Zix: a prescription for divestiture

Contact: Brenon Daly

One conclusion to draw from the recent pickup in divestitures is that dividing corporate attention often means diluting corporate returns. Consider the situation at Zix Corp. The Dallas-based company has a small but growing business selling email encryption. In mid-2003, Zix moved into electronic prescriptions through its $1.5m acquisition of the assets of PocketScript. The plan was to expand its business of providing secure communications to the billions of prescriptions written every year in a less costly and more secure way.

However, after nearly six years of trying to realize those goals, Zix has little to show for it. Revenue from the e-prescriptions unit totaled just $5.4m, or 19% of Zix’s overall sales, in 2008. Sales at the division last year slipped 11% from the year before, compared to a 26% increase in its core email encryption business. (And we would note that both units employed some 73 people, giving an idea of the relative returns of each unit.)

Moreover, the e-prescriptions division has only one-third the number of subscribers that Zix estimates would be required to cover the costs of developing the service, according to the company’s own calculations. And now, Zix has acknowledged that it may never get the business to that level on its own. The firm hired Allen & Co late last week to advise it on ‘strategic alternatives’ for its e-prescriptions unit.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

The ‘new’ Old Media

-by Brenon Daly, Yulitza Peraza

With investment bank Allen & Co opening its annual conference on July 9 in Sun Valley, Idaho, we thought we’d take a look at what sort of shopping the traditional media companies, which make up most of the confab’s attendees, have been doing recently. The short answer: They’ve been busy. And a lot of the buying has been Old Media picking up New Media. (We’ve noted in the past how Allen & Co has re-tooled its business to meet the change in deal flow.)

In the first half of this year, traditional media companies have spent more on Internet content companies than during any other comparable period. Just Tuesday, for instance, Gannett picked up the chunk of ShopLocal that it didn’t already own. Additionally, NBC took a majority stake in Web content and broadcast sports provider World Championship Sports Network for an undisclosed sum last month. (This acquisition, the network’s fourth since 2006, comes just in time to help bolster its upcoming coverage of the Olympic Games in Beijing.) Also, CBS paid $1.8bn in May for CNET, one of the original online information sites. Altogether, since 2002, Old Media has put more than $13bn toward online purchases.

If anything, we expect the pace to pick up in the second half of 2008, as media companies continue to expand their digital offerings. The shopping spree, however, is a bit late because the model has been broken for a long time. It used to be that traditional media companies could run fatly profitable by simply trading their information and entertainment for your dollars, whether the payment came through subscription or advertising. That exchange worked as long as the information and entertainment could be kept closely controlled. In other words, it worked until the Internet came along.

Acquisitions of content companies by media outlets

Period Deal Volume Deal Value
Jan-June 2002 9 $424,000
Jan-June 2003 7 $106m
Jan-June 2004 3 $87m
Jan-June 2005 10 $1.11bn
Jan-June 2006 26 $1.18bn
Jan-June 2007 32 $2.07bn
Jan-June 2008 38 $2.18bn

Source: The 451 M&A KnowledgeBase