One last sale at VeriSign?

Contact: Brenon Daly

With VeriSign having somewhat unexpectedly shed its identity and authentication business to Symantec last week, we started to think about what other transactions might be coming from the former serial acquirer. What about this for a final deal? A sale of itself to a private equity shop. After all, the value of the company is hardly reflected at all on Wall Street.

To be clear, we’re not suggesting that there are any plans to take VeriSign private, at least not that we’ve heard making the rounds. Instead, we’re looking at a leveraged buyout from a strictly hypothetical view, given that the company has a number of appealing characteristics for any would-be financial buyer.

For starters, VeriSign is now a very clean story, with just the core registry business remaining. For all intents and purposes, the registry business, which handles all the .com and .net registration, is a legal monopoly. The business certainly enjoys monopoly-like operating margins of about 40%. VeriSign recently indicated that sales for 2010 (excluding the identity and authentication business) will be in the neighborhood of $675m. Loosely, that would generate about $270m in operating income at the company this year.

Fittingly for a cash machine, VeriSign has a fat treasury. At the end of the first quarter, it held nearly $1.6bn in cash. Add to that amount the $1.3bn that Symantec will be handing over for the divested businesses, and VeriSign will have about $3bn in cash banked. The vendor’s market cap is $5bn, giving it an enterprise value of just $2bn. That works out to just 3 times sales and a little more than 7x operating cash flow. (Granted, that’s without any acquisition premium.)

If we were a buyout shop or some other acquisitive-minded group, another way to look at it is that VeriSign’s remaining registry business currently trades at a discount to the security business that it just got out of. And that’s despite the fact that the registry business is far more profitable and faster-growing than the security business. (In 2009, VeriSign’s naming business increased revenue 12%, four times the rate of growth of the security business.) Maybe it’s time for one last sale at VeriSign?

VeriSign saves best for last

Contact: Brenon Daly

When we look back at VeriSign’s two-year period of jettisoning unwanted businesses, we can only marvel at how it saved the best for last. The divestiture of its identity and authentication division to Symantec for $1.28bn caps a massive process of unwinding the previously misguided acquisitions of former CEO Stratton Sclavos. The longtime chief executive had used the money that gushed from VeriSign’s core registry business to buy his way into markets that were pretty far afield, such as mobile messaging and telecom billing.

Indeed, the scale of VeriSign’s divestitures is unprecedented among technology vendors, with the company dumping seven businesses in 2009 alone. (It’s interesting to note that while Morgan Stanley handled at least three of the divestitures last year, JP Morgan Securities banked VeriSign on the big sale of its security unit.) The company had seemingly wrapped up the grueling process last fall, telegraphing to Wall Street that it liked its two remaining businesses: registry and security. For that reason, the sale of the security division came as a bit of a surprise, the rumors of the divestiture earlier this week notwithstanding.

The sale also came at a substantial premium to virtually all of the other divestitures that VeriSign has closed. While the other divisions were lucky if they went for 1 times sales, the security business is going to Big Yellow for 3.5x sales. (More representative of the divestiture process is the 1x sales that VeriSign received when it sold its managed security services business to SecureWorks a year ago.) On a cash-flow basis, we understand that Symantec is paying about 10x EBITDA, which is roughly twice the valuation of most corporate castoffs.

As we see it, there are two basic reasons for the security division to fetch such a premium. For starters, it hummed along at a mid-20% operating margin. (Granted, that’s lower than VeriSign’s core registry business, but it’s still a level that most companies would envy.) But more importantly, we understand that Symantec actively sought out the VeriSign business, and indicated that it was a serious suitor right from the outset. Certainly, the pairing makes sense. As my colleague Paul Roberts points out, Symantec significantly bolstered its offering around cloud identity, broadening the reach of its policies around data protection, threat monitoring and compliance with enhanced authentication.

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.

Cutting the ties that bind

Contact: Brenon Daly

As the business prospects for this year continue to deteriorate, companies are increasingly looking to shed underperforming divisions. VeriSign, for example, has already divested two units so far this year and still has a handful of others on the block. As drawn-out and money-losing as divestitures can be, it’s almost always preferable to the alternative of actually hanging on to the struggling businesses. At least that’s the view from Wall Street, which rarely dings a company for pruning.

We’ve been thinking about this in recent weeks as we’ve seen the projections for PC sales in 2009 get pulled back again and again. The bearish outlook has caused most PC makers to overhaul their strategies for selling boxes. For instance, Lenovo has scaled back its expectations for selling PCs in Europe and North America, and will instead focus on its home Chinese market, particularly the rural sector. The shift essentially undercuts the need for IBM’s PC business, which Lenovo picked up four years ago. (IBM took payment for the divestiture in cash and stock, booking a pre-tax gain of about $1bn.)

Of course, it’s hard to know how that division would have fared if Big Blue hadn’t shed it. And, it’s virtually impossible to calculate how much of a drag PCs, which accounted for about 10% of IBM’s sales, would have been on the overall company’s performance. But consider this: Since IBM closed the divestiture in mid-2005, Dell shares, which stand as the closest proxy to the PC industry, have lost 75% of their value and are trading at their lowest level since 1997.

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