VeriSign’s bargain bin of deals

-Email Thomas Rasmussen

We’ve been closely watching VeriSign’s grueling divestiture process from the beginning. One year and $750m in divestitures later, VeriSign is largely done with what it set out to do. The company finally managed to shed its messaging division to Syniverse Technologies for $175m recently. Although we have to give the Mountain View, California-based Internet infrastructure services provider credit for successfully divesting nine large units of its business in about a year during the worst economic period in decades, we nonetheless can’t help but note that the vendor came out deeply underwater on its holdings. From 2004 to 2006 it spent approximately $1.3bn to acquire just shy of 20 differing businesses, which it has sold for basically half that amount. (Note that the cost doesn’t include the millions of additional dollars spent developing and marketing the acquired properties, nor the time spent on integrating and running them, which undoubtedly hurt VeriSign’s core business.)

Aside from the lawyers and bankers, the ones who really benefitted from VeriSign’s corporate diet were the acquirers able to pick up the assets for dimes on the dollar. And in most cases, the buyers of the castoff businesses were other companies since the traditional acquirers of divestitures (private equity firms) were largely frozen by the recent credit crisis. The lack of competition from PE shops, combined with the depressed valuations across virtually all markets, means the buyers of VeriSign’s divested businesses scored some good bargains. Chief among them are TNS and Syniverse, which picked up the largest of the divested assets, VeriSign’s communications and messaging assets, respectively. Wall Street has backed the purchases by both companies. Shares of TNS have quadrupled since the company announced the deal in March, helped by a stronger-than-expected earnings projections this year. More specifically, Syniverse spiked 20% on the announcement of its buy, which we understand will be immediately accretive, adding roughly $35m in trailing 12-month EBITDA.

VeriSign’s divestitures, 2008 to present

Date Acquirer Unit sold Deal value
August 25, 2009 Syniverse Technologies Messaging business $175m
May 26, 2009 SecureWorks Managed security services $45m*
May 12, 2009 Paul Farrell Investor Group Real-Time Publisher Services business Not disclosed
March 2, 2009 Transaction Network Services Communications Services Group $230m
February 5, 2009 Sinon Invest Holding 3united Mobile Solutions $5m*
May 2, 2008 MK Capital Kontiki Not disclosed
April 30, 2008 Melbourne IT Digital Brand Management Services business $50m
October 8, 2008 News Corporation Jamba (remaining 49% minority stake) $200m
April 9, 2008 Globys Self-care and analytics business Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate

Will mobile payment startups pay off?

-Contact Thomas Rasmussen, Chris Hazelton

In 2006 and 2007, mobile payment startups were a favorite among venture capitalists. The promise of dethroning the credit card companies by bypassing them had VCs and strategic investors throwing hundreds of millions of dollars after such startups. During this time, a few lucky vendors managed to secure lucrative exits. Among other deals, Firethorn, a company backed with just $14m, sold to Qualcomm for $210m and 3united Mobile Solutions was rolled up for $70m as part of VeriSign’s acquisition spree. Recent prices, however, haven’t been anywhere near as rich. Consider this: VeriSign unwound its 3united purchase last month, pocketing what we understand was about $5m. Similarly, Sybase picked up PayBox Solution for just $11.4m, while Kushcash and other promising mobile payment startups have quietly closed their doors.

Last week, Belgian phone company Belgacom took a 40% stake in mobile payment provider Tunz. Tunz has taken in a relatively small $4m in funding since launching in 2007, but with VCs sidelined, we believe this investment was a strategic cash infusion to keep alive the company behind Belgacom’s mobile payment strategy. It may well be a prelude to an outright acquisition. With valuations clearly deflated and venture capitalists nowhere to be seen, we believe mobile service providers are set to go shopping for payment companies. Who might be next?

Yodlee, mFoundry and Obopay are three companies that have made a name for themselves in the world of mobile banking and payments. Each has secured deals with the major banks and wireless companies, but still lacks scale. Further, all of them are facing increased competition from deep-pocketed and patient rivals such as Amazon, eBay’s PayPal and Google’s CheckOut. Still, we believe they are attractive targets for wireless carriers or mobile device makers, who are increasingly on the lookout for additional revenue streams.

In fact, Obopay received a large investment from Nokia last week as part of its $70m series E funding round. Nokia’s portion is unclear, but Obopay tells us the stake gives Nokia a seat on its board. (Additionally, we would note that this investment comes directly from Nokia, rather than its venture arm, Nokia Growth Partners, as has typically been the case). This latest round brings Obopay’s total funding to just shy of $150m. Although we wonder about the potential return for Obopay’s backers in a trade sale to Nokia, the mobile payment vendor would clearly be a great complement to Nokia’s growing Ovi suite of mobile services. (We would also note that Qualcomm put money into Obopay and considered acquiring the company, but instead went with Firethorn.) Likewise, Yodlee and mFoundry’s roster of strategic investors and customers reads like a short list of potential buyers: Motorola, PayPal, Alltel (now Verizon), along with other large banks and wireless providers. Yodlee says it has raised more than $100m throughout its 10-year history, and mFoundry has reportedly raised about $25m.

Seven down, five to go for VeriSign

-Contact Thomas Rasmussen

After accounting for a dime of every dollar spent on M&A in 2008, divestitures appear likely to be a thriving business again in 2009. They accounted for 11% of the total M&A spending last year, up from 7% in 2007. And respondents to our annual Corpdev Outlook Survey said they were twice as likely to expect the pace of divestitures to increase than decrease this year. This is especially true for larger companies, some of which have overindulged on M&A throughout the years.

