ViVu bolsters Polycom’s Web-based videoconferencing credentials

Contact: Thejeswi Venkatesh

After sitting out of the market for four years, Polycom’s M&A wheels are turning once again. The acquisition of ViVu on Monday was the company’s third purchase this year, and helps Polycom round out its videoconferencing offerings. With many observers expecting video collaboration to become ubiquitous, the purchase helps Polycom extend its offerings into the Web videoconferencing arena – in-line with its declared strategy.

Terms of the deal were not disclosed, but we understand that ViVu was generating less than $2m in revenue. Cupertino, California-based ViVu, which came to market in 2010, had raised just $3.2m in venture funding and was looking to score a second round at the time of its acquisition. (Other companies in the space, including Vidyo and Blue Jeans Networks, have been successful at landing substantial amounts of funding.) Given these dynamics, we suspect that ViVu received a healthy multiple and we wouldn’t be surprised if other suitors, including TIBCO Software, were involved in the bidding process.

The transaction comes at a time of dramatic changes in the videoconferencing market. Microsoft closed its pickup of Skype – the largest-ever purchase for the tech giant – just last Friday. ViVu provides a plug-in for Skype and Polycom has worked with Microsoft on its Lync offering for a number of years. Polycom believes that the two deals will expand its market opportunities.

Select Polycom acquisitions

Date announced Target Deal value Focus
October 17, 2011 ViVu Not disclosed Web-based videoconferencing capabilities
June 1, 2011 HP (visual collaboration business) $89m Videoconferencing
March 23, 2011 Accordent Technologies $50m Non-real-time capabilities
February 7, 2007 SpectraLink $220m Wireless IP telephony

Source: The 451 M&A KnowledgeBase

Flips and flops for PE shops

Contact: Brenon Daly

There are flips that fly, and flips that flop. Consider the two recent exits by private-equity (PE)-owned companies Skype Technologies and Freescale Semiconductor. One deal basically quadrupled the price of the portfolio company, while the other company is still lingering at a value of less than half its original purchase price. Granted, that ‘headline’ calculation misses some of the nuances of the holdings and their returns to the PE shops, but it’s nonetheless a solid reminder that deals need to be done with a focus on the ‘demand’ side of the exit.

For Skype’s PE ownership of Silver Lake Partners, Index Ventures and Andreessen Horowitz, the $8.5bn all-cash sale to Microsoft came less than two years after the consortium carved the VoIP provider out of eBay for just $2bn. The deal stands as the largest ever purchase by Microsoft, and the double-digit price-to-sales valuation suggests Redmond had to reach deep to take Skype off the board. Skype had filed to go public, but was also rumored to have attracted interest from Google as a possible buyer.

On the other hand, there wasn’t much demand for Freescale, which was coming public after undergoing the largest tech LBO in history. Freescale priced its recent IPO some 20% below the bottom end of its expected range. That had to be a painful concession for the PE owners of the company: Blackstone Group, Carlyle Group, Permira Funds and Texas Pacific Group. The club paid $17.6bn in mid-2006 for the semiconductor maker, loading up the company with billions in debt just as the market tanked. Freescale, which still carts around about $7.5bn in debt, has lower sales now than when it was taken private four years ago.

Microsoft pays a princely premium for Skype

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

eBay bids high for GSI

Contact: Ben Kolada

In its largest deal in the past half-decade, eBay is set to acquire e-commerce vendor GSI Commerce for $2.4bn. The company hasn’t made such a move since September 2005, when it forked over $2.6bn for VoIP provider Skype. And while hindsight shows that eBay certainly overpaid for that property, on an equity value basis, this transaction actually carries the highest bid eBay has offered. (We would also note that this pending acquisition is the largest Internet deal since February 2008.)

