Tag: Google

Amex buys into the alternative online payments revolution

-Contact Thomas Rasmussen

As the first significant deal that adds online payments technology to a legacy payment platform, American Express’ recent $300m acquisition of Revolution Money essentially amounts to a shot across the bow of eBay’s PayPal and Google’s CheckOut. The relatively rich purchase of four-year-old Revolution Money also stands as the third-largest alternative online payments buy to date, trailing only eBay’s pickups of PayPal and Bill Me Later. We estimate that Revolution Money, which had taken some $100m in venture funding, was running at around $10m-$20m in sales.

The alternative payments market is both large and fragmented, and is likely to see substantial consolidation in the coming years. It is also a space that has had difficulties in establishing a coherent offering, with early efforts ranging from ill-conceived ‘sci-fi-esque’ biometrics offerings to SMS-based payment methods. Until recently, it has mostly been marred by failed startups, poorly executed acquisitions and fire sales. Nonetheless, thanks to the continuing success of PayPal and new alternatives (Google Checkout, among others), as well as the boom in online micro-transactions and an uptick in general online shopping, the sector is again gaining favor, particularly as a way to cut transaction costs.

Looking ahead, we believe Amex’s acquisition of Revolution Money will serve as a wakeup call to other legacy payments vendors as well as financial institutions that might now look to do some catch-up shopping of their own. This inevitable consolidation should serve as good news for some of the established startups in the industry such as mPayy, Moneta, eBillme and Secure Vault Payments, among many others. These firms could well find themselves getting some overdue attention in 2010 as alternative online payments continue to gain currency.

Is mobile advertising back?

-Contact Thomas Rasmussen

In a clear sign that mobile advertising has grown up, Google spent a whopping $750m in stock on Monday to pick up San Mateo, California-based AdMob in what we hear was a contested process. This transaction goes a long way toward securing control of mobile display advertising for Google and comes just days after the launch of Android 2.0. Although we’ve been projecting dealmaking in the mobile advertising market for quite some time, we’re nonetheless floored by the rich valuation for AdMob, a three-year-old startup that’s raised just shy of $50m. We estimate that the 140-person firm pulled in about $20m in gross revenue in 2008 and was on track to double that figure this year (we surmise that this translates to roughly $20m on a net revenue basis).

The double-digit valuation for AdMob reminds us more than a little bit of the high-multiple online advertising deals that we saw in 2007. Viewed in that context, Google’s purchase of AdMob stands as the third-largest ‘new media’ advertising purchase since 2002. Of course, like many of those transactions, this was not based on revenue, but instead on technology and market extension, which is consistent with Google’s strategy of acquiring big into core adjacencies.

Looking forward, AdMob’s top-dollar exit is sure to have a number of rival mobile advertising startups excited. One competitor that’s preparing to raise an additional sizable round of funding quipped at the near-perfect timing of this transaction. This is an industry that has seen its ups and downs over the past few years. When we first wrote about AdMob back in May it was in the backdrop of fire sales and failed rounds of funding. If nothing else, this deal will dramatically change that.

Microsoft has been actively playing catch-up to Google in advertising and search, and is sure to follow it onto the mobile device. As are many other niche advertising shoppers such as Yahoo, Nokia, AdKnowledge, Adobe-Omniture and traditional media conglomerates such as Cox. AOL has already made its move, reaching for Third Screen Media two years ago. (We would note that AOL’s $105m purchase of Third Screen is a rare case of that company actually being ahead of the market.)

Startups that could benefit from this increasing focus on the sector include AdMarvel, Amobee, InMobi, and Velti’s Ad Infuse. However, we suspect that some of the major advances – and consequently the most promising targets – are likely to come from players that are just now getting started, with fresh and profitable approaches to location-based mobile advertising.

Some recent mobile advertising deals

Date announced Acquirer Target Deal value Target TTM revenue
November 9, 2009 Google AdMob $750m $20m*
September 14, 2009 Nokia Acuity Mobile Not disclosed Not disclosed
August 27, 2009 AdMob AdWhirl Not disclosed Not disclosed
May 21, 2009 Limelight Networks Kiptronic $1m $2m*
May 12, 2009 Velti Ad Infuse <$1m* $1.3m*
March 11, 2008 Qualcomm Xiam Technologies $32m Not disclosed
August 21, 2007 Yahoo Actionality Not disclosed Not disclosed
May 15, 2007 AOL Third Screen Media $105m $3m*

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

Is IAC looking to sell Ask.com?

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, Ask.com. At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (Airfarewatchdog.com, for instance), but IAC did make a significant pickup when it handed over $1.85bn for Ask.com in March 2005.

