M&A Alert - November 12, 2009
Google Agrees to Acquire Gizmo5
Transaction OverviewOn November 12, 2009, Google (NYSE: GOOG) announced that is has agreed to acquire Gizmo5 for $30mm.
Target DescriptionGizmo5 is a Voice over Internet Protocol (VoIP), service provider, in many ways similar to Skype, in that users can make free telephone calls to one another on its network, as well other as free services such as voice mail, conference calls, and call recording capabilities. In addition, Gizmo's CallOut service allows users to initiate calls to mobile and land line phones for a fee, and its CallIn Service allows users to set up a phone number for a monthly fee. As of October 2009, Gizmo5 had over 6 million users. Gizmo was founded in 2003 by Michael Robertson, previously the founder of MP3.com, and is based in San Diego. In February 2006, Gizmo received $6mm in round A venture funding in a deal led by Ed Sim of Dawntreader Ventures. (He explains his investment rationale in his blog.)
Buyer Description
Google offers a telecommunications service, Google Voice, which allows users to set up a free phone number from your computer or use your existing number to route mobile and land line calls for domestic calls. International calls are billed according to a fee schedule. Google Voice is currently only available to GrandCentral users and by invite. Google also offers
Over the past several years, Google has made a substantial investment in internet-based telecommunications led by their acquisition of Grand Central ($95mm) in 2007 and the launching of Google Voice in March of 2009. Wesley Chan and Craig Walker (formerly of Grand Central), both Project Managers at Google, were key sponsors of the Gizmo acquisition. Google was founded in 1998 and is based in Mountain View, California.
Transaction Parameters
Google will purchase Gizmo for $30mm in cash. Gizmo's 6 million-strong user base puts its value per user at $5.00/user. Skype's value $2.75 billion, with a user base of 480 million, for a value per user of $5.73/user. Competitor Vonage has a market cap of $237mm and a customer base of 2.5 million, for a value per user of $94.80/user.
Strategic Rationale
Google is delicately positioning itself to compete with traditional wired and wireless service provides, Skype, and Vonage. Gizmo5's open standard Session Initiation Protocol (SIP), based online calling system enables users to route calls to and from their land line, mobile, and internet accounts with users of Skype, Yahoo, AIM and other online VoIP platforms, either with their existing numbers or a new number provided by Google. Unless Google suffers regulatory challenges, expect to see Gizmo5 technology integrated into Google Voice. Combined with that the extra features that Google Voice offers such as free transcription and storage of voice mails, call screening and blocking, free conference calls, free SMS in US and Canada, Google intends to bring a highly valuable set of communications services to consumers.
Architect Partners’ Observations
Gizmo5 SIP technology is an important building block for Google's communications product strategy. In fact, Skype also had its eyes on Gizmo5 as a solution to its acrimonious dispute with founders Niklas Zennstrom and Janus Friis over duel ownership of Skype's core Global Index technology. Google Voice is a highly disruptive product offering from Google which has the potential to substantially reshape the communication services industry.