M&A Alert - May 6, 2010
Harmonic Acquires Digital Video Storage Provider, Omneon
Transaction Overview
On May 6, 2010, Harmonic (NASDAQ: HLIT, Market Cap: $536mm) announced that it has agreed to purchase Omneon for $274mm in a combination of cash and equity.
Target Description
Omneon offers solutions for digital video storage, production and playout. Products include a digital video storage platform, media servers and content management applications. Omneon claims a 22% market share in the video server market. Customers include the BBC, BSkyB, CBS, Comcast, Discovery Communications, Echostar, NBC Universal, News Corporation, Televisa, Turner Broadcasting System and Viacom. Competitors include Thomson’s Grass Valley, Harris Broadcast, Isilon and DataDirect. Founded in 1998, Sunnyvale-based Omneon has received $71.5mm in total funding from lead investor Accel Partners (Peter Wagner), followed by Advanced Technology Ventures (Steven Baloff), EchoStar Corp. (NasdaqGS:SATS), Ignite Group, Intel Capital (Richard Hsu), Lighthouse Capital Partners, Lucent Venture Partners L.L.C., MeriTech Capital Partners (Mike Gordon), and Norwest Venture Partners (Matthew Howard, Promod Haque). In 2009, Omneon generated 70% of revenues from overseas. Omneon filed for an IPO in 2007 and withdrew its S-1 filing in 2009.
Buyer Description
Harmonic is a leader in video delivery. The company offers video streaming/processing products that enable video encoding and multi-screen digital video content (including Broadcast TV, IPTV, Mobile TV, Video On Demand and Rich Media) delivery. Harmonic also offers server-based content management applications that enable digital content storage, processing and cross-network distribution, as well as software solutions that enable the operator to control, monitor and configure their network. Harmonic, which generates approximately 50% of its revenues from overseas, sells its products and services to cable, satellite, broadcast and telecommunication providers. Patrick Harshman, President and CEO, was the key executive sponsor of the transaction.
Transaction Parameters
Harmonic agreed to pay $190mm in cash to acquire approximately 17.1mm shares of Omneon’s common stock. The transaction indicates an enterprise value of approximately $274mm, based on Omneon’s net cash balance of $32 million and the May 5 closing price of Harmonic stock. Omneon is profitable with revenues in excess of $105mm and 58% gross margin in 2009, and an average annual growth rate of 18% since 2005.
Enterprise Value $274mm
Enterprise Value/Revenue 2.6x
Strategic Rationale
Omneon’s digital video storage/content server products are a natural fit for Harmonic, who has transparently announced their intent to bolster their high-bandwidth digital video delivery products (which include 3D, HDTV, VOD and new internet and mobile TV services). As disclosed in the conference call regarding the acquisition, Omneon and Harmonic will capitalize on their complementary customers (both companies combined have a majority of the Fortune 2000 media, content provider and pay-TV service providers as clients) and cross-selling opportunities. The combined company will have 54% sales generated internationally, 330 sales professionals, 250 global sales channel partners and 450 engineers. Harmonic has made a number of acquisitions of video technology over the past several years including Scopus’s video networking product in 2008 for $84mm, Rhozet’s transcoding technology in 2007 and Entone’s VOD solutions for $45 million in 2006.
Architect Partners’ Observations
As the market increasingly demands high-quality digital video and interactive services, (either via VOD, internet or mobile TV delivered in 3D or HDTV formats), content owners, publishers, broadcasters, cable operators and telcos are now seeking robust and flexible video storage and servers. Harmonic is now positioning itself to leverage this market opportunity.
Other relevant transactions include Juniper’s purchase of Ankeena, Google’s purchase of Episodic, Walmart’s purchase of Vudu, Limelight’s acquisition of Eyewonder, Qualcomm’s acquisition of Digital Fountain, Akamai’s purchase of Acerno and Comcast’s acquisition of thePlatform.
Architect Partners follows the IPTV and IETV businesses and has recently published several points of view regarding Digital TV including: Television is the New Application Platform, Getting Broadband Content on Your TV, and Google Joins Stampede to The Living Room.