A TiVo Acquisition Would Be Cheaper Than It Appears

Jul. 5.11 | About: TiVo Inc. (TIVO)

On May 13, 2011 I published an article titled “Microsoft Should Buy TiVo Next.” This was after the announcement that Microsoft (NASDAQ:MSFT) was acquiring Skype.

On July 1 Bloomberg published an article titled “TiVo Takeover Totaling $2.4 Billion Seen After Battle with Dish”. The article was written after Janney Montgomery Scott suggested in a research note that Tivo would be a good acquisition target for Google (NASDAQ:GOOG), Microsoft, or Rovi Corp (NASDAQ:ROVI). TiVo’s stock increased over 5% on the back of this note.

The $2.4 billion price for TiVo assumes an acquisition price of $20 per share, which would be an 85% premium to TiVo’s July 1 closing price of $10.83. Since TiVo is not currently profitable it is difficult to point to multiples to justify the acquisition price. The rationale for an acquisition of TiVo would be a strategic move to acquire the best cable set top box interface and TiVo’s intellectual property, which has a more tangible value post the $500mm settlement with Dish.

When thinking about the true cost of a TiVo acquisition there are multiple components of value that need to be considered:

  • Post the initial cash payment from the Dish settlement Tivo has a net cash position of $480mm or $3.75/share.
  • Dish also has to pay Tivo $33mm per year from 2012 through 2017. On a present value basis this is worth $150mm or approximately $1.20 per share.
  • Tivo has over $250mm of deferred tax assets that, if acquired by a profitable company even with the section 382 limitation, could be worth another $150mm or $1.20/share.
  • Tivo is engaged in multiple patent litigations that post the Dish settlement are more likely to be settled in the short-term.
  • If the acquirer is engaged in a patent fight with Tivo (e.g. MSFT) the acquirer would save the litigation cost and cost of any potential settlement by acquiring Tivo.

Therefore, a $20 price for TiVo to a profitable buyer, is arguably $13.85 per share, which does not include further patent litigation settlements or the benefits of ending a patent dispute through acquisition. So if an announcement crossed that tape that TiVo has been acquired for $20/share the acquirer could view the actual price tag as $14 or less.

Disclosure: I am long MSFT, TIVO.