Architect Partners

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

Venture Capital-Backed M&A Exits

Margaretha Margaretha — Tue, 27 Jul 2010 14:46:45 +0000

Within our sector focus, venture-backed companies comprised half of the 40 M&A transactions whose value was between $25 million – $1 billion in Q2 2010. This was up nicely from the first quarter in terms of the number of transactions and the median size increased to well above $130m. The other good news was that the returns on investment showed good results. Our analysis indicates that the median multiple of invested capital was 7.5x(a). Quite respectable.

A number of VCs had a very good quarter with more than one solid M&A exits within our sector:
Trinity Ventures: Ankeena (Fred Wang & Ajay Chopra) and two-year-old CubeTree (Gus Tai & Jim Taber)
Accel Partners: Omneon (Peter Wagner) and Coremetrics (Arthur Patterson)
Norwest Venture Partners: Omneon (Matthew Howard, Promod Haque) and Jigsaw (Jeff Crowe)
T-ventures: CoreOptics (Dr. Georg Schwegler) and Cinterion Wireless (Stephan Noll)
Austin Ventures: Jigsaw (Jim Casella) and CreditCards.com (Craig Milius, Kenneth DeAngelis, Philip Siegel)
Highland Capital Partners: Coremetrics (Dan Nova) and Turbine (Corey Mulloy, Matthew Nichols, Richard de Silva and Robert Davis)

For additional information on many of these transactions, please click our M&A Alert as indicated below.

(a) Information derived from sourced deemed reliable although Architect Partners cannot be sure fully complete.

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.

M&A Snapshot: Q2 2010

jshieh — Fri, 16 Jul 2010 12:40:14 +0000

The overall M&A market within the rapidly converging internet, mobile and digital media sectors remains active yet completed transactions are still at only moderate levels. Below is our at-a-glance M&A Snapshot for Q2. We’ll continue further assessment and analysis over the coming weeks.

DeCarta Maps Out New Partnerships

jshieh — Wed, 14 Jul 2010 18:19:07 +0000

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M&A Snapshot: Q2 Transactions

jshieh — Mon, 12 Jul 2010 21:21:56 +0000

Architect Partners tracked 372 M&A transactions which took place in the 2nd quarter of 2010 within the converging internet, mobile and digital media sectors. Of these, 40 had announced transaction value between $25 million and $1 billion. We keep careful tabs on these transactions as many are venture backed and represent an attractive exit for venture investors. Also of note, are transactions where transaction value was not announced but was almost certainly within that same range. Below we summarize this activity for the second quarter of 2010. Over the past quarter, via our M&A Alert, we have published a more in-depth strategic assessment of 20 of these transactions. Those are noted and linked below.

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

M&A Snapshot: Notable Q2 Acquirers

Margaretha Margaretha — Thu, 08 Jul 2010 14:32:44 +0000

By our count, the number of announced M&A transactions within the internet, mobile and digital media sectors remained consistent with the first quarter of 2010. Activity levels are reasonable although buyers continue to be deliberate and selective. Over the course of the next couple of weeks we will be publishing a number of observations regarding recent M&A activity.

Today’s assessment looks at the moves of the most active and notable acquirers. Several important trends emerged:

1) Google continues to be extraordinarily active, acquiring nine companies within the quarter. As is typical of Google, the majority were young companies acquired for their technology and people, not an already built business. Themes included (i) cloud-based application infrastructure (Episodic, Simplify Media, Global IP Solutions and Agnilux), (ii) mobile (Plink, Labpixies and Bump Technologies), (iii) location-based services (Ruba) and (iv) advertising infrastructure (Invite Media).

2) Yahoo is switching into buy mode, with three acquisition this quarter, after a long period of strategy assessment and divestitures.

3) Private-to-private transactions are in vogue with high profile private buyers such as Twitter, Facebook, Groupon, Tippr, Playdom and Zynga.

4) Several traditional enterprise vendors made important moves this past quarter with HP’s acquisition of Palm being the most notable. Also of major significance was SAP’s announced intent to acquire Sybase and IBM’s acquisition of Coremetrics. These were perhaps the most interesting transactions of the quarter as they signal important strategic decisions by an important new group of acquirers to bolster their capabilities within the converging internet, mobile and digital media sectors.

The following table highlights second quarter activity:

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.