On 8/5/09, Google (NASDAQ:GOOG) and On2 Technologies (ONT) jointly announced that Google would acquire On2 in an all-stock transaction valuing ONT at $0.60 per share (compared to $0.38 the prior day, a 57% premium) for total consideration of $106.5 million (at time of deal). On2 is a developer of video compression technology used by customers such as Adobe (NASDAQ:ADBE), Skype, Nokia (NYSE:NOK), Infineon, Sun Microsystems (JAVA), Mediatek, Sony (NYSE:SNE), Brightcove, and Move Networks. Google management stated the following in the press release:
- "Today video is an essential part of the web experience, and we believe high-quality video compression technology should be a part of the web platform," said Sundar Pichai, Vice President, Product Management, Google. "We are committed to innovation in video quality on the web, and we believe that On2's team and technology will help us further that goal."
- "...the deal's price tag of $106.5 million in stock was barely enough to give Google watchers any pause. But the size of the deal isn't seen as nearly important as what On2's technology could add to Google's efforts to increase the amount and quality of the video it brings to consumers either via its YouTube video-sharing site, it's new mobile-device operating system, Android, or other ways to bring video over the Internet to consumers. What On2 does is make video-compression software, which, in its simplest terms, is used to reduce the amount of bandwidth needed to send video over the Internet and onto computers, cell phones and other devices. When the video is compressed, the quality improves after it is accessed and viewed."
On 8/6/09, On2 announced financial results for the June quarter, posting revenue of $5.0 million (+53% Y/Y, + 24% Q/Q) and a GAAP net loss of ($224,000), or ($0.00) per share (including $420 thousand related to the proposed merger and $523 thousand in non-recurring items, partially offset by a $669 thousand one-time gain). The revenue growth was impressive, but management cautioned, "As our top-line patterns are likely to remain somewhat variable, there is no guarantee that positive earnings trends will continue into the next quarter". We include a historical snapshot of On2's quarterly income statement
on our personal blog.
Google saw value in On2's installed customer base and patented video codec technology for efficiently bringing video to mass audiences online. Per the company's 2008 10-K, On2 had the following intellectual property:
- On2 holds nine U.S. patents and has nine U.S. patent applications pending, and six international patent applications pending
- On2 Finland had five U.S. patent applications pending, eight Finnish patents, one Finnish patent application pending, and six foreign (non-Finnish and non-U.S.) patent applications pending
This brings us to Sonic Foundry (NASDAQ:SOFO), our speculative, venture capital-like holding. While Sonic Foundry's Mediasite solution is different from On2's proprietary video technology, we see some similarities:
- Strong market position with favorable long-term secular trends
- Growing, installed, happy customer base
- Patented, proprietary technology suitable for large enterprise deployments
For all we know, Sonic Foundry may remain a stand-alone company indefinitely. However, for reference, let's consider the valuation implied by the Google/On2 transaction:
- Sonic generated TTM cash billings of $19.7 million
- Applying the same six times purchase multiple yields a valuation of $118.2 million, or $2.75 per share assuming 43 million fully diluted shares outstanding
- Implied valuation is 4.4 times Sonic's current $27.1 million market capitalization (assuming 43 million shares)
As an aside, there are some interesting Mediasite presentations on Sonic's blog from the recent Campus Technology conference, including one from a Google Business Development Manager.
Disclosure: Long SOFO.