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.

Sales of tech assets are on the rise

-by Thomas Rasmussen, Yulitza Peraza

At a time when both M&A volume and deal values have declined dramatically, the relative volume of asset sales continues to rise. There are two main contributors to this. First, companies are under increasing pressure to focus on their core operations, so they’re looking to divest underperforming business units. And second, cash-burning startups often find their venture backers unwilling to sink more money into them, resulting in wind-down sales of the intellectual property they had developed.

For the first quarter of 2008, the volume of asset sales represented some 15% of total announced transactions. That number doubled in the first quarter of 2009 and has even inched up a bit in April. About one out of every three transactions announced so far this year has been an asset sale.

For all the talk of unbridgeable valuation gaps, however, we would note that the buyers often get a sharp markdown on the price of the assets. Consider Artistdirect’s acquisition of SafeNet’s MediaSentry unit this month. SafeNet, which originally paid $20m for the division in 2005, wanted the MediaSentry assets off its books before the end of the first quarter, and Artistdirect’s new management was happy to fork over less than $1m for the unit. We understand that the deal closed within a few weeks. Or look at semiconductor startup Nethra Imaging, which picked up the assets of Ambric for an estimated $1m this month. Ambric had received an estimated $30m in funding, but when investors refused to step up with another round, the startup had little choice but to sell.

Asset sales spike

Period Volume of asset sales, as % of overall M&A
April 1-24, 2009 32.4%
Q1 2009 31.8%
Q4 2008 19.9%
Q3 2008 17.4%
Q2 2008 16.2%
Q1 2008 15.8%
Q4 2007 13.7%

Source: The 451 M&A KnowledgeBase

Small-time means good time for M&A

-Contact Thomas Rasmussen

Smaller shoppers are increasingly perusing the proverbial deal aisle. As our 2008 Corpdev Outlook Survey conducted in December indicates, 2009 looks to be the year of small-time shoppers. When we delved further into the data to try to get a feel for what corporate development officials from various companies are thinking, we observed an interesting trend: While large firms said they were more likely to do divestures than acquisitions, small companies were significantly more bullish on M&A. (For our purposes, we classified small firms as those with fewer than 250 employees and large firms as those with 2,500 or more employees). In fact, it seems that large acquirers are a bit more wary of the economic realities than their smaller rivals, with some even leaving the market entirely. Corporate development officials at large companies were twice as likely to say the current economic recession is ‘very likely’ to depress deal flow compared to their brethren at small companies.

Anecdotal evidence of this trend reinforces that sentiment. Take Pegasus Imaging Corp, a privately held, employee-owned company founded in 1991 that is recognized for its host of enterprise and consumer-imaging products but mostly for its JPEG-imaging compression technology. After having been out of the market since acquiring its competitor TMSSequoia four years ago, it picked up Tasman Software and AccuSoft’s imaging business last week for an estimated combined cash value of about $30m. The small, privately held shop told us that the current environment is ripe for M&A, and we expect the two acquisitions to be the first of many this year. Meanwhile, serial shopper Avnet may be slowing down, despite having just announced its first deal of the year (last week, the mid-cap company spent an estimated $30m for Nippon Denso Industry, an electronics distributor based in Tokyo). Avnet announced six deals worth $385m in 2008, but recently indicated to us that it will take a much more cautious approach to shopping this year.

Industry makeup of respondents

Industry Percentage
Infrastructure software 32.0%
Applications software 21.3%
Systems/hardware/semi 13.3%
Other 9.3%
Mobile 8.0%
Networking 6.7%
Services 5.3%
Telecommunications 4.0%

Source: The 451 Group Tech Corpdev Outlook Survey, December 2008

Ad networks: What recession?

-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