Although the deal represents a fairly standard price-to-sales valuation, it carries a hefty share price premium that makes the 40-day go-shopping clause more of a formality than anything else. The $29.25-per-share cash offer values GSI at 1.6 times its trailing sales, in line with other public takeovers, but it represents a premium of 51% over GSI’s closing share price on Friday and the highest price its shares have seen since July 2010. That’s more than twice the premiums eBay offered for Gmarket in April 2009 and in June 2005. The valuation is actually slightly higher when considering that eBay isn’t interested in the entire company. As per terms of the deal, which is expected to close in the third quarter, eBay will divest GSI’s licensed sports merchandise business and 70% of its ShopRunner and Rue La La assets to a newly formed company led by GSI founder and CEO Michael Rubin.

Google picks on the pipeline

Contact: Brenon Daly

As if the IPO process wasn’t already hard enough, candidates looking to go public have found a new obstacle: Google. For the second time in less than a year, the search giant has swung its considerable market heft against a would-be public company – likely trimming hundreds of millions of dollars in market cap from the IPO aspirants. That from a company with the informal motto of ‘Don’t be evil.’

Most recently, Google introduced Google Voice, an add-on to its Gmail offering that allows for free calls to anywhere in North America. If that sounds vaguely familiar, it’s because Skype has been in that business for about seven years now. On the back of that product, Skype filed its paperwork with the SEC earlier this month to go public, less than a year after being carved out of eBay. In the first half of 2010, Skype reported $406m in revenue, according to its S-1 filing.

And it isn’t like Google just stumbled on the idea of Google Voice as a ‘Skype killer,’ or however it thinks of the offering. From our vantage point, Google has set a deliberate course of M&A to acquire bits of useful technology and engineers for a VoIP offering. The company reached for Global IP Solutions in May after picking up On2 Technologies last year, a deal that required Google to top its initial bid. So Google clearly wanted to be in this market, and was willing to buy its way into it.

This bit of sharp-elbowed competition comes after Google made an even more drastic entrance last November into the turn-by-turn navigation market. Just two days before TeleNav, one of the largest mobile navigation vendors, put in its IPO paperwork, Google announced that it would be offering turn-by-turn directions. Although the service would be available on only a very limited number of devices, Google’s price was hard to beat. (It was free.) Granted, TeleNav has run into trouble (no pun intended) of a different sort since it listed on the Nasdaq. But the company seemed almost destined for difficulties after being born under a bad moon, thanks to Google.

Is IAC looking to sell

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, 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 (, for instance), but IAC did make a significant pickup when it handed over $1.85bn for in March 2005.

However, we suspect that 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, 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 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 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 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 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

PE group dials up Skype

Contact: Brenon Daly

Just a month after we speculated on an unconventional home for Skype Technologies, eBay found a rather unconventional home of its own for its VoIP subsidiary. Rather than go to Cisco, which is what we suggested as an (admittedly) far-flung idea, Skype has landed in a portfolio of a consortium led by tech buyout shop Silver Lake. Terms call for the group (Silver Lake, along with venture firms Index Ventures and Andreessen Horowitz, plus the Canada Pension Plan Investment Board) to hand over $2bn for two-thirds of Skype. EBay, which acquired Skype four years ago, will own the remaining one-third stake.

In most markets, a multibillion-dollar carve-out of a noncore asset led by a private equity (PE) firm would hardly be called ‘unconventional.’ (In fact, one could argue that type of transaction is precisely what PE firms should be doing.) But today’s market – even with the recovery that we’ve had – is hardly a healthy one. The equity markets have rallied, but investors – including the big investment groups that back the PE firms – are still skittish. Add to that, debt is still tough to come by. Those are the main reasons why buyout shops have been largely sitting on their hands recently, making a $2bn deal by a PE consortium a relatively unusual event.

Consider this fact: the Skype carve-out is the largest tech PE deal since May 2008. In fact, it accounts for almost half of all tech spending by buyout shops in 2009. So far this year, we’ve tallied 50 transactions that have an aggregate announced deal value of just $4.6bn. That’s one-third the amount during the same period last year ($13.1bn), and a mere fraction of the total the buyout barons spent during the same period in the boom year of 2007 ($101bn).

Should Cisco dial up eBay’s Skype?

