Sonic Solutions-DivX: a big swing back to the same place

Contact: Brenon Daly

The market giveth and the market taketh away. While the giving and taking are usually lopsided, there are rare occasions when it does balance itself out. Consider the recent swings in Sonic Solutions. The company announced the largest deal in its history, the $325m acquisition of DivX, on June 2. Along with the purchase, it also warned that financial results for the quarter were going to be a bit light. That started a slide in shares of Sonic Solutions that had lopped off 40% of the company’s market value by July.

The pain of that slide wasn’t lost on shareholders of DivX. The reason: roughly two-thirds of the consideration for their company was coming in the form of Sonic Solutions stock, with the remaining one-third in cash. (We noted near the bottom of the stock’s slide that the decline had cut the purchase price of DivX by about $50m, or 15% compared to the original offer price.)

But by the time the transaction had closed last Friday, shares of Sonic Solutions had regained the ground they had lost in the four months since the deal was announced. In fact, Sonic Solutions closed Friday at almost exactly the same price it did the day before the company announced the acquisition. So from the perspective of DivX, it was almost like nothing at all happened this summer.

The deepening discount on DivX

Contact: Brenon Daly

A week ago, Sonic Solutions announced that it was making its largest-ever acquisition: the $325m cash-and-stock purchase of DivX. While that pending transaction remains the biggest deal that the digital media management vendor has ever considered, it is getting smaller virtually every day. Because of the decline in shares of Sonic Solutions, the price tag for DivX has been trimmed by about $50m, or 15%.

Under terms, Sonic Solutions will hand over $3.75 in cash and about half a share (0.514) for each share of DivX. The cash portion is fixed, so DivX shareholders stand to pocket about $125m from that. On the other hand, the value of the stock component of the proposed transaction varies from day to day, depending on the price of shares of Sonic Solutions.

On the day before Sonic Solutions announced the acquisition, the company’s stock closed at $11.83. Based on that price, DivX shareholders stood to pocket about $200m of equity consideration ($11.83 x 0.514 = $6.18/share x 33 million DivX shares = $200m). With its stock finishing trading Monday at $8.83, the total value of the equity that Sonic Solutions will hand over to DivX shareholders has dropped to $150m. So altogether, the consideration for DivX is about $275m. But the value is headed even lower. On Tuesday, Sonic Solutions shares closed lower — the fifth straight decline since announcing the acquisition.

Online video: boom and bust

-Contact Thomas Rasmussen

The over-hyped world of online video is going through massive turmoil at the moment. While most investors and companies agree that online video is likely the future of broadcasting, no one has been able to make any money from it so far. And it’s likely to get even harder due to tighter venture funding, the closed IPO window and next-generation Web 2.0 entrants such as Hulu and even Apple’s iTunes. These factors have left the online video players scrambling toward any exit, no matter how cheap.

Consider the case of CinemaNow, which was picked up by Sonic Solutions for a mere $3m last month. The portal never managed to turn a profit and had estimated revenue of less than $4m. Yet it secured five rounds of funding (totaling more than $40m) and brokered partnerships with major studios, VCs and strategic investors. When CinemaNow went to investors begging for another round a few months ago, it found that there was no money to be had and a quick exit became the only alternative. That’s a common occurrence these days, and may well have driven rival MovieLink to sell for a paltry $6.6m to Blockbuster last year. (Expect more of these types of deals next year. According to corporate development executives who completed our annual M&A outlook survey, lack of access to VC will be the major catalyst for deal flow in 2009.)

If this sounds eerily familiar, it’s because a similar situation played out during the music industry’s awkward and reluctant switch to digital a few years ago. Several startups, even major ones backed by large studios, tried to become the distributor of choice. Yet, many of those went away in scrap sales or had the plug pulled on them (Viacom’s Urge, Napster and Yahoo’s music service, to name just a few high-profile failures). We’re now left with just a handful of dominant distributors: iTunes, RealNetworks’ Rhapsody, Amazon and, to an increasing extent, MySpace’s heavily funded music effort. Many of these companies are likely to also dominate online video. In fact, add in Google and Microsoft, and you have a list of the companies that are likely to be buyers for the few remaining online video startups.

Recent online video M&A

Year Number of deals
2008 12
2007 10
2006 5

Source: The 451 M&A KnowledgeBase