11. Structure analysis
11.1. S TRATEGIC GROUPS
11.1.1. Investment firms
Figure 11.1. Strategic Groups of the Internet Industry
11.1.1. Investment firms
An investment firm is financial institution that invests in securities issued by other companies and sell shares to individuals. A definition of investment companies according to
investopedia.com, a financial content provider, is “A corporation or trust engaged in the business of investing the pooled capital of shareholders in the financial instruments of other companies.” (www.investopedia.com, 2007). Some successful new technology firms have very good economic developments, and are therefore very interesting targets for investment firms and financial institutions.
New ventures and especially new technology ventures are desirable targets for many investment companies, due to their abnormal growth potentials (Copeland et al, 2000).
Commonly for all serious investment firms are diversified portfolios, to spread the risks (Grinblatt & Titman, 2004). This means that the investment company, acquiring Internet firms, is not only interested in new technology ventures, but is also investing in totally different industries.
11.1.1.1. CLS Holdings
CLS Holdings plc (CLS) is a property investment company, which has been listed on the London Stock Exchange since 1994. The company has a property portfolio in London, France, Sweden and Germany valued £1,156.9m (US$2,142.4m, June 2006, company data). CLS invests in properties and equities to spread the portfolio.
Significant acquisitions:
At the end of April of 2006 CLS acquired the remaining shares not already under its
ownership in the youth community website, Lunarstorm (www.lunarstorm.se), of Lunarworks AB. The shares were acquired at a price of SEK 35 per share (£2.59 = US$ 4.63), valuing Lunarworks at approximately SEK 374 million (£28 million = US$ 50 million). The cost of the entire investment for CLS is £17.0 million (US$ 30.4 million, SEK 228.8 million).
Lunarworks consistently generates both cash and profits in its home market Sweden. ULS Holdings advocates a significant value creation as the business expands internationally (Company data, website, 2007).
Lunarworks AB’s Lunarstorm is a community targeting youths in Sweden between 12-24 years old. The average age is 18,1 years old, and 71 percent of Sweden’s 15-20 year olds’ are members of the community. Lunarstorm is the busiest Internet site in the Scandinavian (Nordic) countries, with 1.3-1.5 billion site figureions per month and 370,000 unique visitors per day (company facts, Lunarworks AB, 2007). Approximately turnover in 2006 was SEK 90 million (US$ 12.9 million) (DI, 2007).
11.1.1.1.1 Synergy relation
Analyzing why CLS Holdings bought Lunarworks AB, and what they paid for gives that CLS is investing capital in attractive ventures. Since the core business of CLS is property
investments, the new technology investment is noteworthy. Obviously, CLS is not buying any new technology or new competence. Neither do they acquire any significant marketing or distribution channels, or strategic alliances. The acquisition of Lunarworks AB seams to be a pure investment, which hopefully will generate a significant return in the future.
11.1.2. Media Groups
Media groups can be described as groups which encompass the production of:19
• Books, newspapers, journals, consumer magazines and comics
• Online content
• Recorded music
• Film and video/DVD/Blue-ray
• Radio and television broadcast content
• Theatrical content and operation of theme parks
• Computer games
Irrespective of which segments the media companies are working, the main activity is to reach an audience, no matter if it is books readers, television viewers, or web surfers.
New technology firms and Internet sites have become significant targets to control, in order to manage a wider scope of a media audience. According to an article of Court et al (2005) traditional marketing models are challenged and have already faced a declining effectiveness of mass advertising, that traditionally was earmarked to media formats like television,
newspapers, and magazines. The proliferation of media and distribution channels, multitasking by consumers, declining trust in advertising, and digital technology are all undermining traditional approaches to marketing (Court et al, 2005).
19 I will disclaim the list as a comprehensive definition of Media Groups. The list’s purpose is only to display some Media Groups’ operations in order to define the Media industry.
1.9
Media Consumption1 in United States, 2003, per day Hours per person
1Normalized for selected media only; may include multitasking
213-24 age group
Figure 11.2 Fragmented attention, Court et al (2005)
Court et al (2005) estimates that television advertising could be only 35 percent as effective as it was in 1990. Recent trends on B2B marketing are likely to be similarly dramatic as
sponsorship events and trade magazines become less effective, although the impact is harder to measure.
Because of the proliferation of media channels, the giant Media Groups faces a significant challenge to reach the younger target group. The Internet consumption increases every year, simultaneously as the time spent on television, newspapers, magazines, and books are
decreasing (DI, 2007). Internet has become an important distribution channel for younger age groups, which is why an aggressive competition of the new online medias can be witnessed worldwide right now.
