Deal Focus: PayPal Acquires Zong

July 8, 2011

eBay announced this week that it acquired Zong, a mobile payments provider, for $240 million. The acquisition is an attempt to boost eBay-owned PayPal’s dominance in the mobile payments space as competition in the sector grows and the race to remain relevant heats up. Zong, based in Menlo Park, Calif., allows people to charge online purchases to their mobile phone bill. Zong is primarily used to purchase digital goods such as Facebook Credits for online social games. The company, founded in 2008, raised $15 million in venture capital from Matrix Partners.

We’ve written previously that Zong was a likely target for acquisition (given its unique marketshare and fast growth) and that PayPal was one of the more dominant players in electronic payments. So the combination is not a surprise.  Zong will provide PayPal with access to a new user base — people without credit cards, or those uncomfortable sharing their credit-card information online – and will expand its market opportunity in developing countries. Zong’s extensive relationships with mobile carriers (over 250 in 45 countries around the world) will also provide PayPal’s 100 million plus user base with expanded payment options.

PayPal CEO Scott Thompson noted that the digital goods market is worth nearly $20 billion today and still growing. Increasingly advanced smartphones are revolutionizing the retail/e-commerce status quo, allowing shoppers to bring the Internet with them to the store, opening up an entirely new range of buying options. Jupiter Research reports that mobile revenue will reach $670 billion by 2015 — PayPal expects to handle over $3 billion in mobile payments this year alone.

eBay and PayPal have already made five acquisitions this year: local payments and advertising company Where; ecommerce solution Magento; non-profit payment software provider MissionFish; Turkish online-retailer GittiGidiyor; and mobile payment technology FigCard. These acquisitions are no doubt a strategy to fend off increased competition from startups including Square and Google Wallet, as well as companies such as Zong-rival Boku. We expect to see e-commerce and financial services players targeting innovative startups to fill the gaps in their technology that they need to remain relevant to users and consumers. M&A in this space has only just begun.


The Skype Acquisition: Why Microsoft’s Strategy Is Better Than eBay’s

May 12, 2011

Many opponents of Microsoft’s Skype acquisition see the deal as another waste of money and resources by a big out-dated firm looking to become relevant again. But there are quite a few important differences between eBay’s acquisition of the company in 2005 and Microsoft’s today.

  1. Independence makes a world of difference. Just 18 months ago Skype was foundering – an orphan that never fit within eBay. The company was also drowning in an IP ownership lawsuit. When Skype spun-off from eBay, it gained an opportunity to clean up its act without a bureaucratic business to hold it down. Once independent, the IP lawsuit was settled for an equity ownership in the company, and the new owners were able to steer Skype to better ground. New leadership was sought out (CEO Tony Bates joined in October 2010) and a commitment was made to R&D that expressed a fully formed vision of a company. Without that turn around, Skype never could have put itself in the position to obtain such a staggering purchase price — more than three times what Silver Lake, Andreessen Horowitz and Index Ventures paid for it 18 months ago.
  2. Engagement stats support a higher valuation. Skype’s latest valuation is publicly justified by a healthy increase in user engagement. Since eBay spun off Skype to Silver Lake et al in 2009, monthly calling minutes witnessed 150% growth. In 2010, registered users grew to 663 million users – an almost 40% increase over 2009 and a 104% increase since 2008. Of those users, more than 100 million are active every month, spending an average of 100 minutes each month talking on the service. These users are one asset that is extremely important to Microsoft as it shows the huge market opportunity. There is plenty of room for growth; at the beginning of 2010, Skype had only about 12% of the international calling market share. With Microsoft’s help, the service could easily reach billions of users within the next few years.
  3. Synergy is not just a buzz-word. eBay’s vision of voice calling accompanying internet auctions was ill-conceived.  As a consequence, the acquisition destroyed equity value.  Microsoft, in contrast, offers multiple, realistic synergy opportunities that can be carried out immediately. Ultimately, it is not paying $8.5 billion for what Skype is today, but what it can be tomorrow. Currently, Skype is only growing revenue by 20% and is largely driven by individuals and small businesses willing to pay for VoIP. But teamed up with Microsoft, Skype has new credibility as a business tool and beyond. Microsoft plans to keep the company as a standalone unit and incorporate into its other products, such as the Office suite, collaboration tools, its Xbox consumer offering and everything else they do for businesses and consumers. This creates a huge market to sell to, and eventually a huge new source of revenue. With these new user avenues also comes new places for advertising – and yet another huge potential source of income.
  4. VoIP is the new battleground. Microsoft is signaling a face off with Apple, Cisco and Google on VoIP platforms and bulking up its mobile strategy. Facebook, on the other hand, in which Microsoft is an investor and partner, and with which Skype is integrated, will most likely benefit. This deal (Microsoft’s biggest ever) has the potential to spawn acquisitions by other VoIP and video conferencing technologies. This week, VoIP iPhone app provider Bababoo announced it raised $1.5 million from Sierra Ventures. The service allows users the ability to make calls through WiFi, 3G, and the iPhone’s carrier networks, AT&T and Verizon, without having to change networks, phone numbers, or caller ID. Other providers such as Pinger and Talkatone could be in the M&A spotlight in the coming months.
  5. Internet remains a bull market. Microsoft is paying a healthy premium to acquire Skype and keep it out of the hands of competitors, especially Google and Apple, who are clamoring to gain market share in every area possible. The Internet sector overall witnessed an explosion of deal volume during Q1 2011with median revenue multiples rising. Deal making is keeping pace in Q2 as well. On top of that, Internet sector stocks climbed 25% for the last 12-months as of Q1 and have continued to climb since then.