Contact: Thomas Rasmussen

In eBay’s recent report on second-quarter results, the online auction house announced a somewhat disappointing performance in its two core businesses, Payments and Marketplaces, but did see strong results from a surprising source: Skype. The VoIP service increased year-over-year revenue by 25%, while overall sales declined as the legacy Marketplaces revenue sank 14%. Skype revenue hit $170m in the quarter, bringing sales for the division over the past year to $587m. The service is closing in on a half-billion users, finishing June with 481 million users. All in all, that’s a solid performance for a unit largely considered the bastard child of the Silicon Valley auction giant.

However, that certainly isn’t enough to keep Skype inside eBay. The acquisition, which eBay has admitted overpaying for and has written down a huge chunk of the $3.2bn cost, remains largely irrelevant and immaterial to its core e-commerce business. The service has never been integrated into auctions – much less adopted by buyers and sellers – at a level anywhere close to what was planned when eBay picked up Skype four years ago. It stands as the company’s largest-ever purchase and a stark reminder of an ill-conceived deal by the earlier leadership of Meg Whitman. Current CEO John Donahoe has been clear that eBay is returning to its roots, and Skype won’t be a part of that.

So where will Skype go? We see the VoIP vendor on a dual track. It could well get spun off in an IPO. (Provided, of course, that the catastrophe at Vonage hasn’t poisoned the market for VoIP companies.) Or, Skype could look for an acquirer, although we wonder how deep the pool could be for potential buyers that could write a $2bn or so check for it. But we do have one possible interested party: Cisco. Granted, this is a proposal from left field and we’re not suggesting that talks between the companies are going on or anything. However, there is some indication that such a pairing might not be too farfetched. Cisco has increasingly been bulking up its consumer division and its strategy around the media-enabled home is finally starting to come to fruition. Video plays a big part of those plans, and the firm has been talking about expanding its TelePresence offering from the enterprise to the home. An acquisition of Skype with its enormous and growing user base and proven technology on desktops and mobile devices would do just that, and would fit well with its M&A strategy of picking up market adjacencies.

EBay unwinds and adds on

Contact: Brenon Daly

For a company that essentially matches buyers and sellers, eBay has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket, the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

The acquisition of a chunk of Gmarket, which is eBay’s first purchase since November, comes as the company also moved to unwind a pair of previous purchases. In the more straightforward of the two, eBay said it will sell StumbleUpon back to the founders of the online bookmarking site. The divestiture comes two years after eBay paid $75m for the property.

We would note that the deal is actually the second sale of an online bookmarking site in the past month. In mid-March, LookSmart divested its Furl property to Diigo, picking up an undisclosed chunk of equity in its privately held rival. While neither transaction performed as the acquirer had hoped, LookSmart did indeed look smarter than eBay because it paid only $1m for its flier on Furl, compared to the $75m that eBay handed over for StumbleUpon.

Rather than go the same route of divesting to former owners, eBay hopes to find a whole new set of buyers for its planned unwinding of Skype. It plans to spin the VoIP vendor to public market investors next year. (We’ll withhold comment on the rather unconventional ‘dual track’ that eBay has now set up for Skype. Just as we’ll withhold comment on the fact that ‘Skype’ rhymes with ‘hype.’)

If it’s lucky, eBay may see the division valued at about half of the $4.1bn that it spent on Skype (including earnouts) back in September 2005. EBay has already acknowledged that it overpaid for Skype, writing down some $1.4bn of the purchase price. While reports have indicated that Skype’s initial founders may be trying to repurchase the company from eBay (a la StumbleUpon), it appears those talks have ended. Still, we could very well see Skype getting snapped up in a trade sale before it hits the public market next year. In a mid-October report, we noted that any of the telcos or even Nokia might be interested in owning the largest VoIP provider.

eBay deal flow

Year Deal volume Deal value
2009 0* $0*
2008 4 $1.5bn
2007 3 $385m
2006 2 $75m
2005 7 $5.1bn

Source: The 451 M&A KnowledgeBase *Excludes purchase of controlling stake of Gmarket

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