However, we suspect that Ask.com hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, Ask.com would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for Ask.com makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Ask.com. Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of Ask.com coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of Ask.com could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 – present

Year Number of acquisitions Number of divestitures
2009 5 4
2008 7 0
2007 6 0
2006 3 0
2005 3 0
2004 4 0
2003 4 0
2002 4 0

Source: The 451 M&A KnowledgeBase

What’s next for billionaire Twitter?

-Contact Thomas Rasmussen

At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Date Company Valuation/exit value Revenue Revenue to value multiple
September 2009 Twitter $1bn $0* N/A
Summer 2009 Facebook $8bn $500m* 16x*
June 2008 LinkedIn $1bn $100m* 10x*
May 2008 Plaxo $150m* (acquisition by Comcast) $10m* 15x*
March 2008 Bebo $850m (acquisition by AOL) $20m* 42.5x*
July 2005 MySpace/Intermix $580m (acquisition by NewsCorp) $90m 6.5x
December 2005 FriendsReunited $208m (acquisition by ITV; divested to Brightsolid in $42m fire sale in August 2009) $20* 10x*

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

Will Adobe-Omniture marriage prompt online video M&A?

-Contact Thomas Rasmussen, Jim Davis

When Adobe Systems and Omniture announced the details and rationale behind their $1.8bn tie-up in mid-September, some interesting items emerged. Highlighted was the obvious benefit from a combination of Adobe’s popular Flash video platform and Omniture’s analytics capabilities. As the Web analytics market has become more saturated, Omniture has recently been expanding into higher-margin niches such as online video analytics. Combining online video content management with analytics is an area in which some early startups have carved out a profitable niche over the past few years as video has finally started to move to the Web.

However, if the newly bulked-up Adobe truly moves into the space – as we suspect the company will – it will undoubtedly present an enormous challenge to an industry previously dominated by a few well-funded startups. As a consequence of other larger players wanting to get a piece of the booming sector and startups being more inclined to strengthen their position, we believe consolidation in the market is inevitable. With that as our premise, who might be buying, and who are the potential prime targets?

Among a slew of startups in the space, the two primary ones we think could be in play in this scenario are market leaders Move Networks and Brightcove. The two have each taken in roughly $90m in venture capital. It is worth noting that both Microsoft and Cisco are strategic investors in Move Networks, and we think the company would make a great fit for either one since both have a strong focus on video moving forward. Meanwhile, both IAC/InterActive and AOL are strategic investors in competitor Brightcove. While we don’t think AOL is in a position to make an acquisition like this now, we would not put it past IAC. Google with its more consumer-oriented YouTube makes a logical acquirer as well, particularly as a way to add a business-friendly enterprise offering.

And finally, we might put forward rich content delivery networks (CDNs) such as Akamai and Limelight Networks. These vendors have been buying their way into premium verticals recently to escape the rapid commoditization of their core business and would be wise to consider acquiring into the space. From the estimated $40m or so in revenue that we understand Brightcove brings in, a large part of that comes from reselling bandwidth through CDNs.

Adknowledge inks super deal for social advertising dominance

-Contact Thomas Rasmussen

Rumors of the sale of Super Rewards (also known as SR Points) have been swirling for quite some time. On Wednesday, acquisitive Adknowledge announced that it is indeed the winning bidder in a competitive sales process for Vancouver-based Super Rewards, a bootstrapped, 40-person incentives-based online advertising startup. (We understand that Super Rewards is profitable and generating approximately $60m in gross revenue – a number the firm says could hit as much as $100m this year. Of course, the company’s net revenue is much lower, likely in the neighborhood of one-fourth the gross amount after revenue share.) The purchase of Super Rewards marks the sixth acquisition for Adknowledge in less than two years, and we estimate this transaction is by far its largest yet. The deal also marks a shift in the M&A strategy of the Kansas City, Missouri-based online advertising giant, which has typically been more inclined to pick up heavily discounted distressed assets.

Nonetheless, Adknowledge, which we estimate was running profitably on close to $200m in revenue prior to the acquisition, has made a smart purchase in reaching for Super Rewards. Incentives-based advertising companies like Super Rewards have received quite a bit of attention recently because they seem to have found a way to actually make money off of social networks. (The fundamental business principle of profitability has largely eluded the social networks themselves.) Much like other online advertising niches, it is a sector that stands as a small, faster-growing piece of a much larger overall market. But in order to reach their full potential, incentives-based advertising vendors need the scale brought by established and wealthy companies like Adknowledge, which boasts more than 50,0000 advertisers. Because of that, we weren’t surprised to see Super Rewards gobbled up – and we wonder if the same thing might not end up happening to the firm’s two main rivals.

