Tag: M&A

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.

Push-back on the markdown

Brenon Daly

Rather than the current M&A market being a place where buyers and sellers meet on more or less equal footing, current deals clearly show that acquirers have the upper hand (if you’ll forgive the mixed anatomical metaphor). We’ve already noted how some would-be buyers have pushed for ‘recalibrations’ in deal prices and, for the most part, have gotten these discounts.

However, one target isn’t just sitting by for a markdown. I2, which agreed to be acquired by JDA Software Group in mid-August, has told its bargain-minded buyer that it plans to hold to the original terms of the deal. Under those terms, i2’s common shareholders would pocket $14.86 for each share. (There are also payments to satisfy i2 convertible holders, giving the proposed transaction an enterprise value of $346m.)

I2 shares traded close to the bid up until Wednesday, when JDA told i2 it wanted the company to delay its shareholder vote. I2 went ahead and held the meeting as scheduled Thursday, with more than 80% of shareholders voting for the deal. The company says it has done everything it needed to do to close the deal and ‘expects’ JDA to do the same. The market doesn’t share that expectation. Instead, it anticipates that JDA will trim its bid. I2 shares dropped $4 on Wednesday and sank again on Thursday, closing at $9. That’s almost 40% below the original offer price. In case anyone is curious, terms call for a breakup fee of $15m or $20m, depending on the split.

Barack Obama meets Bluto and Otter

Brenon Daly2 Comments

Just after Barack Obama was elected to the White House, a website devoted to him got moved into Animal House. A few months ago, National Lampoon took a small flier into politics, buying BarackObamaJokes.com. On Wednesday, the day after America elected Obama to the nation’s highest post, the aspiring comedy conglomerate revealed that it had closed the deal. (Although terms weren’t disclosed, we guess the transaction cost National Lampoon less than $10,000.)

National Lampoon’s purchase of BarackObamaJokes.com continues its transformation from essentially a licensing business to a company with actual operations. It has done that largely through acquisitions, picking up a half-dozen Web humor sites so far this year. That flurry of dealmaking has pushed the ‘new media’ portion of National Lampoon’s overall revenue to 20%. The company plans to at least double that level within three years. (Incidentally, National Lampoon, perhaps best known for the film Animal House, is a publicly traded company. No joke. It currently sports a market capitalization of just $8m, but only trades some 9,000 shares in a typical day on the Amex.)

In the interest of a ‘fair and balanced’ account of our White House election M&A report, we also tracked down the guy who owns JohnMcCainJokes.com. The first thing he told us is that he also has a hand in HillaryClintonJokes.com and was going to register BarackObamaJokes.com, but ‘spaced’ on it. As for JohnMcCainJokes.com, which is little more than a placeholder, the owner says he hasn’t received any M&A overtures for the site.

National Lampoon’s 2008 acquisitions

Date Target
November 5 BarackObamaJokes.com
September 4 ZingFu Enterprises
August 19 AllModelZone.com
February 11 Comedy Express (assets)
February 4 Rivalfish
January 9 College Hangover

Source: The 451 M&A KnowledgeBase

RFMD takes a timeout

-by Thomas Rasmussen

RF Micro Devices is taking a break from M&A. The radio frequency semiconductor company told us after an investor conference last week that it will sit on the sidelines until at least the second quarter of 2009. The pause comes after a pair of tuck-ins (its $25m acquisition of Filtronic’s semiconductor business and its $24.1m purchase of Universal Microwave) and its $900m bet on Sirenza Microdevices late last year. The company plans to use the next six months to digest its earlier acquisitions.

As it holds off on inorganic growth, RFMD may need to focus on organic growth. Revenue has flatlined at about $1bn in the company’s past two fiscal years and it has lost money in three of its last four quarters. Meanwhile, its cash flow has dried up substantially. In its most-recent four quarters (ending June 30), RFMD reported negative EBITDA of $8m, which is down from a positive EBITDA of $175m in the year-earlier period. That slump has weighed on shares, which have shed two-thirds of their value so far this year. And that has not only cost the company, it has also cost the shareholders of Sirenza, who took two-thirds of their payment in RFMD shares.

Less of the same for October M&A

Brenon Daly

With October standing as the worst month for the Dow Jones Industrial Average in more than a decade, we thought we’d see what the market’s rout did to M&A totals. Essentially, October continued the sluggishness that we’ve already seen in the first three quarters of 2008, with M&A falling about one-third from October 2007. (See our full report on Q1-Q3 activity.) And while the drop in dealmaking seems sharp, it pales in comparison to the losses on Wall Street, at least on a relative basis. Consider this: the October declines of the Dow and the Nasdaq (14% and 18%, respectively) account for exactly half of the total losses for both indexes in 2008. Ouch.

