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.

IPO woes

Contact: Brenon Daly

For the second straight time, a tech company hoping to come to market has scaled back the money it planned to raise. TeleNav, which started trading Thursday, originally planned to sell shares at $11-13. The mobile navigation service vendor then cut the range to $9-10 before ultimately pricing its seven-million-share offering at $8. The erosion on TeleNav’s terms comes two weeks after Convio also had to reduce the price tag on its IPO.

Of course, in the period between the two IPOs we saw an almost inconceivable market plunge that erased 1,000 points from the Dow Jones Industrial Average in just five minutes. (OK, the collapse might not be inconceivable, but it is proving to be inexplicable. Was it the black-box, high-velocity firms or just a bunch of ‘fat-fingered traders’ that bled the Dow last Thursday?) And while that uncertainty continues to weigh on the overall market, it’s basically stifling the IPO market. After all, if investors are fleeing from billion-dollar companies that are household names, are they really going to embrace unknown and unproven would-be debutants?

But as we note in a new report on the IPO market, Wall Street – as it often does – appears to have swung too far in its avoidance of risk. Investors have been demanding a ridiculously steep discount on the valuations of the companies that want to come public. Take the case of TeleNav, which closed its initial day of trading with a market cap of just $400m. If we back out the cash that TeleNav already held ($46m) along with the cash that it just raised ($45m), the company starts its life on Wall Street with an enterprise value of just $310m. By our back-of-the-envelope calculation, that’s just 2 times sales and 5 times cash flow – a slap-in-the-face valuation for a profitable company that’s growing sales at 50%.

When we look at the capital markets today, we aren’t particularly concerned with the day-to-day trading. Stocks go up and stocks go down, just as risk in the market (real or perceived) ebbs and flows. Nonetheless, it’s hard to look at the tech IPO market and not be struck by the fact that companies are putting together smaller offerings and debuting at notably lower valuations than they would have in the time before the US economy slumped into its worst decline since the Great Depression. And we don’t see that changing anytime soon.

Recent tech IPO events

Date Company Comment
May 2010 TeleNav Cuts expected range, and then prices below it
April 2010 Convio Prices below range, goes public at sub-$200m market cap
April 2010 SPS Commerce Debuts at sub-$200m market cap
April 2010 IntraLinks Files for $150m IPO, the third time it has filed an S-1
April 2010 QlikTech Files for $100m IPO
April 2010 Nexsan Postpones $55m IPO after setting initial range

Navigating a decent exit

Contact: Brenon Daly

When we last checked in with Networks In Motion (NiM) two weeks ago, we noted that the turn-by-turn navigation vendor had just been stepped on by the not-so-gentle giant, Google. As it turns out, NiM’s valuation got stepped on a bit, too. The Aliso Viejo, California-based company sold itself Tuesday to TeleCommunication Systems for $170m. Terms call for TeleCommunication to hand over $110m in cash and $20m in shares, along with a $40m note. Raymond James & Associates advised TeleCommunication Systems while Jefferies & Co advised NiM on the transaction, which is expected to close by the end of the month.

The offer values NiM at 2.3 times 2009 revenue and 1.7x the company’s projected sales for next year, according to our understanding. NiM’s expectation of $100m in sales in 2010, representing 33% growth, strikes us as a bit aggressive. The reason? Google has started giving away a turn-by-turn navigation product for select Android devices that run on Verizon Wireless, the only network on which NiM currently offers its service. Although the threat of Google completely wiping away NiM’s business is grossly overblown, we suspect that it did put some pressure on the price of the company. NiM’s early focus on feature phones gave competitors such as TeleNav an early lead on smartphones such as BlackBerry and Windows Mobile. According to one rumor, T-Mobile and NiM had been close to a deal earlier this year. Without the ‘Google overhang,’ we could imagine that NiM would be selling for quite a bit more than the $170m that TeleCommunication Systems is slated to pay.

That said, it’s actually a decent exit for seven-year-old NiM. Although it’s getting an admittedly so-so multiple for its business, the company is providing a solid return for its backers, largely because it didn’t raise much money. It drew in a total of less than $20m, with Mission Ventures and Redpoint Ventures as early NiM backers and Sutter Hill Ventures joining in the third – and last – round of NiM funding in March 2006. (There was also some money from unnamed strategic investors.) Unlike rival TeleNav, NiM was unlikely to go public because of concerns about competition from Google. (TeleNav, which put in its IPO paperwork a month ago, isn’t immediately threatened by Google because the latter’s service isn’t yet available on TeleNav’s networks, AT&T and Sprint.) A solid (if not spectacular) trade sale of NiM in the face of growing competition from Google isn’t a bad bit of navigation for the startup at all.

Google, the not-so-gentle giant, steps into mobile apps

Contact: Brenon Daly, Chris Hazelton

In order to grow and foster broad support, technology platforms need to be open and inclusive. Of course, that’s a sentiment that runs counter to M&A, which by definition is selective and exclusionary. (See our earlier report on how selecting a company to buy often means giving a ring to one while giving the finger to another.) The all-embracing aspect of platforms is one of the main reasons why platform providers (notably Apple and have not inked many acquisitions.

We’ve been musing on this in recent days as we’ve tallied up the valuation devastation brought on by Google’s announcement that it will give away free navigation services for certain mobile phones. One of the hardest-hit companies, Garmin, has shed some $1.8bn in market capitalization in the two weeks since Google announced its move. We also noted that Google Maps Navigation is likely to weigh on the IPO of TeleNav, even though the offering won’t hit the market until next spring. And pity poor Networks in Motion (NiM), which has built its business largely on Verizon Wireless, which just happens to be the network that will be the first to offer Google’s free navigation, albeit on a very limited basis. (Although a bit smaller and less profitable than TeleNav, NiM still has a solid business, likely finishing this year at $75m in revenue and hoping to hit $100m in 2010.)

So what does navigation software (whether free or fee) have to do with platforms? Well, remember that Google Maps Navigation is only available (for now at least) on devices that run Android, Google’s mobile OS that effectively serves as the vendor’s mobile platform. So rather than just be a platform provider and let startups develop software on top of that, Google has also stepped into the applications market with its turn-by-turn navigation offering. We would note that this product, which collectively generates hundreds of millions of dollars in fees each year, is one of the few mobile applications that subscribers are willing to pay serious money for.

So in strict economic terms, it’s easy to see why Google is willing to run roughshod over current and potential ISVs as it rolls out its own turn-by-turn navigation offering. Of course, to realize the full potential of the service (where Google infuses ads and paid search results into navigation, as it has done with wild success for Internet searches), the company will need to push it to other mobile platforms.

While most of the focus on Google’s mobile moves has been on that expansion, we can’t help but consider the subtler implications of what it’s already done. The key concern: We wonder whether Google Maps Navigation could undermine the company’s effort to attract other mobile application developers to the Android platform. Not that Google seems particularly worried about throwing elbows in the mobile software development market. After all, coincidentally or not, it timed the announcement of its turn-by-turn navigation product to come just two days before the maker of a rival product filed its IPO paperwork. That’s a curious bit of synchronicity from a vendor that has ‘don’t be evil’ as its informal motto.