We’re thinking specifically about Fremont, California-based Offerpal Media and San Francisco-based Peanut Labs, which have taken approximately $20m and $4m in venture capital, respectively. The largest independent startup remaining in the niche sector, Offerpal Media recently said it was doing around $40m in revenue. Potential acquirers include dominant online advertising players such as Microsoft, Google, Time Warner’s AOL and ValueClick. In particular, we suspect ValueClick could be ready to shop as a way to stand out from its larger competitors. The Westlake Village, California-based company certainly has the means to do a deal, since it has no debt and some $100m in cash. Other potential suitors for incentives-based advertising startups include large-scale application platforms such as Facebook and NewsCorp’s MySpace that would benefit greatly from bringing the ad service in-house.

Adknowledge M&A

Date announced Target
July 22, 2009 KITN Media [dba Super Rewards]
March 12, 2009 Miva Media
November 6, 2008 Lookery (Advertising business assets)
November 3, 2008 Adonomics [fka Appaholic]
December 6, 2007 Cubics Social Network Advertising
November 8, 2007 Mediarun (UK and Australia divisions)

Source: The 451 M&A KnowledgeBase

Q2 earnings to shape Q3 M&A

-Contact Thomas Rasmussen, Xiaoyue Ma

Is there a correlation between the equity markets and M&A? Anecdotal evidence sure seems to suggest so. After a hot start to the second quarter for both the stock market and deal flow, tech M&A slowed as the Nasdaq cooled in recent weeks. In fact, spending on deals in June was less than half the level that it was in both April and May. Many would-be buyers now seem to be looking to earnings season – both for a report on second-quarter results and the outlook for the balance of the year – to determine if they’ll be going shopping again. We have heard this throughout the year from companies that have both the means and the desire to shop, but have refrained from any meaningful deals because of the uncertain outlook.

That sentiment was clearly evident when we tallied the results of our June survey of corporate development executives, who are pretty much the only acquirers in today’s market. When we analyzed the findings and separated respondents at large firms from those at smaller ones, almost two-thirds of large buyers predicted they will be more acquisitive in the second half of 2009. This stands in stark contrast to the results of our survey conducted last December, in which large acquirers were significantly more bearish on M&A, with less than one-third of respondents indicating they would do more purchases. We should note that the June survey was done when the Nasdaq was trading at its highest level since last October, while the December survey was done at a significantly more bearish time.

Given that there hasn’t been a raft of negative pre-announcements by tech vendors so far, second-quarter results may well come in somewhat stronger than many expect. In fact, tech bellwethers IBM and Google, up 20% and 30% year-to-date, respectively, will report after the bell Thursday and the overall consensus seems to be positive. Big Blue recently reiterated its fiscal year forecasts of at least $9.20 and $10-$11 in earnings per share for 2009 and 2010, respectively. If the tech earnings season does indeed go smoothly, we would anticipate companies to pick up their pace of acquisitions.

Drawing the line between M&A and the equity markets

Period M&A spending Nasdaq median Nasdaq median % change from prior month
October 2008 $20bn 1,711 N/A
November 2008 $13bn 1,532 -10.47%
December 2008 $7bn 1,531 -0.05%
January 2009 $3bn 1,521 -0.70%
February 2009 $2bn 1,494 -1.72%
March 2009 $4bn 1,444 -3.35%
April 2009 $21bn 1,646 13.97%
May 2009 $17bn 1,731 5.17%
June 2009 $10bn 1,832 5.84%
July 2009 N/A 1,787 -2.45%

Source: The 451 M&A KnowledgeBase and the Nasdaq

Navigating for relevance in a changing landscape

-Email Thomas Rasmussen

It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.

RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.

The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

Could ad slump lead to ValueClick exit?

-Contact Thomas Rasmussen

Recently, we’ve covered the hardships of online advertising companies. However, for a clear example of just how tough the environment really is, we point to the weakness at ValueClick, one of the few remaining publicly traded pure-play advertising firms. Amid an advertising slump and tough competition, the vendor has seen its first-quarter revenue decline 20% from the same quarter last year and its own projections point to a similar decline for the current quarter. With the advertising market seemingly trapped in the doldrums for the foreseeable future, we wonder if an opportunistic acquirer might consider a run at ValueClick.

ValueClick trades at an enterprise value of about $800m. This is about half its 2008 high, and down about two-thirds from 2007, when Google and Microsoft were throwing billions of dollars around to secure market leadership. With $592m in trailing 12-month (TTM) revenue, the company trades at a scant 1.3x sales. This is a far cry from the multiples paid for aQuantive and DoubleClick of 10x TTM sales and 12x TTM sales, respectively.

With $100m in cash and no debt, ValueClick CEO Tom Vadnais has indicated that the company is interested in doing some shopping of its own. However, given the dire state of the economy, we think a takeout is a much more plausible outcome over the next year or so. The potential acquirers include the usual suspects such as Microsoft, Google and IAC/InterActiveCorp; soon-to-be-independent AOL; and large media companies. However, we would hasten to note that most of these vendors have full traditional advertising portfolios, so an acquisition of ValueClick would merely be for boosting market share.