Also similar to the first three quarters of the year, big buyers sat out October. Only three transactions valued at more than $1bn were announced last month. (And, we’d be quick to add, one of them – the $2.3bn unsolicited bid for Atmel – has been rejected and, if history is any guide, probably won’t go through.)

Even with the continued bearishness in the M&A markets, the activity in October does offer a glimmer of hope for the return of a vibrant deal economy. At least things didn’t get worse. And if things continue to not get worse, it’s not too much of a stretch to see them starting to get better.

October deal flow

Month Deal volume Deal value Deals worth $1bn+
October 2006 330 $37bn 8 (Google-YouTube, Open Solutions LBO)
October 2007 309 $32bn 5 (Nokia-Navteq; SAP-Business Objects)
October 2008 238 $23bn 3 (CenturyTel-Embarq, unsolicited bid for Atmel)

Source: The 451 M&A KnowledgeBase

Of ‘corrections’ and ‘recalibrations’

Brenon Daly

Since the beginning of September, a new euphemism has found its way into Wall Street parlance: ‘recalibration.’ It is a close cousin to the original euphemism, ‘correction.’ In fact, the pair of linguistically neutral terms are often popping up in the same sentence, such as ‘Given the market’s correction, we have recalibrated the deal.’ We gather that’s a lot more sensitive than saying, ‘Look, stocks have gone to hell, so we slashed the deal.’

Whatever the language, we saw two cases of this on Wednesday. Not unexpectedly, Brocade ‘amended’ its offer to buy Foundry, originally inked in late July. (‘Did we say $3bn? We meant $2.6bn.’) And Broadcom took a pair of scissors to its agreement to buy AMD’s digital television unit, cutting 25% from the price.

At least the deals will get done (probably). The same can’t be said for a transaction a banker described for us yesterday over coffee. Working on the sell-side, the banker and his client hammered out an agreement with a strategic acquirer over the summer. Terms called for the buyer to pay about $30m, about $25m of that in cash, the rest in equity. As shares in the would-be buyer ‘corrected,’ the company ‘recalibrated’ the price down to about $20m. The final kicker: the company planned to pay in stock. The would-be target is ‘recalibrating’ its interest in the offer.

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

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.

Take the next exit

Brenon Daly1 Comment

In addition to clobbering existing stocks, the recent financial crisis has thinned the ranks of companies that we had expected to offer up stock in the coming months. In the past week alone, two companies that we had short-listed as IPO candidates (back when there was an IPO market) both got swallowed in trade sales.

On Wednesday, MessageLabs took a $695m offer from Symantec to help establish Big Yellow’s on-demand security offering. We understand MessageLabs had put together its underwriting ticket, and was planning to hit the market once the IPO window opened again. The IPO track was a distinct change from the path rumored for MessageLabs for more than two years. Several sources have indicated that MessageLabs had been shopped widely, with Trend Micro considered the most serious suitor at times.

And last week, we had to take LeftHand Networks out of the ‘shadow IPO pipeline’ when Hewlett-Packard came calling with a $360m offer. For more than a year we have noted that, pending the return of the market for new offerings, LeftHand appeared set to join the IPO parade of storage vendors (a half-dozen storage companies have gone public in the past two years). Instead, LeftHand sold, in a deal banked by Merrill Lynch. Incidentally, Merrill Lynch also banked the sale of another company that had its eye on the public market: Postini, a direct rival to MessageLabs, went to Google for $625m in July 2007.

Tombstones for a law firm

Brenon Daly

As if the recent bankruptcy of one investment bank and hasty sale of another wasn’t disruptive enough to current deal flow, we now have yet another major M&A adviser headed toward breakup. Only this time, it’s a law firm: Heller Ehrman indicated that it will dissolve on Friday. Unlike the banks, however, the winding down of Heller Ehrman was not caused by the current upheaval on Wall Street. Instead, the San Francisco-based law firm, which traces its roots back to 1890, has been slumping since the end of last year, as partners defected amid a slight dip in revenue in 2007.

Like its financial brethren, Heller Ehrman had clients across industries, with a significant technology practice. The firm worked on 42 tech deals last year, including IronPort Systems’ $830m sale to Cisco in January, Hewlett-Packard’s $1.6bn purchase of Opsware, Autonomy Corp’s $375m acquisition of Zantaz and the $200m leveraged buyout of Embarcadero Technologies. Overall, Heller Ehrman tied for fourth-busiest law firm in terms of tech deals, according to our rankings.

Legal league tables, 2007 deal volume

Rank Firm Number of transactions
1 DLA Piper 63
2 Cooley Godward 61
3 Jones Day 57
4 (tie) Heller Ehrman/O’Melveny & Myers 42

Source: The 451 M&A KnowledgeBase