FT : Skype Was No Blunder For eBay

It is commonly called one of the dumber deals to come out of techland – which has given birth to quite a few dud transactions in its time.  Online auction house Ebay bought Skype in 2005 for $2.6bn.  Two years later, it took a $1.4bn writedown after fewer Ebay users than expected were tempted by software that makes calls over the internet.  But on Tuesday Ebay announced it had sold a 65% stake in Skype for an implied valuation of about the same that it originally paid, after adjusting for the earn-out payments to the company’s founders.

Far from being chastised, therefore, former chief executive Meg Whitman deserves credit for orchestrating one of the better performing investments over the past five years.  While the value of Skype has remained flat, the Bloomberg world equity index has fallen 6% while the S&P 500 has dropped by a fifth.  Including their latest rally, even US tech stocks are down by a 10th over the same period.  And that is before Ebay makes a writeback.  Ebay should also be applauded for getting almost five times sales – far more than the market was expecting (less than $2bn for the lot).  Why have a smart bunch of private equity investors and venture capitalists, not to mention a big Canadian pension plan, ponied up?  One reason is that Skype is growing its top line by about 25% year-on-year and added more than 100m registered users last year.  So-called “SkypeOut minutes”, the time users are paying to be connected to fixed-line and mobile phones, jumped by a half.  Another reason may be that out of $550m of sales last year, $290m was accounted for by cost-of-goods-sold, mostly the expense of buying telecoms network capacity.  Given Skype had an operating margin of 23% last year, this means that other expenses must be under control.  Ebay bagged a rich price, but Skype now appears very scalable indeed.

Reference : http://www.ft.com/cms/s/3/
8c0e5aa4-96fe-11de-9c24-00144feabdc0.html

Oracle Gets Sun

Swooping in before dawn broke over Silicon Valley on Monday, software maker Oracle announced an agreed offer to buy Sun Microsystems.  The transaction at $9.50 per share in cash – the price that rival IBM had been expected to pay before negotiations collapsed two weeks ago – launches Oracle into direct competition with IBM and Hewlett Packard.  Does this make sense for the software maker, though?  On consensus forecasts, the $5.6bn enterprise value Oracle is paying for Sun equates to eight times expected earnings before interest, tax, depreciation and amortisation of $673m.  But that does not factor in considerable scope for cost-cutting.  Sun has successively failed to wring out savings over 10 successive restructuring plans.  Oracle – typically bullish, without detailing plans and hardly any numbers – believes Sun will add $1.5bn to operating profits in its first year, and $2bn thereafter.  Lawrence J. Ellison, Oracle’s chief executive, said in a conference call Monday morning that Sun’s Java programming language and its Solaris operating system were the main attractions.  He said Java, the language used in most computer science schools and a technology used daily by millions of software developers, was “the single most important software asset we have ever acquired.”

Slashing costs is not the main rationale for this deal, however.  Unless Oracle has developed a sudden desire to manufacture servers, Sun’s struggling hardware business will probably be sold on. (Cisco could be a potential buyer.)  Rather, the draw is Sun’s software assets.  Its key products, Java and Solaris, do not make much money.  But they are industry standards, and much of Oracle’s own database software relies on them.  Even if the group is unable to extract higher licence revenues from such intellectual property, it removes the risk of a competitor such as IBM stealing a march on Oracle.  Indeed, the deal fits into Oracle’s overall strategy of building a software empire by acquisition, providing it with the ability to offer an “industry in a box” solution to businesses.  Whether it will integrate the pieces into a coherent whole remains to be seen – although, as Oracle’s share price has handsomely outperformed its peers since it began its spending spree, investors should give Oracle the benefit of the doubt.

