Category: mobile

Returning to eBasics

-by Thomas Rasmussen

Despite its stock trading near a five-year low and plans to cut 10% of its workforce, eBay managed to go shopping last week, picking up a pair of companies for a total of $1.3bn. The auction giant spent $945m on Bill Me Later, an online payment processor popular among big-ticket retailers, and $390m on Danish classifieds giant Den Bla Avis. The acquisitions mark a return by eBay’s recently appointed CEO John Donahoe to a focus on the company’s core operations. It also brings into sharper relief the largest strategic misstep by Donahoe’s predecessor Meg Whitman: the purchase of Skype. We believe that will soon be remedied, with the newly refocused eBay divesting its communications division.

It’s clear why eBay would want to return to its roots, and why the Bill Me Later acquisition makes a lot of sense. (The purchase of Den Bla Avis is another step in the company’s international expansion strategy.) Bill Me Later is a complementary acquisition to eBay’s PayPal payments division, which unlike the Skype acquisition has paid off handsomely. The payments segment now represents more than 25% of total revenue, or $2.2bn for the past 12 months, while Skype only brought in about $475m, or roughly 6% of total revenue. (Remember that eBay paid just $1.5bn for PayPal but handed over $2.5bn for Skype.) So who might want to pick up the Skype business?

Just because eBay has struggled to realize a return on its acquisition of Skype doesn’t mean another owner, particularly one focused on communications, couldn’t do well with the property. With about 340 million registered users, Skype is the undisputed leader in VoIP. That commanding market share is likely to attract attention from the existing telcos. It is particularly enticing once you factor in what is happening in the mobile space right now and Skype’s position to dominate mobile VoIP. So far, the wireless telcos have been fighting to keep Wi-Fi, VoIP and other services they do not control or profit from off their handsets. This is a battle they are quickly losing (case in point: Android, BlackBerry and iPhone). Much in the same way that the legacy telcos were quick to adopt wireless technology when it was still in its infancy rather than cling to the wires, it makes sense to try to profit from the trend rather than fight it. Another likely bidder for Skype is Nokia, which has been an avid acquirer of mobile content in its bid to move away from strictly hardware. In addition, Google, Microsoft and Yahoo might consider picking up Skype, since all three of these companies have used acquisitions to enter the emerging mobile communications market.

Performance of select eBay acquisitions

Date of acquisition Target Deal value Current TTM revenue Current revenue to deal value multiple
September 12, 2005 Skype $2.5bn $475m 5.2x
July 8, 2002 PayPal $1.5bn $2.5bn 0.6x
October 6, 2008 Bill Me Later $945m $130m (projected for calendar year ending December 31) 7.2x
October 6, 2008 Den Bla Avis $390m $58m (reported) 6.7x

Source: The 451 M&A KnowledgeBase

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

Buying and building at Google

Brenon Daly

Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)

With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.

Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.

Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.

However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.

Google deal flow

Year Deal volume
YTD 2008 3
2007 15
2006 11
2005 6
2004 3

Source: The 451 M&A KnowledgeBase

Chipping away

Brenon Daly

It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.

With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.

Signing off on a deal

Brenon Daly

The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)

Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)

Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.

Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.

We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.

Selected unsolicited tech deals

Date launched Bidder Target Status
Aug. 2008 Nuance Zi Corp Zi has declined to negotiate
June 2008 Cadence Design Mentor Graphics Cadence dropped bid last week
May 2008 Barracuda Networks Sourcefire Sourcefire has declined to negotiate
March 2008 EMC Iomega EMC closed acquisition a month later
Feb. 2008 Electronic Arts Take-Two Interactive EA dropped tender offer, but talks continue
Feb. 2008 Microsoft Yahoo Microsoft dropped bid after three months

Source: The 451 M&A KnowledgeBase

Half-billion-dollar communications division up for grabs

Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.

We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.

As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.

VeriSign’s communications acquisition binge

Date Target Deal value
November 27, 2006 inCode Wireless $52m
March 20, 2006 m-Qube $250m
March 13, 2006 Kontiki $62m
February 13, 2006 3united Mobile Solutions $65.5m
January 11, 2006 CallVision $30m
January 10, 2005 LightSurf Technologies $270m

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

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

Assembling the deliverable

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Comcast’s digital content delivery software subsidiary ThePlatform made its first acquisition this week, picking up tiny social networking startup Chirp Interactive. Founded just one year ago, the San Francisco-based company has developed an interactive screen saver that collects updates from websites like Facebook and Flickr. Structured as an asset acquisition, ThePlatform will use the VC-backed company’s technology and select employees to build similar social features into its own content distribution and management system.

