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.

Deal Focus: Cerberus Buys U.S.-based Unit of 3i Infotech

May 17, 2011

3i Infotech, a global information technology company, announced yesterday it agreed to sell its U.S.-based global billing and payments unit to an affiliate of private equity firm Cerberus Capital Management. Cerberus is paying $137 million for the unit which includes Regulus Group and J&B Software — two companies 3i Infotech acquired less than three years ago.

In April 2008, 3i Infotech acquired Regulus for $80 million (with $20 million earn-out); just a few months earlier it had snapped up J&B Software for $25.25 million in October 2007. Both acquisitions were part of a strategic acquisition push to strengthen its position in the payment processing industry. At the time, Regulus was the largest independent remittance provider as well as one of the top providers of bill processing services in the U.S. J&B provides software products and services related to remittance processing in the USA and had revenues of around $25 million when it was acquired in 2007. After the acquisitions, the companies were integrated to form the global billing & payments unit of 3i Infotech.

Interestingly, ICICI Group (a partial owner of 3i Infotech) was recently rumored to be in talks with IBM to sell its 20% stake in 3i Infotech, valuing the company around $240-$300 million (its current market cap is about $212 million). Today’s announced unit spin-off could be the firm cleaning up its portfolio before a larger investment in the entire company takes place. 3i currently offers solutions and services on IBM pSeries, xSeries and IBM Total Storage servers, so a strategy investment on IBM’s part would not be farfetched.

Revenues at 3i Infotech also more than doubled over the past three years, partly boosted by the acquisitions. This is certainly a lure for investors, and as 3i says, a testament to their M&A strategy.  According to 3i CEO V. Srinivasan, the divestment of the billing and payments unit reduces the leverage and strengthens the balance sheet of the company, as well as enables it to go back to its roots as a significant IT products and services player.

The Mobile Payment Reality Gains Traction

August 18, 2010

With the advent of increasingly more capable mobile phones, payment tech, and more specifically, mobile payment technology, the stage is increasingly set for the market to take off. Recent research calls for global mobile payment transactions to rise to $1.13 trillion in 2014, a CAGR of 94.8%, with the total number of users increasing to 351.4 million, according to IE Market Research Corp.’s 3Q.2010 North America Mobile Payment Market Forecast, 2010 – 2014.

We’ve written previously that security concerns, among other things, could hinder the adoption rate of payment technology, but venture capital firms are continuing to fuel the fire. Already Q3 investments in the sector include $7.5 million in funds for WePay, a group payment platform; $12.1 million in funding for eWise, a provider of online payments and financial management services; and $8.5 million for Wave Crest Holdings, a provider of e-payment solutions. On the mobile front, Payfone, a mobile payment provider, recently raised $11 million in venture capital investments.

Game-changing mobile payment technology in the U.S. is still a year or two away, however, even with the continuing evolution of super-smartphones and exponential growth in mobile apps. some companies are starting to acknowledge mobile technology as a coming force: Zong and Google’s latest acquisition, Jambool, have begun making waves by monetizing digital currency for mobile and social games, but there is still no real front runner. One exception may be eBay’s old-reliable PayPal, which recently teamed up with Google to let Android phone users pay for apps using PayPal instead of credit cards or Google Checkout.

The sector’s best bet for a break-out hit in payment technology is the advent of near field communication (NFC), which is a short-range high frequency wireless communication technology which enables the exchange of data between devices over a distance of a few inches. NFC accounted for 14.9% of mobile payment transactions in 2009 and is expected to increase to 32.8% by 2014 or 35.6 billion transactions. Traditional credit card companies have attempted to spark this trend through NFC chips placed in cards and contactless payment kiosks, but adoption has been slow (only about 26% of U.S. consumers have contactless credit cards).

The right combination of reliable financial institution and intuitive software provider, however, could put the wheels in motion for a mobile phone innovation. Apple recently brought in Benjamin Vigier, formerly of mCommerce vendor mFoundry Inc., as product manager for mobile commerce. While no one knows the company’s exact plans yet, Apple has quite a few patents under its belt for NFC technology, suggesting mobile payments made through iTunes, mobile marketing campaigns, and even airline ticketing services could just around the corner.

Globally, the number of mobile payment users is expected to rise to over 1 billion in 2014 for a CAGR of 20.5%, however, the adoption curve is not expected to accelerate meaningfully until sometime between 2011 and 2013. Money transfers, mobile payments and NFC services are three of the top ten uses expected by mobile consumers over the next few years. Given this expected growth, we expect to see traditional credit card providers and consumer banks team up with e-payment innovators, such as Visa’s acquisition of CyberSource in April. A pick-up in M&A for payment technology by consumer banking institutions is likely, or at the very least, we will see them begin to forge partnerships with the strongest payment technology start-ups. One thing is for sure: now is the time for combinations to start happening if these firms want to be at the forefront of the impending payment revolution.

Financial Buyers Re-enter Market, Focus On Recurring Revenue

May 21, 2010

Midway through the second quarter of 2010, signs are pointing to a resurgence of M&A, especially with the re-emergence of the financial buyer community. Already in the first six weeks of Q2 there have been 13 transactions involving private equity firms in the market spaces that we track*. That compares to only five financial buyers throughout all of Q1 and 33 total in 2009, according to Updata’s transactions database.

The majority of the financial buyer activity in Q2 is two sectors: Financial Technology and Business Services. Within FinTech, private equity firms are focusing the most attention on payment technology. For Business Services, the primary activity is in Government-related services and Managed Services. The Services sector is no stranger to big deals involving PE buyers – in 2009 financial buyers spent over $2.6 billion on call center operator Bellsystems24 and Northrop Grumman’s government-focused TASC unit. These companies have a solid source of recurring revenue, an important factor that financial buyers seek for their portfolios.

Easier access to debt financing, stock piles of cash, and greater certainty in the future financial performance of target companies are just a few of the factors helping to drive resurged interest by financial buyers. And these buyers are not afraid to pay healthy multiples. Although few valuations have been disclosed for Q2 deals, a number have revenue multiples well north of their sectors’ Q1 2010 medians. Specifically, the acquisitions of Sophos (3.2x), Interactive Data Corporation (4.2x) and TIVIT (1.8x) so far in Q2 compare favorably to Security (2.0x); FinTech (3.6x); and Business Services (0.7x) multiples in Q1.

All in all, the beginning of Q2 is a refreshing sign that although the stock market has witnessed some turmoil over the past few weeks, the M&A market continues to stabilize and show signs of improvement. As of May 15, Updata has tracked 160 deals – a pace that, if sustained, will far exceed the number of M&A transactions in the previous quarter (183). With financial buyers re-entering the market and throwing good money at solid companies, we can only expect the remainder of 2010 to see increased, healthy M&A activity and rising valuations.

*Updata tracks Enterprise Application Software, Internet, IT Security, Business Services, Financial Technology, Infrastructure Software, Mobile, IT Healthcare, CROs and research transactions.

Q2 2010 Transactions With Financial Buyers
(click image to enlarge)

financial buyers in Q2 2010


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