Verizon pays sky-high price for cloud provider Terremark

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

Google adds to NFC with Zetawire

Contact: Jarrett Streebin, Ben Kolada, Vishal Jain

Google continues to gobble up startups, and we’ve just uncovered a deal that supports its near field communications (NFC) ambitions. We’ve learned that Google recently picked up Zetawire, a Canadian startup focusing on mobile payments transactions. Like most of Google’s buys, this was a small deal, but it plays into a bigger market.

Little is known about Toronto-based Zetawire, but we suspect that the company was in the pre-revenue stage, making its only valuable asset a patent and corresponding trademark awarded by the US Patent and Trademark office. According to the filing, the patent provides for mobile banking, advertising, identity management, credit card and mobile coupon transaction processing. These features would allow a consumer to make purchases using their smartphone instead of their credit card. Think of a smartphone with this technology as a virtual wallet (in fact, the company has also trademarked the name Walleto for these very purposes).

This acquisition bolsters Google’s position in the coming wave of NFC and the phone as a device for payments, tracking and identification. For Google, the timing of the deal couldn’t have been better. Although we understand that the transaction closed in August, just earlier this month Google released its Nexus S smartphone, which has built-in NFC capabilities. In the meantime, Google’s competitors are hard at work. Research in Motion has also filed a patent for NFC functions, and Nokia in June announced that all of its phones will have NFC capabilities by 2011. Isis, a partnership involving telcos AT&T, T-Mobile and Verizon, is also planning a similar mobile wallet and UK startup Proxama has been working on NFC-focused technology for payments and advertising. (We’ll take a deeper look at the Zetawire purchase and the greater NFC market in an upcoming Post-Merger IQ.)

HTC bids on mobile ads

Contact: Jarrett Streebin

In the shadow cast by Apple’s iPhone 4 release, HTC’s purchase of Paris-based Abaxiaon Monday went largely unnoticed. Granted, it was a small deal, costing HTC just $13m. But it has the potential to be a big deal, since it bolsters HTC’s offering in the emerging mobile advertising market.

Abaxia, which has worked with HTC since 2001, offers a cross-platform UI for idle screens. HTC already has a UI called the HTC Sense that sits on top of Google’s Android OS. The Taiwanese device vendor has incorporated its own custom applications and some MDM capabilities into Sense. While similar, Abaxia offers a platform for pushing mobile advertising to idle screens. This acquisition provides HTC a modest entry into an area that Apple has already staked out with its iAd product.

Although HTC entered the North American and European markets as a white-label device for carriers, its advanced devices and early support for Android have boosted the value of its brand. Customers have been snapping up the phones, with both Verizon and Sprint reporting they have sold out of some HTC devices. The Droid Incredible and EVO 4G are the strongest competition to Apple’s iPhone 4, which means they are also comparable ad delivery platforms. Now that HTC has proved it can compete with Apple devices, it’s time to take on Apple’s iAd.

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

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