Author: Ben Kolada

Microsoft pays a princely premium for Skype

Ben Kolada

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

Quest builds up vWorkspace with RemoteScan buy

Ben Kolada

Contact: Karin Kelley, Ben Kolada

In its latest desktop virtualization and management play, Quest Software has announced that it is purchasing the assets of imaging device management vendor RemoteScan. The deal lands Quest more healthcare accounts, mostly in North America, but the company plans an aggressive push into European markets next.

Quest will integrate eight-year-old RemoteScan’s assets, including all of its employees, with its vWorkspace group. The tiny target was launched in 2003 with RemoteScan for LAN, but has since been focusing most of its efforts on RemoteScan Enterprise and RemoteScan Universal. The deal gives vWorkspace one more competitive feature – wide driver support for imaging devices in LAN-based VDI and terminal services environments. Most of RemoteScan’s customers are in healthcare, although the vendor claims some traction in financial services and insurance markets. The products work with Windows Terminal Server and Citrix’s XenDesktop and XenApp, and support all other virtualized LAN environments using Microsoft’s RDP and Citrix’s ICA graphics-remoting technology.

Terms of the deal weren’t disclosed, but we understand that RemoteScan has had considerable success over the years, having lined up some 20,000 customers, with particular strength in the medical vertical. Since it hasn’t taken any institutional funding that would propel its growth, we bet that its revenue is still in the single-digit millions. And while Quest generally pays in line with broader market valuations, RemoteScan could have gotten somewhat of a premium, since companies that are successful in targeting the medical vertical typically get higher-than-average valuations.

US telcos feeling the squeeze

Ben Kolada

Contact: Ben Kolada

Amid double-digit revenue growth in the cloud infrastructure market, US telcos are increasingly buying their way into this industry in an effort to stem losses in their traditional wireline businesses. However, just as the hosting and colocation sectors are growing rapidly, so too are the major players being acquired. So far this year, we’ve already seen three of the largest hosters scooped up by eager telco service providers, with CenturyLink’s $2.5bn Savvis purchase being the most recent. If the remaining telcos don’t move fast enough, they could increasingly be squeezed out of the growing cloud infrastructure space. And competition for the remaining firms is expected to increase as foreign operators could look to enter the US market as well.

Atlanta-based Internap Network Services is among the short list of firms most likely to be taken out next. The company has a wide-reaching geographic footprint, with facilities spread throughout the US, Europe, Asia and Australia. The company’s large US and international presence makes it a particularly attractive target, especially for large CLECs such as tw telecom and PAETEC, or even cable MSO Comcast. However, its footprint could also attract foreign operators looking for synergies in their home markets, as well as entry into the US market. My colleague Antonio Piraino at Tier1 Research recently penned a piece reminding buyout speculators that just a few years ago Internap rebuffed a takeover offer from Indian telco Reliance Communications. He notes that Reliance may once again be a potential suitor, alongside Asian firms Pacnet and China Telecom or European provider Colt Technology Services Group.

Though opportunities for US acquisitions are diminishing, domestic telcos still have options. Given the hyper-competitive takeover market that is expected for remaining US hosters, US telcos may instead look for international deals. As seen by regional stalwart Cincinnati Bell’s CyrusOne unit expanding into London, US telcos are showing no fear of international expansion when it comes to their hosting and colocation businesses. If US telcos look abroad, we wouldn’t be surprised if they checked out Interxion. The Schiphol-Rijk, Netherlands-based firm operates 28 datacenters in 11 countries spread throughout Europe, and pulled in more than €200m in revenue in 2010, a 21% jump from the previous year.

In mobile gaming, a company is only as valuable as its users

Ben Kolada

Contact: Ben Kolada

A pair of mobile gaming acquisitions in the past half-year has proven that an ability to monetize an audience is just as important as the audience itself. In the latest deal, GREE is paying $104m in cash for OpenFeint. While that’s certainly a handsome payout for the startup’s investors, it’s a considerably lower price-per-user valuation than competitor ngmoco caught from DeNA in October. From our perspective, the disparity in valuations seems primarily due to each firms’ ability to generate revenue from their audiences.