References :
http://www.ft.com/cms/s/2/aeaa52e4-2db2-11de-9eba-00144feabdc0.html
http://www.nytimes.com/2009/04/21/technology/companies/21sun.html

Why Big Blue Is Drawn To Sun

After weeks of private negotiations, IBM was poised to buy rival Sun Microsystems for a reported $7 billion.  Negotiations apparently broke down on Sunday when Sun’s board regected a reduced offer.  But beyond allowing IBM to reclaim from Hewlett-Packard the title of world’s biggest computer company, why would the company even want Sun, a sprawling Unix vendor that has struggled for years to even show a profit?  The answer, according to insiders at both companies, lies in Sun’s intellectual property.  Not only would Sun be IBM’s largest acquisition ever, but the buy is out of character for the staid mainframe company, which has for several years worked to streamline itself and become a very profitable vendor of computer and Internet services.  But sometimes a deal comes along that’s simply too good to pass up.  Despite years of losses, Sun has continued to spend an average of $3 billion per year on research and development.  Sun also has a huge patent portfolio that might have unique value to IBM, the world’s largest and arguably most aggressive licensers of technical IP, according to experts in IP licensing.  The parts of Sun that have most value to IBM are the Java programming language, Solaris (Sun’s version of the Unix operating system), the MySQL open-source database, and certain virtualization and cloud-computing components.

IBM has already made a huge commitment to Java, a language that it doesn’t control.  Now almost 15 years old, Java has come into its own as a platform for mobile computing and server applications.  “As a high-level language, Java is ideal for applications that are intended to run for weeks and months at a time without having to restart,” says Paul Tyma, former senior developer of server software at Google and now chief technical officer at Home-Account, an Internet startup in San Francisco.  “Compared to older languages like C++, Java is ideal for large enterprise applications,” he adds.  “The longer it runs, the better it runs.”  Java is also the dominant development environment for applications running on more than one billion mobile phones–an area of computing that is not only growing like crazy, but, with mobile devices being replaced every 18 months, evolving like crazy.  Now IBM will have a crucial piece of that new business.

IBM already has its own version of the Unix operating system, called AIX, but Sun’s Solaris has larger market share and runs on a broader selection of hardware than AIX, which is aimed primarily at very big systems.  But there’s an additional attraction to Solaris, one that is critical primarily for legal reasons.  For years, IBM has been dogged by a lawsuit from the tiny SCO Group of Lindon, UT.  SCO holds certain rights to the UNIX operating system acquired from Novell and before that AT&T, and the company claims that IBM is responsible for allowing certain SCO UNIX code (and possibly AIX code) to be inserted in Linux, an open-source version of Unix that IBM has been involved in developing.  While IBM has the upper hand in the SCO suit, which has been ongoing since 2003, it has become clear that some code commingling has taken place, which could hurt future copyright and intellectual-property claims over software developed for Linux and AIX.  Sun’s Solaris, however, has taken an entirely separate development path and is free of any such taint.  In other words, its DNA is clean.  Given the years of SCO litigation, this has value for IBM.

Both Sun and IBM are major players in the Unix workstation market.  If there are antitrust concerns about this merger they will probably center on the intersection of those hardware businesses.  IBM already owns the DB2 SQL database, while Sun paid $1.1 billion last year to buy MySQL, the most popular open-source SQL database around.  Owning this would potentially give IBM new advantages at both ends of the market and help the company compete better against Oracle Corporation, its chief database rival.  Cloud computing, in which applications run in data centers on hundreds or thousands of servers, is an important new computing market.  Cloud computing is dependent on virtualization–software that allows several operating systems to run at one time on servers used in the cloud. IBM has recently made several significant announcements about cloud computing and server virtualization.  But announcements alone aren’t enough, according to sources inside IBM. Sun has virtualization and cloud-computing software that will allow IBM to deliver what it has promised.  No wonder IBM is so interested in Sun.