11.1.2.1. Modern Times Group, MTG
Modern Times Group, MTG AB is an international entertainment-broadcasting group with television as its core business. The headquarter is located in Stockholm, Sweden why its associated as a Swedish media company. MTG was formed out of the holdings of investment
company Kinnevik. The business divisions of MTG are:
• Viasat Broadcasting comprises MTG’s broadcasting business and is the largest business in the group
• MTG New Media, a company that comprises all of Modern Times Group’s online and interactive businesses within Viasat.
• Modern studios incorporates companies which produce and distribute TV productions and films
• Home Shopping contains online retailing and TV-shopping
• MTG Radio is largest commercial radio operator in the Nordic region and Baltic countries.
Significant acquisitions:
MTG’s acquisitions are mostly related to traditional media as television and radio (company web site, 2007). However, in year 2006 MTG New Media acquired 90 percent of the issued share capital of the Playahead online social networking community. The cost of the entire investment for MTG is SEK 102 million (US$ 14.6 million).
Playahead is Sweden’s second largest Internet community, after Lunarstorm, with over 530,000 members. Its Swedish operations generated more than 50 percent year on year revenue growth (Company data, company web site, 2007). Approximately turnover in 2006 was SEK 25 million (US$ 3.6 million) (DI, 2007).
11.1.2.1.1. Synergy relation
Analyzing the acquisition of Playahead, gives that MTG is valuing the channels to reach a specific audience, in this case youths between 15-25 years old. MTG is acquiring new marketing channels as well as distribution channels in the acquisition of Playahead. The distribution will foremost comprise in-house media material.
Due to the novelty of strategic Internet community acquisitions, many companies like MTG buys Internet communities and similar operations, in order to prevent others to acquire them.
These actions are strategic, and prevent other companies to reach an audience of hundreds of thousands, many times without having a clear corporate Internet strategy though. Due to the novelty of commercial Internet operations for MTG, the acquisition also indicates the obtaining of new competence as preparation for future operations.
11.1.2.2. Schibsted
Schibsted is a Scandinavian media group with around 8,500 employees and operations in 20
countries. Its headquarter is located in Oslo, Norway. Schibsted’s domestic markets are Norway and Sweden, and have currently presence in newspaper, television, film, online, mobile phone, book and magazine media. Schibsted had a turnover of NOK 9.8 billion in year 2005.
Significant acquisitions:
Schibsted is one of the heaviest investor of online products and concepts, and has during the recent years acquired a considerable share of the online market in the Scandinavian countries (Company data, company web site, 2007). Schibsted has a clear online focus of the media of tomorrow is controlling the most profitable Internet newspaper, aftonbladet.se, which has helped the company to fast pace growth (schibsted.no, Interviews, 2007).
Blocket.se was acquired in 2003 and is a C2C electronic auction. The cost for Blocket.se was SEK 183 million (US$ 22.9 million). In year 2006, Schibsted acquired the last 18 percent of the electronic auction, and is now controlling the site to100 percent. The cost of the past 18 percent was set to SEK 297.2 million (US$ 40.2 million), and the value of the web site is set to SEK 1.65 billion (US$ 223.7 million) (www.aftonbladet.se, 2007., www.schibsted.no).
Blocket.se has approximately 2,600,000 unique visits per week (KIA index, 2007).
Hitta.se was acquired in 2005 and is a information content provider. The cost of the hitta.se acquisition was SEK 200 million (US$ 26.8 million). The site has approximately 2,000,000 unique visits per week (KIA index, 2007).
11.1.2.1.2. Synergy relation
Schibsted has been noticed because of their heavy Internet investments during the recent years.
At the same time, their most successful e-paper, www.aftonbladet.se has won awards for their functionality several years in row in Sweden, indicating that Schibsted has a good Internet strategy. The acquired operations quoted above are, after the acquisition, all integrating with each other, thru the main e-paper. Relating this to synergies, it will foremost be marketing and distribution channels, facilitating marketing and distribution of their own content. Since Schibsted is a Media Group and its core competence would be media content, one can argue that Schibsted also is obtaining new technology and new competence, when acquiring sites that are fully developed like the quoted ones above. Comparing the synergies as new technology and new competence to the marketing and distribution channels, the latter will represent the major part of the acquisition’s value.
11.1.3. Technology firms
Technology firms, in this context are companies with a special interest in new technology development. Referring to the definition in Chapter 5.2, Damodaran (2001) advocates two groups of firms that are designated as technology firms. The first group includes the
companies like Cisco, Microsoft, HP, IBM, and Oracle that deliver technology-based or technology-oriented products. Companies like high growth telecommunications, Nokia and Ericsson, can also be classified to the first group. The second group, referring to Damodaran (2001), contains firms that use technology to deliver products or/and services that were delivered by more conventional means until a few years ago. In the relative short era of IT-business, Amazon.com has become a symbol of the second group of technology firms, and worldwide successful e-commerce.