At a macro-level view, OpenFeint and ngmoco should theoretically garner similar valuations. Both companies are mobile gaming startups founded in 2008, based in the Bay Area and backed by blue-chip investors. For the most part, they seem to have shared the same recipe for success.

However, their per-user valuations are markedly different because of their abilities to monetize their audience. OpenFeint managed to attract some 75 million users, but was only able to turn that into $283,000 in net sales in its last fiscal year. Meanwhile, ngmoco touted just 50 million downloads before its sale to DeNA, but managed to generate just over $3m in revenue in its calendar year before its acquisition and was reported to be on a $30m revenue run-rate. That led to a roughly $6 price-per-downloaded-user valuation for ngmoco – more than four times the per-user valuation OpenFeint received from GREE.

China becoming social in public

Ben Kolada

Contact: Ben Kolada

While talk of social companies hitting the public markets has so far focused on US firms such as Facebook, GroupOn and LinkedIn, the first vendor to do so may actually come from the Far East. Dubbed the ‘Facebook of China,’ Beijing-based Renren filed its prospectus on Friday and will reportedly hit the NYSE in two weeks, trading under the symbol RENN.

Founded in 2002, Renren today offers social and professional networking, online commerce and gaming to an audience of approximately 117 million. According to its prospectus, the company added an average of two million users per month during the first quarter. Sales have grown at a similarly quick pace. Net revenue soared from $13.8m in 2008 to $76.5m in 2010, representing a compound annual growth rate of 136%.

Excluding underwriters’ overallotment options, Renren will offer a total of 53.1 million American Depository Shares (ADS). (Lead underwriters are Morgan Stanley, Deutsche Bank Securities and Credit Suisse.) The company expects to price at $9-11 per ADS, which at the top of that range would be a whopping $584m raised. However, if interest in previous Chinese IPOs is any indicator of what to expect, then Renren’s total amount raised could be significantly higher. Just two weeks ago, Beijing-based security vendor Qihoo 360 Technology made its debut on the NYSE, offering 12 million ADSs (excluding underwriters’ overallotment shares). Shares hit the market at $27 each, nearly twice the expected initial offering price of $14.50, and eventually closed at $34 each. Shares have dipped a bit since then, but Qihoo is still sporting nearly a $2.5bn market cap, which is approximately 43 times its 2010 sales of $57.7m.

Hosters lose another telco acquirer

Ben Kolada

Contact: Ben Kolada

In the latest billion-dollar-plus telco transaction, Level 3 Communications has announced that it is acquiring Global Crossing in an all-stock deal worth $1.9bn. (The actual price of the acquisition – the largest we’ve recorded for Level 3 – is closer to $3bn when Global Crossing’s debt is included.) And while the deal impacts the telecom industry by bringing together two well-known fiber operators, in a way it more significantly impacts the hosting and colocation markets by removing yet another potential telco buyer. (We’ll have a full report on Level 3 buying Global Crossing in tonight’s Daily 451.)

Earlier rumors in the hosting and colocation industries had Level 3 as a potential acquirer, perhaps picking up CDN vendor Limelight Networks or hosting company Internap Network Services. These rumors were made more convincing by the growing trend of telcos buying into hosting and colocation. But in their conference call discussing the transaction, executives at Level 3 and Global Crossing put those rumors to rest, saying they don’t expect to announce another acquisition anytime soon. Further distancing Level 3 from the hosting M&A game is the fact that the company doesn’t appear to be too interested in hosting or datacenter services at all, since it chose a target that generates only 5% of its total revenue from these segments.

We previously noted that CenturyLink is likely out of the market as well, following its purchase of Qwest Communications for an enterprise value of $22.4bn, which saddled the company with a mountain of debt (the deal closed April 1). Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that debt load is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A activity, thereby forcing the company to focus on organic growth. With CenturyLink/Qwest and now Level 3 focused on integration, we expect that acquisition speculation following the next telco-hosting deal will be somewhat tempered.

eBay bids high for GSI

Ben Kolada

Contact: Ben Kolada

In its largest deal in the past half-decade, eBay is set to acquire e-commerce vendor GSI Commerce for $2.4bn. The company hasn’t made such a move since September 2005, when it forked over $2.6bn for VoIP provider Skype. And while hindsight shows that eBay certainly overpaid for that property, on an equity value basis, this transaction actually carries the highest bid eBay has offered. (We would also note that this pending acquisition is the largest Internet deal since February 2008.)