Deal Focus: eBay Enters Charity Market with MissionFish Acquisition

May 5, 2011

eBay recently acquired non-profit fundraising tool MissionFish. The company, which has been powering eBay’s GivingWorks program for the past eight years, has raised more than $250 million for U.S. and U.K. non-profits and eBay plans to create a separate nonprofit organization that will eventually be directly responsible for the collection and distribution of funds, using MissionFish’s technology.

There have been few acquisitions in the non-profit technology market; Renaissance Administration’s acquisition of BlackBaud’s donor-advised fund platform is the only other transaction Signal Hill has tracked over the past year. Yet there are a growing number of competitors emerging in the $300 billion charity space, especially due to the growth of social networks.  These companies span the range of charitable giving and technology, including crowd-sourced fundraising (Crowdrise), micro-lending (Kiva), mobile fundraising (Nadanu), online fundraising software (Fundly) and even provide the ability to donate every time you make a purchase on your credit card (Swipegood.com). Philanthropy-enabling platform give2gether even takes giving one step further, using 10 years of research in its analytic metrics to help improve the probability that non-profits raise more funds.

These companies can be a difficult target for M&A, however, as non-profits provide little up-side for acquirers aside from the “goodness” factor. Still, as social responsibility becomes a major focal point for corporations and consumers, venture firms see opportunity and are investing. Social fundraising platform Fundly recently closed a $2 million seed funding round led by a group of Silicon Valley investors.

Ultimately, we believe these charity-focused companies have the potential to be picked up by larger charitable networks, financial institutions, or even major credit card providers such as Visa or Mastercard. But don’t expect these to be blockbuster deals – chances are any acquisitions would only occur at modest valuations.


Despite Economic Woes, Deals Are Still Being Struck

October 8, 2008

Lorie Roscitt

Lorie Roscitt

This Week Sees A Flurry Of IT M&A Activity

by Lorie Roscitt

While all attention is fixated on worldwide economic problems, M&A transactions continue to occur under the radar. This week alone, as stock markets around the world continue to decline, several significant deals have been struck — and at multiples favorable to the target companies. Furthermore, these transactions cut across all sectors that Updata Advisors covers.

For example, in the Internet sector, eBay announced Monday that it was spending over $1 billion to acquire three companies; two online classified websites in Denmark for $390 million and $945 million for Bill Me Later, Inc., a provider of online credit. eBay anticipates that Bill Me Later will generate an estimated $150 million in revenue in 2009, which represents a deal value multiple of 6.3x 2009 revenues. Not shabby.

In the IT services sector, Tata Consultancy Services today announced its intention to spend $505 million to acquire Citigroup Global Services, an India-based BPO firm which expects to generate revenues of approximately $278 million in 2008, representing a multiple of 1.8x 2008 revenues. This is above the 1.1x median trailing revenue multiple Updata Advisors has observed for companies in the BPO-sector over the past 12 months.

Also this morning, Symantec announced it has signed a definitive agreement to acquire MessageLabs, a SaaS-based provider of online messaging and Web security services for a purchase price of approximately $695 million in cash. MessageLabs generated approximately $145 million in revenue during fiscal year ending July 31, 2008, representing a multiple of 4.8x trailing revenues. This compares favorably to the median 2.0x revenue multiples paid for security companies and 3.5x paid for SaaS firms over the past year.

The financial technology sector also saw a deal struck this morning as Fundtech Ltd. announced the acquisition of Synergy Financial Systems Ltd. for $6.3 million (including earnouts) which had $2.5 million of trailing 12 months revenues, representing a trailing revenue multiple of 2.5x. Updata Advisors has observed a 2.1x median trailing revenue in the financial technology sector during the past year.

Finally, Oracle, who is already a serial buyer of companies, announced the acquisition of Primavera Software this morning. Primavera is a provider of project portfolio management (PPM) solutions. In this case, the deal value was not disclosed. In the past 12 months, Oracle has acquired 11 companies at a total cost exceeding $9 billion.

While these transactions are merely anecdotal and the volume of M&A transactions has clearly declined during the current economic and financial malaise, it is heartening to note that good things can happen during bad times.


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