Reference : http://www.technologyreview.com/printer_friendly_article.aspx?id=22391

FT : Tata DoCoMo

NTT DoCoMo, Japan’s largest mobile phone company by market share, is to pay Rs130.7bn ($2.7bn) for 26% of Tata Teleservices in a deal that highlights the high prices foreign operators are willing to pay to enter the booming Indian market.  The investment in the world’s fastest growing mobile telephone market shows that DoCoMo is determined to compete head-to-head with rivals such as Vodafone and Telenor in emerging markets.  The UK company controls Vodafone Essar, India’s third largest operator, while two weeks ago Norway’s Telenor announced a $1.1bn deal to buy 60% of Unitech Wireless, a new Indian network.  Operators from Europe and Japan are attracted by India’s low mobile phone penetration of about 25 per 100 people.  That rate is expected to double over the next five years – resulting in several hundred million new subscribers.  Analysts said DoCoMo was paying a high price.  “We’re very bearish on this.  Tata has been on the block for years and nearly everyone has kicked the tyres and walked away,” said one, who asked not to be named.  He added that, at about $350 per subscriber before debt, DoCoMo was paying a substantial premium relative to Idea Cellular, a comparable Indian network.  DoCoMo said that it expected to make a 15% return on investment over the next five to 10 years.  Tata Teleservices was a late entrant to India’s mobile market and has grown from 1.6m subscribers in March 2004 to 29.3m today.  Its uses the CDMA standard and needs heavy investment to build a GSM network.  For the Tata group, the deal will provide much-needed capital to its telecoms unit and to the increasingly cash-strapped parent conglomerate.  The deal fits the DoCoMo strategy of buying relatively large minority stakes in mobile networks around Asia.  In June, it bought 30% of TM International, the third-largest operator in Bangladesh, for $350m.  It also owns 10% of KT Freetel of South Korea and a stake in the Philippines.  These stakes, compared to the majority ownership taken by Vodafone and Telenor in their Indian subsidiaries, have brought criticism that DoCoMo is repeating the mistake it made 10 years ago, when it spent Y1,900bn on minority stakes in various foreign operators including AT&T Wireless, KPN Mobile, and Hutchison 3G.  It had to write off much of this investment after the technology bubble burst.

Reference : http://www.ft.com/cms/s/0/3a41f492-b0d1-11dd-8915-0000779fd18c.html

FT : Infosys Acquires Axon

Infosys Technologies on Monday launched the biggest overseas acquisition by an Indian information technology outsourcing company with a £407.1m ($755.5m) cash deal for UK-based consultancy Axon Group.  The deal, which was agreed by Axon’s board and supported by founding and large shareholders, follows longstanding speculation that India’s burgeoning computer services firms would use their strong cash balances to make big acquisitions in Europe…..The acquisition of Axon, a specialist in providing consulting services based on business software created by Germany’s SAP, in effect doubles Infosys’ presence in one of the fastest growing areas of computer services outsourcing.  “This is about increasing our scale and reach and ability to participate in large transformational deals,” said Kris Gopalakrishnan, chief executive of Infosys…..

Last year, Wipro, the number three outsourcing company, bought US firm Infocrossing for $600m, a specialist in data and IT infrastructure management.  Aniruddha Dange, analyst with India Infoline, said the aim was to add high-value services to create “non-linearity” – to break the traditional direct connection between labour costs and revenues.  “Margins for the industry in our view will be on a declining trend so you might as well start acquiring now and creating non-linearity,” said Mr Dange.  Infosys said it already had 2,100 consultants working in its SAP practice and the deal with Axon would give it another 2,000 consultants and access to the UK group’s customers…..However, it would also dilute Infosys’ margins.  The Indian company’s operating margin in the quarter ended June was double Axon’s operating margin of 15% last year…..Infosys reported revenue of $4.18bn in the year ended March, up 35%, and net profit of $1.16bn, up 36%.  Axon reported profit after tax of £20.2m and revenue of £204.5m for the year ended December, 2007…..Stephen Cardell, chief executive of Axon, said the takeover premium was “fairly reasonable”, even though it lagged other recent UK IT services deals.  “If you look back in Axon’s history, we are highly impacted by the cycle.  We ride high when the cycle is up and come down hard when it’s not.”…..

Reference : http://www.ft.com/cms/s/0/c58dea5c-72a0-11dd-983b-0000779fd18c.html