Although the deal represents a fairly standard price-to-sales valuation, it carries a hefty share price premium that makes the 40-day go-shopping clause more of a formality than anything else. The $29.25-per-share cash offer values GSI at 1.6 times its trailing sales, in line with other public takeovers, but it represents a premium of 51% over GSI’s closing share price on Friday and the highest price its shares have seen since July 2010. That’s more than twice the premiums eBay offered for Gmarket in April 2009 and Shopping.com in June 2005. The valuation is actually slightly higher when considering that eBay isn’t interested in the entire company. As per terms of the deal, which is expected to close in the third quarter, eBay will divest GSI’s licensed sports merchandise business and 70% of its ShopRunner and Rue La La assets to a newly formed company led by GSI founder and CEO Michael Rubin.

AT&T does Sprint a favor

Ben Kolada

Contact: Ben Kolada

If the rumors that Sprint was eyeing T-Mobile USA were actually true, then AT&T did its competitor a big favor by taking in the divested business. From our view, T-Mobile would have been a bigger bite, both financially and operationally, than Sprint could have swallowed. The transaction would likely have introduced a whole new set of tricky integration problems just at a time when Sprint is (finally) emerging from the set of problems it took on when it did its last big deal, the $39bn purchase of Nextel in late 2004. (Sprint shares have lost 80% of their value since that ill-fated acquisition.)

Sprint is already the only national carrier managing three different networks (CDMA, iDEN and WiMax), and the addition of T-Mobile would have added a fourth, bringing additional cost and complexity to the carrier’s operations. And while Sprint is moving back into the black, T-Mobile’s financial performance wouldn’t necessarily have helped that effort. (Don’t forget that the Deutsche Telekom subsidiary has long been a laggard, in terms of margins and subscriber growth, and is being divested for less than it was acquired.) While Sprint is adding subscribers and is finally growing revenue (2010 marked the first time in four years that it grew its top line), subscriber and revenue growth at T-Mobile have been flat.

Instead of T-Mobile, several of the remaining cellular properties in the US would fit better, both technologically and financially, with Sprint. While Sprint’s share price plummeted on AT&T’s news, stocks of regional cellular carriers such as MetroPCS and Leap Wireless soared on buyout speculation. Like Sprint, both are CDMA network operators, and both would provide Sprint with growing revenue and subscriber bases. And both companies are still within Sprint’s price range.

Even with M&A speculation inflating their valuations, MetroPCS and Leap currently sport $5.5bn and $1.1bn market caps, respectively. A cash-and-stock deal similar to AT&T’s T-Mobile acquisition could actually put both under Sprint’s ownership, since Sprint is sitting on $5.5bn in cash and short-term investments. And Sprint actually seems the most likely acquirer for these companies, even though Verizon is widely speculated to react to AT&T’s announcement with a deal of its own. Given the scrutiny that AT&T’s pending purchase of T-Mobile is expected to receive, we doubt that Verizon, currently the nation’s largest cellular carrier, could make a deal without regulators saying they’ve had enough.

Could CenturyLink’s Qwest buy prevent a future cloud infrastructure play?

Ben Kolada

Contact: Ben Kolada

Almost exactly one year after they announced their intention to merge, CenturyLink and Qwest Communications are set to close the largest US wireline consolidation play in the past half decade. But while the deal will more than double CenturyLink’s revenue, the debt assumed could prevent it from making another significant acquisition anytime soon. And that’s a shame, since the combined company’s datacenter business could use a boost.