The group of interest is the first group, companies that deliver technology-based products, specifically software.
From an exit perspective, technology firms might be interested in an acquisition of several reasons:
• Direct competitors – The firm of interest, MindValue, are providing a similar solution as the technology firm itself. The interesting part is that small start-ups have serious potential to compete with big corporations, due to ease of spreading on the Internet. Small firms can act big, but remain small.
• New technology – The firm of interest is developing something that does not exist anywhere else. In this case it might be software with patent.
• New competence – The brainpower of the firm of interest is highly desirable for the acquiring firm.
11.1.3.1. IBM – International Business Machines Corporation
IBM is an information technology (IT) company, creating, developing and manufacturing advanced information technology, computer systems, software, networking systems, storage devices and microelectronics (IBM company website, 2007). IBM also provides business, technology and consulting services. Its major operations encompass a Global Service segment, A Systems and Technology Group, a Software segment, a Global Financing segment and an Enterprise Investment segment.
IBM has three principal segments: Systems and Financing, Software and Services. The majority of it's enterprise business, which excludes its original equipment manufacturer technology business, occurs in industries that are grouped into six sectors: financial services, public, industrial, distribution, communications and small and medium business (NYSE, 2007).
Significant acquisitions:
An enterprise sized as large as IBM constantly conduct strategic acquisitions. During the year of 2006 IBM conducted three large acquisitions in software companies, ranging from US$
740 million to US$ 1.6 billion.
One of the recent acquisitions with relevance for this report is IBM’s bought of ISS, Internet Security Systems. Internet Security Systems develop security products and services,
protecting IT-systems. ISS was founded in 1994 and has about 35 offices in 20 countries globally. The cost of the acquisition was set to US$ 1.3 billion.
Analysts state that the acquisition of ISS announces IBM’s desire to raise its profile in fast growing segments of the IT-market (IBM, Company data, 2007).
11.1.3.1.1. Synergy relation
From the press release of IBM’s acquisition of ISS in 2006, following quotation can be read:
“This acquisition advances IBM’s strategy to utilize IT services, software and consulting expertise…”(IBM corporate information, 2006). Referring to the synergies, the value in this acquisition is clearly the new technology and new competence prior to marketing and distribution channels.
11.1.3.2. HP – Hewlett Packard
HP (Hewlett Packard) is a provider of technology solutions, products, and services to individual consumers, small and medium-sized business (SMBs), large enterprises and
institutions globally. The company’s offerings span over a wide specter covering IT structure, global services, business and home computing, and imaging and printing. During the fiscal year 2006, HP's operations were organized into seven business segments: Enterprise Storage and Servers (ESS), HP Services (HPS), Software, the Personal Systems Group, the Imaging and Printing Group, HP Financial Services and Corporate Investments (NYSE, 2007).
Significant acquisitions:
In 2005 HP acquired Trustgenix Inc., a leading provider of software federation solutions that establish secure, privacy-protected exchange of user data among cooperating organizations.
Trustgenix offers federated identity management software that supports all open federation protocols and integrates with any identity management system or homegrown single-sign on
system, which has significant similarities with MindValues own solution
"Identity federation appeals strongly to companies in the telecommunications, financial services, manufacturing and government industries," said Todd DeLaughter, vice president and general manager, OpenView Business Unit, HP. "Adding Trustgenix solutions to OpenView will bolster our efforts to help customers securely and quickly expand their enterprises to include business partners." (HP company website, 2007).
Trustgenix uses industry-standard federation protocols to link multiple accounts with different providers on the Internet so that secure user authentication occurs only once. When a user navigates to different sites belonging to the same federation, Select Federation, a solution of Openview Business Unit, HP, recognizes the user and is able to provide a secure, personalized experience based on the user's preferences and identity (HP company website, 2007).
Financial terms of the transaction were not disclosed.
11.1.3.2.1 Synergy relation
Similar to the case of IBM and ISS, HP’s acquisition of Trustgenix was an acquisition of new technology and new competence as well. The press release did not disclose any technical details of the transaction, but if Trustgenix owned any patents related to the operations, an acquisition of the technology is an efficient solution to strengthen HP’s competitive advantage.
