.) Nevertheless, the rumored run at Twitter confirms our speculation in June that Facebook, which has hardly ever dabbled in M&A, is gearing up to go on a substantive shopping spree. If that’s the case, it could do a whole lot worse than roping in Loopt.

When we first reported on this possibility, we had heard that initial talks were under way. However, the less-than-stellar adoption of the overhyped location-based services (LBS) applications probably put a damper on the enthusiasm. Nonetheless, recent developments have made LBS an attractive area again: Android devices have hit the market, the iPhone continues to sell well and Nokia is rolling out its own sleek new smartphone. Granted, the degree to which people are interested in having friends and family track their every move is debatable. But for Facebook and other social networks, which essentially base their entire business models on our instinct to pry into each other’s business, adding Loopt’s service to its currently static desktop and mobile offering is a no-brainer. And if Facebook was willing to hand over north of $100m to acquire Twitter, spending the same amount on Loopt, which is roughly where we pencil out its valuation, would make a lot more sense.

Social network M&A, 2006-2008

Period Number of deals Total known deal value
2008 YTD 32 $98.3m
2007 12 $149.7m
2006 8 $31.1m

Source: The 451 M&A KnowledgeBase

‘Lighter’ M&A at Nuance

Brenon Daly

Since former rivals Nuance Communications and Scansoft welded themselves together three years ago, the combined company has been shopping at a furious rate. In 2007, the speech-recognition vendor inked seven acquisitions. So far this year, it has spent some $640m on three acquisitions. (That doesn’t count an unsolicited offer for Zi Corp.) The company has used its purchases to focus on specific products for the healthcare market, bolster its mobile offering and expand into Europe.

However, don’t expect Nuance to continue shopping. The company told Wall Street on Monday that its current fiscal year will be ‘lighter’ in terms of M&A, with small deals serving narrow focuses. Cash will be currency for any purchase, since Nuance said it is ‘unlikely’ to use equity in a deal and the debt market is currently closed.

Nuance generated some $196m in cash from operations in the just-completed fiscal year, and had $262m in cash and equivalents at the end of September. However, it also carts around $895m in long-term debt going back to its earlier shopping spree, which has attracted a number of bears to Nuance. At various points over the past year, investors have sold as many as 35 million shares of Nuance short. That’s roughly equivalent to the amount of Nuance shares that typically change hands in more than 10 days of trading, although the number of shares sold short has been declining in recent months.

Betting on casual gaming

-by Thomas Rasmussen

Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?

The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.

Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.

Ad networks: What recession?

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-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase