M&A Alert - December 23, 2009
O2 Agrees to Acquire Jajah
Transaction Overview
On December 23, 2009, Telefónica O2 Europe, a subsidiary of Telefónica SA, agreed to acquire Jajah for $207mm in cash.
Target Description
Jajah is a Voice over IP service provider that allows its users to make low-cost calls to more than 125 countries. Jajah offers Jajah-Web where users go to the company’s website and enter two phone numbers — their own and the number they want to call. The company calls both numbers. If the calls are answered, Jajah simply connects the calls to each other. Jajah also offers Jajah-Direct where Jajah assigns a local telephone number to a customers allowing them to dial and receive directly from their landlines or cellphones. Jajah has built its own virtual network with VoIP servers connecting through PSTN networks and buys wholesale termination from carrier networks. Jajah’s calls are delivered over switched telephone line and therefore have call quality rivaling fixed line service. Jajah charges calling rates lower than Skype. Jajah has agreements with Twitter, LinkedIn, Plaxo, AOL, Microsoft and Yahoo which embed Jajah’s service into their services allowing voice calls directly from their sites. Jajah has 25mm subscribers and announced in June 2009 that it had connected its one billionth call. Since inception, Jajah had received $35mm in funding from Deutsche Telekom (Partner: Andreas Kindt), Intel Capital (Stephen Saltzman), Sequoia Capital (Partner: Michael Moritz) and GlobeSpan Capital Partners (Partner: Venky Ganesan). Founded in 2006, Jajah is headquartered in Mountain View, CA with an office in Luxembourg.
Buyer Description
Telefónica O2 Europe, a subsidiary of Telefónica SA, provides integrated mobile, fixed, and broadband services in the U.K., Ireland, Germany, the Czech Republic, and Slovakia. The company provides mobile telecommunications services using universal mobile telecommunications system, general packet radio services, and fixed line systems.
It owns and operates a mobile Internet portal and sells telephone equipment. Matthew Key, CEO and Chairman, was the key executive sponsor of the acquisition. Telefónica O2 serves approximately 46.7mm fixed and mobile customers across Europe. Earlier this month, it launched LTE network in the U.K. Founded in 2001, Telefónica O2 is headquartered in Slough, U.K.
Transaction Parameters
The announced purchase price of $207mm put Jajah’s value per user at approximately $8.28/user. Microsoft and Cisco had reportedly participated in the earlier bidding process for Jajah. Comparable recent M&A transactions include Gizmo5 that was acquired for $30mm by Google with a 6mm user base ($5.00/user), Skype, that was valued at $2.75b in its recent sale from eBay, with a user base of 480mm ($5.73/user) and Vonage with a market cap of $237mm and a customer base of 2.5mm ($94.80/user).
Strategic Rationale
Telefónica is well aware of the threat that ultra-low cost VoIP has upon its core voice services. Jajah represents a strategic acknowledgement that VoIP services must play a role in traditional service provider service offerings, even if that means threatening its core wireless and landline services.
Architect Partners’ Observations
This transaction has several interesting elements. First, in the “fight them or join them” debate, it’s clearly a step in the join them camp. All wireline and wireless service providers are under increasing pressure from low cost VoIP services. Companies such as JaJah, Truphone, Skype and most notably Google are making notable inroads and will continue to do so. Carriers must find ways to economically embrace this trend. Second, JaJah has done a good job at offering a “white label” voice communication service for online sites. Think of voice communication as simply another application which can be easily integrated into any other application. This is a significant change in concept as to how voice has been thought of in the past which will result in interesting innovation in the next several years. Third, let’s watch how aggressively Telefónica promotes the JaJah service, particularly its Jajah-Direct offering. That will be telling to understand if this represents an all out embrace of low-cost VoIP service or an attempt to muzzle a successful competitor.