11.1.4. Direct Competitors – Pure Internet firms
The direct competitors in this context are competitors that operate purely on Internet, with a wide range of products and services. Referring to MindValues business plan and competitor analysis, there were only one (1) out of fourteen (14) competitors that could be classified as a direct competitor, providing the same solutions as MindValue does. The direct potential competitor provides an e-payment solution, and has similar ideas of how to grow its business as MindValue. This specific company might be a potential buyer of MindValue or vice versa, since it is also in an early growth phase.
Direct competitors in an angle of an exit, in this report are pure Internet companies, defined as the second group of new technology firms (Chapter 5.2, Damodaran, 2001) which operates purely on the Internet.
Similar to large technology and new technology enterprises like IBM, Microsoft, and HP,
giant Internet firms like Google and Yahoo!, constantly conduct strategic acquisitions, in order to maintain or become market leaders (Grant, 2005., FT, 2006). On par with many other successful Internet firms, these direct competitors have expanded their business extremely fast into a wide range of products and services. Because of a fast pace of expansion into new markets, and a widening of the products and services park, these direct competitor companies are always important from an exit point of view of newly start-up companies.
11.1.4.1. Google Inc.
Google Inc. offers advertising and Internet search solutions, as well as Intranet solutions through an enterprise search appliance. Google Inc. offers a wide range of products and services thru Google.com and had a market share of the US search engine market of 49.2 percent in 2006 (Yahoo! Finance, 2007., Nielsen NetRating, 2007).
Significant acquisitions:
Google Inc’s acquisition of YouTube in 2006 was an important strategic action, referring to the outline of chapter 13.1.1 – the competition of young peoples media habits. YouTube is a video-sharing site, where anyone can upload their content and share it. The cost of the acquisition was US$ 1.65 billion (FT, 2006).
11.1.4.2. Yahoo! Inc.
Yahoo! Inc. and its subsidiaries provide Internet services to users and business worldwide.
Similarly to Google, Yahoo! is a portal, providing primarily search services, but offers also a range of online tools and marketing solutions to business. Yahoo! is number two in the search engine market, with a market share of 23.8 percent in 2006 (Yahoo! Finance, 2007., Nielsen NetRating, 2007).
Significant acquisitions:
Yahoo! Inc., like Google constantly conduct strategic acquisitions, in order to maintain first mover advantages in new markets. The giant search engine’s buying pattern makes it interesting for newly start-up companies in an exit context.
In 2006 Yahoo! Inc. acquired the Swedish based start-up company Kenet Works. Kenet Works provides a technology, which enables visitors of an online community to “chat” on
their cell phones, and to use other functions such as push-to-talk. Yahoo acquired the Stockholm-based 13-man company in 2006, for at least US$ 23 million
(www.stockholmbusinessregion.se, 2006).
Kenet Works was founded in 2003 by seven civil engineers (MSc. in Engineering), led by CEO, Gustav Söderström from the Royal Institute of Technology in Stockholm (KTH).
11.1.4.3. Synergy relation
The synergies of Google’s and Yahoo’s acquisitions are the benefits of first mover advantages.
In terms of synergy, first mover advantages can be seen as strategic alliances, where both companies benefit from a merge. The big companies like Google and Yahoo benefit from the novelty of content and the smaller acquired firms benefit from a fast expansion and a
contribution of venture capital. In some cases, new technology in terms of patents can be a synergy that raises the value as well as marketing and distribution channels. The acquisitions of YouTube and Kenet Works are examples where many synergies occur concurrent. The novelty of YouTube vouches for a first mover advantage, and its content is an important marketing and distribution channel. The technology of Kenet Works may be patented, why the new technology is important to acquire, as well as the new competence connected to the technology. Often the original management team is obligated to stay in its position for a period of time after the acquisition, to ensure that the new competence acquired does not disappear, but also transferred to new manpower.
12. Analysis of a potential exit situation of MindValue
The exit possibilities for an Internet start-up company are currently very positive (DI, 2007;
MindValue, company data, 2006). There are several examples of successful exits of new technology firms made the past years (Appendix). The aim with this report is to analyze and identify the value drivers, which gives a specific company competitive advantage enough to differentiate from others.
Referring to the chapter of exit strategies (3.1) the most likely exit for a new start-up firm will be an acquisition, due to negative fulfillments of the requirements of the other exit situations. The other exit strategies are not suitable enough, because of the requirement of healthy liquidity, which start-ups mostly do not benefit of
(www.bizplanit.com, 2006). In order to become attractive enough for a larger firm the value drivers that creates future profit must be accentuated, which also can give answer to the first question of issue of this report:
“What can a start-up firm do in order to become valuable for an acquisition firm?” and
“What can a start-up firm do in order to become valuable for an acquisition firm?” and