Comcast bought ThePlatform in 2006, early in its efforts to build a viable online video distribution business, and operates the business as an independent entity. Since 2006, it’s been reported that the cable giant has shelled out nearly half a billion dollars on five online deals since the beginning of 2006, including its purchases of movie review and ticketing website Fandango in April 2007 and social networking site Plaxo in May 2008. Comcast’s VC arm, Comcast Interactive Capital, has also been banking heavily on online startup. One recipient of Comcast’s capital is tiny video and advertising distribution company Revver, which incidentally was picked up by LiveUniverse in February.

Going forward, we ask where Comcast and its VC arm will be setting their sights. Well, mobile content distribution, of course. In fact, Comcast participated in a $12.6m seed-round funding of Boston-based mobile WiMax startup Cartiza earlier this month. It also joined Google, Time Warner and other industry behemoths in a $3.2bn round in WiMax company Clearwire in April. After building up a healthy reserve of content, a video and advertising distribution platform and increasing social networking capabilities, the need to converge these platforms on mobile devices is clear, and Comcast is making the moves to do just this.

Selected Comcast acquisitions

Date announced Target Target description Deal value
May 14, 2008 Plaxo Online address book synchronization $160m*
April 11, 2007 Fandango Online movie tickets & reviews $192m*
June 28, 2006 ThePlatform Digital media publishing & delivery $90m*

Source: The 451 M&A KnowledgeBase *Reported values

Location-based stalking?

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Nokia has been going navi-crazy lately. Last week, the Finnish conglomerate bought location-based social networking company Plazes for an estimated $30m. This comes as the company is wrapping up the largest acquisition in its history – the $8.1bn purchase of Navteq. We believe this is just the beginning for Nokia and others in the excessively hyped mobile location-based services (LBS) space. The question arising from this acquisition, as well as Vodafone’s $48.7m acquisition of Zyb in May, is what these acquisitions mean for the rest of the market. One implication is already clear: GPS technology has been commodified. (Just ask shareholders of Garmin, who have seen the stock skid to a two-year low.) With this technology popping up on dozens of devices, we expect hardware vendors to be even more active in snapping up LBS startups.

Nokia plans to roll Plazes into its Nokia Maps division, which itself was formed from the acquisition of gate5 in late 2006. It is part of Nokia’s overall strategy to have GPS technology play a large role in expanding beyond just being a mobile hardware company. Nokia claims it will sell upward of 37 million GPS-enabled handsets this year alone. The approaching worldwide release of the GPS iPhone, as well as Research in Motion’s push to include the technology in most of its BlackBerry devices, make it clear why high-profile backers such as KPCB and Sequoia Capital are so excited about LBS applications.

Beyond being a simple technology purchase, however, Plazes and other future deals will likely bring another important component to the apps: users. Despite their hype and position as leaders in the space, services such as Palego’s Whrrl, Loopt and Brightkite have fewer than a million users combined. Compare that to the hundreds of millions of users that ‘traditional’ social-networking sites such as Facebook and MySpace command, and one wonders what the hype is all about. By pairing up with larger companies, however, the services get instant access to millions of users. It is the technology and expertise that rumored suitors such as Facebook, Microsoft, Google and now the mobile carriers and hardware manufacturers are interested in. With continued consolidation, the fear of being left behind in a potentially important market will drive many to acquire first and ask questions later. Nokia might have just lit the fire in the M&A race to dominate the LBS market.

Seven signs of a consolidating LBS industry

Announced Acquirer Target Deal value
June 2008 Nokia Plazes $30m*
June 2008 Polaris Hughes Telematics $700m
May 2008 Vodafone Zyb $48.7m
October 2007 Nokia Navteq $8.1bn
July 2007 TomTom Tele Atlas $2.8bn
July 2007 Springbank Resources Location Based Technologies (fka PocketFinder) $50m
August 2006 Nokia gate5 $250m*

*estimated, Source: The 451 M&A KnowledgeBase