Architect Partners » M&A Alert

Disney Interactive Media Acquires Playdom

Margaretha Margaretha — Thu, 29 Jul 2010 00:53:44 +0000

Transaction Overview

On July 27 2010, Disney Interactive Media acquires Playdom for up to $763.2mm including a $200mm earn-out.

Target Description

Playdom develops online social games and is the largest social game developer on MySpace and is third largest developer on Facebook. Popular games include Social City, Mobsters, Poker Palace, Tiki Resorts and Sorority Life. Playdom has 38 million monthly active users (“MAU”). To date, more than 130 mm Playdom games have been installed on Facebook, MySpace and Hi5. Since inception in 2008, Mountain View-based Playdom has raised $76mm in total funding. It has recently closed its second round financing of $33mm at a $336mm post-money valuation in June 2010. New investors were Bessemer Venture Partners (Byron Deeter, David Cowan, Ethan Kurzweil), New World Ventures and Disney’s SteamBoat Ventures. The first round of financing was $43mm in November 2009, led by New Enterprise Associates (Scott Sandell and Sujay Jaswa), followed by Lightspeed Venture Partners (Jeremy Liew) and Norwest Venture Partners (Timothy Chang). After hiring John Pleasants, Electronic Arts’ former COO last year, the Company grew from 60 employees to 600 employees and made numerous social gaming acquisitions this year as an effort to build game developer talent. Playdom’s acquisitions include Metaplace (July 2010), Hive7.com (June 2010), Acclaim Games (May 2010), Mersom (April 2010), Three Melons (March 2010), Offbeat Creation (March 2010), and Trippet and Green Path (November 2009). Upon acquisition, John Pleasants will become the Executive Vice President of Disney Interactive Media Group, reporting to Steve Wadsworth, President of Disney Interactive Media Group.

Buyer Description

Disney Interactive Media develops and publishes interactive entertainment content including multi-platform games, movies, music and video for internet, mobile and video-game devices. Disney Interactive has made a number of game studio acquisitions, which has helped Disney create game titles ranging from Toy Story 3 to Split/Second. Earlier this month, Disney Interactive acquired Tapulous, the maker of iPhone music games, for an estimated $22mm-$50mm. Previous game acquisitions include Wideload Games in September 2009, TruGames Interactive in September 2008 and Gamestar in April 2008. Key executive sponsors of this transaction include Robert A. Iger, President and CEO of the Walt Disney Company and the business unit leader, Steve Wadsworth, President of Disney Interactive Media Group.

Transaction Parameters

The purchase price was $563.2mm plus a $200mm performance-based earn-out. Approximately 90% of Playdom’s revenues are derived from the sale of virtual goods (of which 75% are from direct sales of virtual goods, and 15% are from advertising-offer-based virtual goods) and the remaining 10% is derived from in-game advertisements.

Acquisition Price:                                                      $563.2mm-$763.2mm
2009 Revenue Multiple¹                                                           11.3x-15.3x
Invested Capital Multiple                                                             7.4x-10.0x
Acquisition Price Per User²                                                  $14.82-$20.08

Listed below is comparative valuation context for other social gaming companies and social networking sites.

Acquisition Price / # of Users – Social Gaming

Electronic Arts/Playfish (Nov ‘09)³ $5.00-$6.67

Acquisition Price / # of Users – Social Networking

NewsCorp/MySpace (July ’05)⁴ $28.00

Private Market Valuation / # of Users

Facebook Secondary Market (Jun’10)⁵ $50.00
Zynga Secondary Market (Apr ‘10)⁶ $16.88

Note:
1) Based on estimated 2009 revenue of $50mm
2) Based on 38mm monthly active users (“MAUs”) as disclosed by Playdom
3) Based on $300mm-$400mm purchase price and 60mm MAUs
4) Based on $580mm purchase price and 20mm unique users.
5) Based on $25b valuation and 500mm MAUs
6) Based on $4b valuation and 237mm MAUs

Strategic Rationale

The acquisition of Playdom continues to demonstrate Disney’s evolving strategy around games and their continued leverage of new distribution platforms for their content. Until fairly recently, Disney has been content with an out-licensing strategy, allowing others to develop and publish PC and console games based on Disney characters and brands. Playdom is the most notable acquisition in a series of acquisitions that really started with the acquisition of Club Penguin in August 2007. Playdom brings Disney a top brand, 38mm active players, top notch social game development talent, experience with the virtual goods revenue model and social networking credibility. There are clearly numerous opportunities for Disney to build upon Playdom’s success with its world-recognized characters and content.

Architect Partners’ Observations

We put this transaction into the blockbuster category: dramatic value creation in a very short period of time. So what makes Playdom and social gaming so attractive? Jeremy Liew, (Managing Director at Lightspeed Venture Partners) has a compelling post on this topic. A few additional observations:

1) Playdom was one of a few social gaming companies who were able to quickly build users and revenues by leveraging the immense user base of social networking sites such as Facebook and MySpace. This opportunity has since been constrained as Facebook (and others) implemented spam-and-privacy-related restrictions. Recently, Facebook restricted notifications of users’ latest game score or game activities, and prohibited the sending of viral invitations, which impacts the ability of users to discover, try or play new games.

2) Costs of game development and distribution have to-date been extremely low. It is estimated that the average social game costs $100K-$200K versus $30mm-$50mm for a top PC or game platform title.

3) High-margin monetization: Playdom and other social game vendors drive revenue largely via sale of virtual goods. Virtual goods are non-physical objects that are purchased for use in online games, such as digital clothing or weapons for avatars. The gross margin is essentially infinite.

Resources

Secondary Valuation Research Report by Second Research

Jeremy Liew’s (Lightspeed Venture Partners’ Managing Director) Insight on Why The Economics of Social Gaming Are So Attractive To Investors

Pace Acquires Home Gateway Provider 2Wire

jshieh — Tue, 27 Jul 2010 22:00:38 +0000

Transaction Overview

On July 26 2010 Pace plc (LSE:PIC), a British set-top box firm, announced the acquisition of 2Wire for $475mm in cash.

Target Description

2Wire provides DSL residential gateways and software for phone companies to manage broadband connections with customers. These gateways provide Internet access as well as home networking to consumers. Their clients are global and include AT&T, Bell, Telmex, BT Group, and SingTel. 2Wire’s main hardware products include broadband modem and routers as well as MediaPortal, which combines HD and SD programming with DVR capabilities, photo and music sharing, and home networking. The company’s competitors include Motorola, Cisco, ActionTe and Technicolor. The company was owned by a range of strategic investors including Alcatel-Lucent, AT&T and Telmex, as well as VCs Oak Investment Partners (Brian Hinman), Meritech Capital Partners (Paul Madera) and Technology Crossover Ventures (Will Griffith). The company was founded in 1998 and has raised a total of $199mm.

Buyer Description

Pace plc (LSE:PIC) is a British set-top box maker with a market cap of $1b as of July 2010. Pace currently works with satellite, cable, IPTV and terrestrial payTV providers and sells its set-top boxes through both operators and retail markets. The company is headquartered in Britain and is the largest set-top box provider globally with their main strength resting outside of the U.S. market. The key executive sponsor in the deal was CEO Neil Gaydon.

Transaction Parameters

The acquisition value was $475mm and an Enterprise Value¹ of $420mm.


Enterprise Value	$420mm

Purchase Price Multiples:
Enterprise Value / 2009 Revenue²	.6x
Acquistion Value / 2009 Implied Net Income²	24.9x

1) Acquisition value + debt – cash
2) Calendar Year 2009 revenue, gross profit, pre-tax profit and Architect Partners calculation of implied net income (34% tax rate) were $667.4mm, $141.8mm, $28.9mm, and $19.1mm, respectively. Pace Press Release July 26 2010.

Comparable M&A transactions include EchoStar’s acquisition of SlingBox for $380mm, Cisco’s acquisition of Scientific Atlanta for $5.3b, and Walmart’s acquisition of Vudu for $100mm.

Strategic Rationale

Pace plc was driven by two primary objectives: (i) to build their business in North America using 2Wire’s U.S. clients and customer base and (ii) to work with 2Wire to build an end-to-end home gateway which converges media, content and Internet connectivity. The ultimate goal of 2Wire and Pace is to build a plug-and-play, networked media and Internet hub for service providers to offer to their customers, a combination that has been difficult for service providers to achieve when dealing with individual product vendors. 2Wire and Pace’s customer bases have minimal overlap and they intend to cross-market their products to drive additional revenue as well.

Architect Partners’ Observations

As we mentioned previously in our Ecosystem Thoughts post, broadband content is increasingly becoming connected to the television. Companies such as TiVo, Roku, Netflix, Boxee and Google are all focused on the growing interplay between Internet and media. The largest hurdle these competitors face is the integration of Internet, home networking and content into one service. The acquisition of 2Wire will allow Pace to pre-package this functionality and offer consumers and service providers a one-stop solution to home gateway/media boxes. Furthermore, with the combination of 2Wire’s U.S. service provider clientele and Pace’s European retail customers, Pace will be able to offer their end-to-end solution to a larger audience.

Resources

Press Release

Fierce IPTV – Interview with Jamie Fink, CTO, 2Wire

Nokia Acquires Wireless Network Assets of Motorola

jshieh — Fri, 23 Jul 2010 22:15:57 +0000

Transaction Overview

On July 19 2010 Nokia Siemens announced it would acquire Motorola’s wireless network assets for $1.2 billion in cash.

Target Description

Motorola’s wireless infrastructure provides GSM, CDMA, WCDMA, WiMAX and LTE for various carriers. They currently have more than 50 operators including Sprint, Verizon, Vodafone and China Mobile. The deal excludes Motorola’s iDEN equipment division which powers their iDEN line of cellphones with two-way calling, packet transmission, paging and cellular transmission technology. Competitors in the wireless infrastructure arena include Ericsson, Alcatel-Lucent, Huawei and Nokia Siemens. Motorola has long been planning to breakup their operations into three categories: wireless network infrastructure, cell phone manufacturing and police radio manufacturing. After this acquisition, the spin-off will leave Motorola Mobility as a cell phone and set-top box manufacturer and Motorola Solutions focused on governmental and commercial equipment such as police radios.

Buyer Description

Nokia Siemens is a joint venture between Nokia’s Network Business Group and Siemens’s COM division. Focused on network infrastructure, they will become the third largest vendor in the U.S., largest vendor in Japan and second largest globally after the acquisition. Before the acquisition, Nokia Siemens held a market share of about 11% of the wireless infrastructure market, compared to the 15% held by Ericsson, 11% held by Alcatel-Lucent, 5% by Huawei and 2% by Motorola. Nokia Siemens specializes in building wireless and telecommunications networks for carriers, government and corporate customers. They currently have 60,000 employees in 200 countries and will add 7,500 employees from Motorola. Nokia Siemens has their strongest presence in countries such as China, Germany, Poland and India and hope to bolster their U.S. presence with the acquisition of Motorola. The CEO, Rajeev Suri, was the key executive sponsor of the deal.

Transaction Parameters

Nokia will pay $1.2 billion in cash to acquire Motorola’s wireless infrastructure business. In the deal, Motorola will keep $150mm in accounts receivable, cash and other assets including its wireless patents. The division sold to Nokia Siemens contained no debt and had net profits of $366mm and revenues of $3.7b last year. Many transactions have occurred in the wireless infrastructure industry with the most notable being Cisco’s acquisition of Starent Networks for $2.9b and Ericsson’s acquisition of Nortel Network’s mobile division for $1.13b.


Enterprise Value ¹	$1.2 billion

Purchase Price Multiples:
2009 Revenue¹	.3x
2009 Operating Profit²	3.3x

1) $3.7b reported by Business Week July 19 2010
2) $366mm reported by CRWE Newswire July 15 2010

Strategic Rationale

The main strategic value of the transaction is Nokia Siemens’s entrance into the U.S. wireless infrastructure market. Along with Motorola’s infrastructure assets, Nokia Siemens also cites gains Motorola’s client base to build their U.S. business. The deal also struck a blow to Huawei, the Chinese telecom giant that has been looking to gain a foothold in North America through acquisition. Huawei lost its two best targets with the acquisition of Motorola by Nokia Siemens and the acquisition of Nortel Network’s mobile unit by Ericsson. Furthermore, the division is profitable and will boost both the revenues and operating profits of Nokia Siemens while providing an opportunity to boost margins through reducing redundant expenses.

Architect Partners’ Observations

Consolidation in the wireless infrastructure industry is being driven by the highly competitive market. Companies have been forced to consolidate to cut costs in the highly competitive market with margins hovering at about 8% – 10%. In 2007, Alcatel-Lucent cited competition in Europe for its decline in profits and the squeeze on margins.

Consolidation has also been encouraged by infrastructure sharing between network operators. Fierce Wireless estimates that savings can range from 5% – 25% of RAN cost savings which account for 20% – 40% of operators expenses. As the telecom market consolidates, infrastructure sharing becomes increasingly attractive for large carriers as larger networks are controlled by single companies.

Synchronoss Technologies Acquires Sync Specialist FusionOne

jshieh — Sat, 10 Jul 2010 01:17:51 +0000

Transaction Overview

On July 7 2010, Synchronoss Technologies (NASDAQ: SNCR) announced that it has agreed to acquire FusionOne for up to $75 mm in cash and stock.

Target Description

FusionOne provides content transfer and synchronization services for mobile phones. Mobile phones increasingly contain a broad variety of valuable content such as photos, contacts, email messages, music, ringtones, applications and mobile website bookmarks. FusionOne allows such content to be transferred to a new phone, stored as a backup file or synchronized with other devices so that the content is available and up-to-date on multiple devices. FusionOne has historically sold its services directly to mobile phone operators such as Verizon Wireless, AT&T and Cellular South who have then either resold the FusionOne capability to consumers or offered it for free as part of a service plan. The most notable competitor is Apple with their MobileMe product offering which is offered to consumer for a $99 per year subscription fee. Other independent competitors include open-source vendor Funambol, SIMchronise, Syncronica PLC, Susteen and Rseven Mobile. Google, Microsoft, Yahoo and many major wireless carriers offer similar, albeit generally less fully capable, synchronization services. FusionOne has more than 40 issued and pending patents related to mobile content transfer and synchronization services. Founded in 1998, San Jose-based FusionOne raised $145.8mm in total funding from investors, with a significant recapitalization along the way. The three most recent investors include Blue Run Ventures (John Malloy), El Dorado Ventures (Charles Beelr, Shanda Bahles) and Vesbridge Partners (Jeffrey Hinck).

Buyer Description

Synchronoss Technologies provides wireline and wireless communications service providers, cable operators, on-line and store-based retailers and handset and other device makers a cloud-based service which automates new subscriber activations, initiates new services and provides ongoing customer support. Customers include AT&T, Cablevision Systems, Clearwire, Comcast, Embarq, Level 3 Communications, Sprint, Time Warner Cable, Verizon Business, Verizon Wireless, Vodafone. Stephen G. Waldis, President and CEO, was the key executive sponsor of the transaction.

Transaction Parameters

The transaction is structured as $32mm in cash and $8mm in Synchronoss’ stock paid upon closing. An additional $35mm of consideration can be earned depending upon financial performance parameters through the first six quarters post transaction close. These payments are half cash, half Synchronoss stock. FusionOne is expected to contribute $8mm – $10mm in revenue to Synchronoss in the second half of 2010. Assuming the transaction closes on July 31, that translates into a rough annual revenue run rate of $19.2mm – $24.0mm. FusionOne has approximately 80% gross margins.

Transaction Multiple (Revenue-Based):

Without Earnout: 1.9x
With Earnout: 3.5x

Note: (1) calculated at mid-point of revenue run rate range as estimated above ($21.6mm).

Strategic Rationale

Synchronoss’ strength is helping carriers and retailers activate newly purchased cellphones. While historically simple voice communication was the primary purpose of a cellphone, increasingly it’s the non-voice applications, music, web-browsing and video capabilities that are most compelling. This content is extremely valuable to the user and must be transferred to any new device purchased. FusionOne brings this capability to Synchronoss, nicely extending the activation process to incorporate content transfer.

Architect Partners’ Observations

Content transfer is clearly increasingly important, as noted above. However, real-time synchronization of content, applications and setting is an even more challenging problem. What happens to a photograph taken on your new camera phone? Does the photo end up on your PC, your Facebook page, your Flikr photo album? What about when you update a personal contact using your PC? Does it show up on your phone the next time you want to dial the number? What if you purchase a new song from your phone, can you listen to that same song on your PC, your TV, your iPad? Synchronization has been a challenge for quite some time and a number of M&A transactions have occurred over the past decade to help solve the challenge. However, the increasingly diverse set of connected devices, applications and content not just on your PC but also your phone, TV, tablet, book reader and automobile, the challenge remains. We believe this is a fundamental capability that any device maker, service provider, application developer and content developer has a stake in getting right.

Resources

Synchronization Solutions Assessment

HP Acquires Content Streaming Capability Via Melodeo

jshieh — Tue, 06 Jul 2010 14:37:50 +0000

Transaction Overview

On June 23 2010 HP (NASDAQ:HPQ) acquired music streaming service Melodeo for between $30-35mm.

Target Description

Melodeo has a portfolio of applications which specialize in streaming music and media to mobile devices. Their flagship application nuTsie scans a users iTunes playlist and streams it to the user’s mobile device in shuffle mode. nuTsie also offers the ability to search other user’s playlists and listen to their own “Top 100” lists. They also offer other applications such as Effin Genius for the iPhone which scans a user’s music library and creates a “Top 100” playlist of songs that they do not own. Melodeo has accumulated 2 million downloads with 60% being their flagship application. They were founded in 2003 and have received $9.5mm and $7.9mm in their first and second private funding rounds from Bill McAleer of Voyager Capital, Adrian Smith of Ignition Partners and Erik Baker of GF Capital.

Buyer Description

With the recent acquisition of Palm for $1.2B, HP has signaled its intention to create a series of products and services for mobile devices. Other early mobile moves have included increasing connectivity for mobile devices such as direct printing in HP products as well as their experimentation with mobile phones via their iPaq branded phones. Of course, given HP’s historical strength within the enterprise, they have also been helping businesses integrate mobile functionality into their business operations for some time. Historically, HP has partnered with Microsoft for much of its mobile capabilities. HP’s mobile efforts are being led by Todd Bradley VP of HP’s Mobile Devices Group who was formerly CEO of PalmOne.

Transaction Parameters

While terms of the transaction have not been officially disclosed, it’s believed that the purchase price was between $30mm and $35mm.

Strategic Rationale

First, the streaming of content to mobile devices from the cloud is a fundamental capability to enable a broad array of content and application services. Melodeo brings HP robust streaming capability which, while historically focused on music, should have application to other forms of digital content as well. Second, while music oriented services have been proven tough to build into nicely profitable stand alone businesses, they have an been absolutely crucial component of a broader strategy. Apple is certainly a fine case study here with iTunes supporting a broad ecosystem of hardware and services. Melodeo gives HP the content relationships, a small user base and executives with music and streaming DNA to build upon.

Architect Partners’ Observations

We’re pleased to see HP begin to publicly unveil its broad mobile device and services strategy. While some suggest that HP is late to the party, we see the mobile market opportunity as quite early in it’s growth cycle. We have no doubt that HP will build a robust mobile business, both consumer and business oriented.

eBay Acquires Mobile Comparison Pricing Application, RedLaser

Margaretha Margaretha — Fri, 25 Jun 2010 13:41:05 +0000

Transaction Overview

On June 24 2010 eBay (NASDAQ:EBAY) announced that it has bought RedLaser and all related technology from Occipital LLC.

Target Description

RedLaser is an iPhone application that allows consumers to compare prices of products in-store with online prices. The user simply photographs the barcode label of the in-store product and RedLaser returns a listing of online prices. RedLaser was launched in May 2009 and has been downloaded 2 million times at a price of $1.99. Occipital LLC, the owner of RedLaser, was founded in 2008 by Jeffery Powers and Vikas Reddy with funding from TechStars. RedLaser, the product and underlying technology, is being acquired by eBay while Occipital LLC will continue as an independent company.

Buyer Description

eBay (NASDAQ:EBAY) is an e-commerce giant which initially built its business via online auctioning services. eBay has a large mobile commerce division which includes mobile applications such as eBay Marketplace, eBay Selling, StubHub and Shopping.com. In 2009 eBay had a mobile merchandise volume of $600mm and expects to generate $1.5b by 2010. The key executive sponsor in the deal was Mark Carges, CTO and SVP Global Products. The company was founded in 1995.

Transaction Parameters

Purchase price was not disclosed. Occipital LLC will continue to operate as a stand-alone company developing computer vision technology and products.

Strategic Rationale

eBay, at its heart, is an on-line retailer. RedLaser gives eBay something incredibly valuable:

A PRESENCE in the in-store environment,
at the MOMENT a purchase is being contemplated and
the opportunity to TAKE OR FACILITATE that specific purchase.

Architect Partners’ Observations

This is one of the most strategic and potentially impactful M&A transactions we have ever seen. eBay brings a strong value proposition to the consumer by allowing them to check for best pricing, real-time when considering a purchase. That gives the consumer something they don’t easily have today, the ability to price negotiate with the retailer or purchase elsewhere. eBay benefits in a multitude of ways including:

Forging a valuable relationship with the consumer,
having an opportunity to directly sell the consumer that desired product
acting as a gateway to that consumer for other on-line retailers (for a fee) to sell that product or
offering other local merchants (for a fee) a chance to grab that purchase.

eBay immediately began offering RedLaser for free following the acquisition announcement.

IBM Acquires Coremetrics

jshieh — Sat, 19 Jun 2010 16:09:22 +0000

Transaction Overview

On June 15 2010 IBM announced that it has agreed to acquire Coremetrics for an undisclosed amount.

Target Description

Coremetrics develops marketing analytic software. Their software allows businesses to deeply understand how consumers interact with their websites to measure and improve the effectiveness of online marketing programs and product sales efforts. Clients include 13 of the top 25 online retailers as well as major brands such as Bank of America, Virgin Atlantic, Office Depot and Victoria’s Secret. Competitors include Omniture (recently acquired by Adobe), Unica, Webtrends and Google’s free offering, Google Analytics. The company was founded in 1999 and initially raised $113m. In 2002, the company was recapitalized and ultimately raised an additional $111m in funding from Arthur Patterson of Accel Partners, Eric Byunn of FTV Capital, Dan Nova of Highland Capital Partners, and Robert Migliorino of W Capital Partners across five rounds.

Buyer Description

IBM provides a broad array of hardware, software and services to business customers. IBM’s software offerings span across many categories and are generally oriented toward helping large and medium-sized businesses run their businesses more efficiently. IBM plans to integrate Coremetrics into its WebSphere product line. In fact, IBM and Coremetrics had previously jointly built integration between several of their respective products including IBM’s Websphere Commerce, Portal and Sales Center. IBM’s software group has acquired 55 companies since 2003. The key executive sponsor of the deal was the General Manager of IBM’s WebSphere group Craig Hayman.

Transaction Parameters

The transaction details were not disclosed. We do know that Coremetrics has a highly regarded product offering relative to its competitors and demonstrated 20% revenue growth from 2008 to 2009 in spite of a difficult economic environment. This sector, web analytic software, has been fairly active recently with a highly notable transaction of Adobe purchasing Omniture for $1.7b, which we reviewed previously.

Edit: The transaction has been reported to be valued at an estimated $150m.

Strategic Rationale

Coremetrics helps fill a large hole in IBM’s online commerce and analytic product set. IBM has a strong product and services set around helping companies build robust commerce oriented websites. They also have a very solid offering around analytic software via their 2007 acquisition of Cognos, one of the leading independent business intelligence vendors at the time, as well as SPSS and Redpill Solutions in 2009. Interestingly however, IBM has always had a product hole around providing robust marketing and website analytic software. Websites, whether online or mobile, have become an extremely important marketing and commerce vehicle for companies big and small. Coremetrics brings very solid capabilities to help fill out IBM’s product hole.

Architect Partners’ Observations

It’s interesting to us that it took so long for a traditional enterprise-centered vendor, like IBM, to seriously enter this segment. In essence, the Coremetric product set brings visibility into how users interact with and respond to a company’s online and increasingly mobile presence, their internet website. Clearly, if you are an internet retailers, like Amazon.com, this information is crucial to understanding your customer, improving the user experience and learning what translates into product sales and what doesn’t. The same is true as mobile devices (i.e. mobile phones, tablets, kiosks, …) with internet access proliferate. These emerging devices will inevitably have unique characteristics in terms of how consumers use them and what works and doesn’t work both from the consumer and online businesses perspective. Gathering key data, analyzing it, guiding experimentation with immediate feedback and ultimately understanding what drives user satisfaction, and ultimately spending, is fundamental to running many types of businesses today, regardless of size. As is common when a leader makes a move, it frequently acts as a catalyst for competitors to act as well.

Sonic Solutions Acquires DivX

jshieh — Fri, 04 Jun 2010 19:30:18 +0000

Transaction Overview

On June 2 2010, Sonic Solutions (NASDAQ:SNIC) announced it was acquiring DivX (NASDAQ:DIVX) in a cash and stock agreement worth $323 million.

Target Description

DivX (NASDAQ:DIVX) has video compression/decompression (codec) technology suitable for premium content and DRM technology that is widely accepted in the film industry by studios such as Paramount, Warner Bros., Sony, LionsGate and Starz Media. Their software is built into more than 300 million devices ranging from televisions to PCs to mobile devices. The Company went through an IPO in May 2006 and was trading in the range of $6 to $8 before the acquisition. The Company received four rounds of funding totaling $35 million with the major players being Timothy Draper, Zone Ventures, New Atlantic Ventures, Epic Ventures and Insight Venture Partners. The Company acquired MainConcept AG in 2007 for $28 million, which also developed high-quality video codecs, as well as AnySource Media in 2009 for $15 million, an internet TV company. Direct codec competitors include industry giants such as Apple Quicktime, Microsoft Windows Media, Google, Real Networks and Rovi Corporation (previously known as Macrovision) as well as open source codec developers such as Xvid and VideoLAN (VLC).

Buyer Description

Sonic Solutions is a video management software company focused on “enabling digital media from Hollywood to Home.” Their software and services range from producing Hollywood Blu-ray and DVD titles to consumer-oriented Roxio digital media management software. They currently specialize in CD, DVD and Blu-ray Disk encoding and production; however, their focus has recently shifted toward developing digital content delivery solutions over the Internet. The Company’s CinemaNow service sells or rents movies and TV shows over the Internet, a business which is widely cited as the company’s next focus. The Company is headquartered in Marin County, California. The key executive sponsor was Sonic Solutions CEO Dave Habiger.

Transaction Parameters

The deal was valued at $323 million in a combination of cash and stock. Shareholders of DivX are to receive $3.75 in cash and .514 shares of Sonic Solutions stock for every share of DivX stock. This would price the stock of DivX at about $9.83 per share.


Enterprise Value¹	$187.4m

Purchase Price Multiples²:
LTM Revenue	2.5x
LTM Net Income	114.5x
Est. 2010 Revenue³	2.3x
Est. 2010 Net Income³	65.5x


Premium Paid:
1 day prior to announcement	41%
30 day average prior to announcement	38%
90 day average prior to announcement	34%

1. Transaction Value + Total Debt – Total Cash

2. Sonic Press Release June 2 2010

3. Yahoo! Finance June 2 2010

Strategic Rationale

As video content delivery begins to move to cloud-based solutions, Sonic Solutions has shifted focus toward an Internet-delivery business model. Sonic Solutions’s acquisition of DivX will allow them push cloud-based premium video delivery by utilizing DivX’s approved DRM and codec solutions. DivX is already widely installed on millions of hardware devices, which will give Sonic an advantage in disseminating video players on PCs, TVs , personal media players and DVD players.

Architect Partners’ Observations

This acquisition is another part of the race to bring content to Internet-enabled televisions. Google, for example, recently released its VP8 video codec as open source , announced Google TV and is introducing an online video project called WebM. This move is putting pressure on competitors in the Internet television business. With the acquisition of DivX, Sonic Solutions is buying a consumer-branded video store, an existing content distribution platform and access to a large installed base of DivX players.

DivX entered their 2006 IPO with significant momentum, priced at $16 per share (above their $12-$14 target), and proceeded to double share price to a peak of $32 in the two months post-IPO. Their momentum faded from this point with the stock steadily dropping to a trading range of $6-$10 where they have stagnated since July 2008.

Google Acquires Invite Media

jshieh — Thu, 03 Jun 2010 20:28:42 +0000

Transaction Overview

On June 2, 2010 Google (NASDAQ:GOOG) acquired display advertising exchange Invite Media for a reported price of $70 million.

Target Description

Invite Media provides an full view of, and real-time bidding for, advertising inventory available across all major online display ad exchanges such as Google’s DoubleClick Ad Exchange, Yahoo!’s Right Media Exchange, Microsoft’s AdECN and OpenX, among others. Ad exchanges arose to provide a full view of inventory available on specific ad networks. Invite Media takes this one level higher, by bringing a single view of ad exchanges. Fundamentally the idea is to allow advertisers (and ad agencies working on behalf of advertising clients) to efficiently view and select, via a single user interface, where to run their online advertising campaigns. Invite Media competitors include startups such as MediaMath, X+1 and Turn. The Company was founded in 2007 out of the University of Pennsylvania by Nat Turner, Zachary Weinberg, Scott Becker and Michael Provenzano. We estimate Invite Media has approximately 30 – 40 employees currently. The Company received funding from First Round Capital, Genacast Ventures, Creative Commerce, and Comcast Interactive Capital. The total amount of funding was not disclosed.

Buyer Description

Google is an advertising giant which offers a range of services to advertisers. Google entered the ad exchange business with their acquisition of DoubleClick for $3.1 billion. Correction: Google launched their ad exchange through DoubleClick on September 18, 2009.

Transaction Parameters

Google reportedly acquired Invite Media for $70 million.

Enterprise Value ¹	$70 million

1. AllThingsD June 2 2010

Strategic Rationale

Google is continuing to bolster its display advertising capabilities via the acquisition of Invite Media. The so called “demand side platform” area has seen considerable attention recently with Google mentioning in its blog today “many agencies and advertisers have been asking us to make a bidding platform available directly to them, as they want to take advantage of the opportunities that real time bidding presents.”

Architect Partners’ Observations

Google has been looking at demand-side platforms for some time now. Competitors will be required to match capabilities.

Google Acquires Streaming Technology Vendor Simplify Media

jshieh — Sat, 29 May 2010 15:00:14 +0000

Transaction Overview

On May 20, 2010, Google (NASDAQ:GOOG) revealed that it has acquired Simplify Media for an undisclosed amount.

Target Description

Simplify Media is a media streaming service which allows users to access their personal music, photos and videos from any Internet-enabled device. Before their acquisition by Google, Simplify Media offered an application which allowed users to stream media from iTunes to any Internet-connected computer or mobile device. The Company is based in Redwood City, California and has received funding from Sierra Ventures rumored to be between $1 – $5 million.

Buyer Description

Google (NASDAQ:GOOG) has begun to introduce music oriented products such as a web-based competitor to iTunes as well as including songs in search results through partnerships with MySpace, Rhapsody, Pandora, Lala (acquired by Apple) and iLike (acquired by MySpace). Vic Gundotra, VP of Engineering at Google, was the key executive sponsor of the deal.

Transaction Parameters

The transaction parameters were not disclosed.

Strategic Rationale

Google’s acquisition of Simplify Media is all about ubiquitous access to personal media from any device. Users increasingly want access to their music, TV, photos and other media on whatever device is most convenient at the time. Simplify Media provides these core capabilities. Google is quickly moving to be a force in media as exemplified by the recent introduction of Google TV and the expansion of the Android mobile OS.

Architect Partners’ Observations

Streaming, versus downloading and locally storing media, will become more and more prevalent over the next several years. This allows content to be stored and maintained in a limited number of locations and made available, on demand, to any Internet-connected device. Robust streaming technology which recognizes the available bandwidth and end-device characteristics and constraints is a crucial component.