Even in retrospect, the Qwest purchase is still a smart deal, since CenturyLink needs Qwest to expand its own meager business services division – especially since the telecom industry’s focus between consumer and businesses is increasingly leaning toward the latter. But while the move grows CenturyLink’s revenue, in the near term the assumption of Qwest’s debt will actually prevent the company from moving into the datacenter and hosting industry, which is showing more long-term potential than wireline services.

Neither Qwest nor CenturyLink are providing aggregate financial projections for 2011, but numbers from 2010 show the combined company will be weighed down by a hefty amount of debt. Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that mountain of debt is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A history, thereby forcing the company to focus on organic growth.

And this comes at a time when telcos are increasingly seeking growth by buying into the cloud infrastructure industry. With Qwest’s debt, CenturyLink may be the last to the table to acquire a large hosting provider, even though the company certainly needs one. Qwest’s datacenter footprint is already fairly small when compared to the other Regional Bell Operating Companies. In its last-ever annual report, the company cited 17 hosting centers in operation – that’s the same amount as many of the medium-sized private providers. Without an inorganic boost, the company could lose out on cloud infrastructure market share. Consider this: Qwest doesn’t break out datacenter revenue, but the business division’s sub-segment that includes this service only grew 8% in 2010. For comparison, in its 2011 Global Managed Hosting Market Overview, our Tier1 Research subsidiary predicted that the managed hosting sector’s global revenue will grow 19.8% this year.

The cloud expands overseas

Ben Kolada

Contact: Ben Kolada

Although the US hosting, cloud and colocation markets are still growing, cloud infrastructure providers are already expanding overseas. This international expansion is driven in part by enterprises demanding global cloud platforms, as well as the vendors’ desire to tap into emerging markets.

Verizon Communications’ Terremark Worldwide purchase seemingly set the stage for international expansion (although the telco was primarily attracted to Terremark’s cloud platform, the deal also provided Verizon with deeper penetration in Central and South America), and colocation and hosting providers soon followed suit. Shortly after the Terremark sale, Savvis announced a partnership in India with Bharti Airtel and claimed to be looking for similar partnerships in South America and China. Meanwhile, Savvis competitor Equinix has already moved into South America with the $127m pickup of Rio de Janeiro-based ALOG Data Centers. The company also has a presence in China with facilities in Hong Kong and through a partnership in Shanghai with Shanghai Data Solutions.

While international expansions will continue, we expect that the announcements will eventually turn from partnerships to outright acquisitions as cloud infrastructure providers look to get the most out of their investments. Equinix has already shown a willingness to make international deals, and we anticipate that the company will announce additional overseas transactions. The company could make further inroads in China by entering the Beijing market. My colleagues at Tier1 Research believe that large cities in China such as Beijing, Guangzhou, Shenzhen and Tianjin are underpopulated with datacenters and predict that these cities will see significant datacenter investment over the next five years.

Although the US hosting, cloud and colocation markets are still growing, cloud infrastructure providers are already expanding overseas. This international expansion is driven in part by enterprises demanding global cloud platforms, as well as the vendors’ desire to tap into emerging markets.

Verizon Communications’ Terremark Worldwide purchase seemingly set the stage for international expansion (although the telco was primarily attracted to Terremark’s cloud platform, the deal also provided Verizon with deeper penetration in Central and South America), and colocation and hosting providers soon followed suit. Shortly after the Terremark sale, Savvis announced a partnership in India with Bharti Airtel and claimed to be looking for similar partnerships in South America and China. Meanwhile, Savvis competitor Equinix has already moved into South America with the $127m pickup of Rio de Janeiro-based ALOG Data Centers. The company also has a presence in China with facilities in Hong Kong and through a partnership in Shanghai with Shanghai Data Solutions.

While international expansions will continue, we expect that the announcements will eventually turn from partnerships to outright acquisitions as cloud infrastructure providers look to get the most out of their investments. Equinix has already shown a willingness to make international deals, and we anticipate that the company will announce additional overseas transactions. The company could make further inroads in China by entering the Beijing market. My colleagues at Tier1 Research believe that large cities in China such as Beijing, Guangzhou, Shenzhen and Tianjin are underpopulated with datacenters and predict that these cities will see significant datacenter investment over the next five years.