In the world of tech divestitures, there is no better example of this than VeriSign. The naming and encryption giant has been working toward selling off billions of dollars worth of properties that ousted CEO Stratton Sclavos picked up during his multiyear shopping spree. The company announced its first divestiture of 2009 last week, the sale of its European messaging division 3united mobile Solutions. That move follows the sale of its remaining stake in Jamba in October 2008 and the divestiture of its inCode communications and post-pay billing divisions in November and December, respectively.

For those of you keeping score, VeriSign has now completed seven deals, with five still to go. But as is becoming grudgingly apparent to the company and many others in the same position, this is easier said than done. The current economic environment is not exactly ideal for divestitures or spinoffs. And shedding the remaining parts, especially its bloated communications and messaging divisions, has proven to be quite a challenge for the company since they most likely command a much higher price tag, likely in the hundreds of millions of dollars. VeriSign says there are strategic buyers, but the closed credit market and general economic anxiety are severely hampering potential deals.

A chronicle of VeriSign’s seven divestitures

Date Acquirer Unit Note
February 2009 Sinon Invest Holding 3united Mobile Solutions Acquired for $66m in 2006
December 2008 Convergys Post-pay billing business
November 2008 Management buyout inCode Wireless Acquired for $52m in 2006
May 2008 MK Capital Kontiki Acquired for $58m in 2006
April 2008 Melbourne IT Digital Brand Management Services business Sold for $50m
April 2008 Globys Self-care and analytics business
June 2007 business

Source: The 451 M&A KnowledgeBase

Credit crisis hits home for VeriSign

-by Thomas Rasmussen

In VeriSign’s 3rd quarter earnings conference call last night, interim CEO Jim Bidzos detailed its divesture progress. The gist: There is none.

It was essentially a repeat of its second quarter call. Bidzos insists that it is “this” close. He reiterated that one of the three non-core businesses is close to being divested, possibly before the end of the year (our money is on Communications). Bidzos offered up the reason for the holdup: The would-be acquirer needs financing. This is yet another unfortunate example of frozen credit markets hampering M&A.

Half-billion-dollar communications division up for grabs

Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.

We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.

As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.

VeriSign’s communications acquisition binge

Date Target Deal value
November 27, 2006 inCode Wireless $52m
March 20, 2006 m-Qube $250m
March 13, 2006 Kontiki $62m
February 13, 2006 3united Mobile Solutions $65.5m
January 11, 2006 CallVision $30m
January 10, 2005 LightSurf Technologies $270m

Source: The 451 M&A KnowledgeBase

eBay places bid

EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.

Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.

Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.

By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.

Significant eBay acquisitions, 2005 – present

Date Target Deal value
January 28, 2008 Fraud Sciences $169m
May 30, 2007 StumbleUpon $75m
January 10, 2007 StubHub $310m
April 24, 2006 Tradera AB $48m
October 10, 2005 Verisign (payment gateway business) $370m
September 12, 2005 Skype $2.57bn
June 1, 2005 $678m

Source: The 451 M&A KnowledgeBase

The Art of hosting

Art Zeile is at it again. The private equity arm of Wachovia recently bought privately held HostMySite for an estimated $60m. Wachovia Capital Partners has tapped Zeile and his management team to lead the company, and intends to aggressively grow the venture through further acquisitions. Despite an unfavorable market for M&As, both Wachovia and Zeile are very bullish about going on a shopping spree. And they have a pile of cash – to the tune upwards of $150m – to do so. We hear that talks are already under way. But while awaiting official word of forthcoming deals, we take a stab at identifying some potential candidates.

Although it’s in a unique position as one of the leaders in the niche managed dedicated hosting space, HostMySite is currently not a heavyweight by any means. It is running about $20-25m in revenue at the moment. Nonetheless, it is the future prospects and track record of the new management that have Wachovia and a few other undisclosed investors so willingly parting with their money. Zeile and his team founded Inflow Inc in 1997, successfully navigated it through the bubble era, and with a few strategic acquisitions turned it into a $70m company. Inflow was sold to SunGard Data Systems in early 2005 for almost $200m.

The managed dedicated hosting sector has seen a lot of consolidation over the past few years. One of the main reasons for this is the prevalence of on-demand and outsourced hosting. The dominant players in the space are looking to build up scale and expand geographically to better meet their customers’ increasing needs.

According to insiders, HostMySite is looking at buying up small to medium-sized companies with revenue greater than $10m, largely focused on managed dedicated hosting. It has a preference for companies based in the West and Midwest, for geographical diversity. The market is littered with hosting providers, but few that fit those parameters, especially ones focused mostly on managed dedicated hosting. We did manage to come up with a few potential targets: LiquidWeb, ServePath, and INetU. All three are making names for themselves in the managed dedicated hosting space – but with revenue between $10-20m, they’re still small enough for a potential acquisition.

Frankly we would be surprised if at least one of these companies wasn’t acquired in the near future, either by HostMySite or another company. In fact, given the revenue multiples typically applied to acquisitions in this space (between 2.5 to 3.5 times trailing 12-month revenue), all three could conceivably be bought for about $100m – leaving ample cash for future endeavors.

Recent select managed hosting acquisitions

Date Acquirer Target Deal value TTM revenue
April 2008 ABRY Partners Hosted Solutions $140m $39m*
December 2006 Fujitsu Services TDS AG $132m NA
June 2008 International Game Technology Cyberview Technology $76m $53m
February 2006 VeriSign 3united Mobile Solutions $65m NA
April 2008 Layered Technologies FastServers.Net $13.5m* $9.5m*

Source: The 451 M&A KnowledgeBase * official 451 Group estimate

VeriSign’s yo-yo diet

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase