M&A Alert - August 4, 2009
Google Agrees to Acquire On2 Technologies
Transaction Overview
On August 4, 2009, Google (NASDAQ: GOOG) announced that it has agreed to purchase On2 Technologies, (NYSE: ONT) for $106.5mm in a stock-to-stock transaction. On January 7, 2010, Google amended the purchase to a total of $133mm in a stock and cash transaction.
Target Description
Based in New York, On2 Technologies, Inc. was founded in 1992 and provides video compression technology that allows video delivery within desktop and mobile applications and devices. Product includes VP6 and VP7 series of video codec design and Hantro codec design that provide video coding, format and resolution support, as well as AMR-NB coder that enables video messaging and streaming via telephony applications. On2 supports 2.5G, Edge, 3G and 4G networks. It licenses its video coding designs to chip and mobile handset manufacturers. While V6 technology is installed in the majority of PCs, V6 technology is now facing competition against H.264 and OGG Theora, which is an open source video coding design, that is offered by Mozilla. On2’s customers include Adobe, Skype, Nokia, Infineon, Sun Microsystems (now part of Oracle), Mediatek, Sony and Move Networks. Before entering the public market in 1999, On2 (previously known as the Duck Corporation) received $6.5mm funding from Edelson Technology Partners and Citigroup Ventures.
Buyer Description
Based in Mountain View, Google Inc. was founded in 1998 and provides targeted advertising and Internet search solutions to users and advertisers. Products include Google.com for search, personalization and advertisements. It offers advertising services through Google’s AdSense, Adwords and display advertising programs. It also offers Google Docs, Google Calendar, Gmail, YouTube, Google Chrome, Picasa, and Google Mobile that allows users to search and view the mobile Web, maps and satellite imagery. Google’s browsers, Chrome and Android, are based on HTML 5 which can play videos independently without the installation of players such as Adobe Flash or Microsoft Silverlight. Sundar Pichai, VP at Google’s Product Management represents Google’s group that supported the transaction.
Transaction Parameters
The amended transaction is valued at $133mm, payable in Google Class A Common Stock and additional $0.15 per share in cash, representing an increase of $26.5mm in cash from the original $106.5mm stock-to-stock transaction value. Prior to the amendment, On2 had settled a lawsuit made by On2’s shareholders alleging that On2’s management had not made the effort to obtain the best price for On2’s shareholders. On2 had positive gross margins although suffered an operating loss in the second quarter of 2009.
 |
|
| Equity Value of Considerations Paid 1 | $133mm |
| Enterprise Value / LTM Revenue 2 | 7.56x |
| Offer Premium to Stock Price | |
| 1 Day Previous |
57% |
| 1 Week Previous |
62% |
|
1. Equity value is assumed to equal purchase price as stock option dilution is not expected to be material per On2′s 10-Q as of June 30, 2009
2. Enterprise value is derived from equity value to which $2.9mm debt was added and from which $2.8mm cash was subtracted. LTM revenue was $17.6mm. Debt, cash and LTM revenue are as of June 30, 2009 and are sourced from Capital IQ
Strategic Rationale
On2 Technology’s products and services bolster Google’s core technology capabilities that are important for Google’s video initiatives. On2 will enable Google to offer better video quality and experience through YouTube and Google Mobile. It will also enable Google to integrate On2’s V6 technology with Google’s HTML 5 technology in its Android and Chrome browsers. Users will then be able to view web video on Android and Chrome without Adobe’s Flash and Microsoft’s Silverlight. Furthermore, it is also estimated that Google may open source the On2 technology to provide a standards-based platform to attract an ecosystem of developers.
Architect Partners’ Observations
This is a classic Google acquisition of technology that bolsters the core services that they would rather own than license from a third party vendor. This again is a shot at Microsoft, directly attacking the need for Silverlight and potentially is an attempt to marginalize Adobe Flash. The purchase price was fairly rich for a pure technology acquisition but consistent with Google’s past behavior.