It was a real surprise to see the acquisition of Icera by Nvidia earlier this week.

- One, for some reason I always had Icera and Picochip as two possible UK contenders for an IPO rather than a sale.

- Two, Nvidia. Yes, they are both focused on the mobile and tablet market but two very different segments of the value chain.

- Three, $367 million for a company which has had about $250 million invested in it by VCs since 2002. Good returns, not blockbuster.

So, let’s look at each of these points:

IPO scenario: We have looked at the IPO scenario on the FTSE in a previous post. 2009 saw an overall outperformance by listing IPOs. However in 2010 valuations trended downwards prior to IPOs for a risk-wary market. Economic outlook both for country and market as well as company forecasts were being looked at askance. In fact, IPOs in London were actually at third place after the US and Hong Kong stock markets. Not the ideal scenario for a high revenue generating but not necessarily as profitable a business; or for one still needing huge funds to meet their R&D requirements.

Why Nvidia: Nvidia has been focused on the entertainment element (i.e. graphics, image processing, computing) of PC, tablet, mobile devices, PMPs, navigation devices etc. In their own words ‘ Our business strategy leverages our ability to design and develop programmable GPUs, system I/O processors, system-on-chip processors, application programming interfaces for multiple operating systems, and application programming tools and middle-ware to provide our customers with platforms that allow superior performance and utility beyond the base capability’.

The Icera acquisition is in keeping with their focus on the development of low power mobile system-on-chip products. However it is a huge step marking an entry into the communication end of the chain.

Icera provides low power baseband solutions for the mobile segment i.e. the entire modem implemented in software on a single core processor. In effect, it is a software defined multimode receiver for 2G/ 3G/ LTE.

So the commonality – mobile focused and software defined.

As the two companies put it, the acquisition brings together the two main processors in any smartphone – the application processor and the baseband processor. One would expect this to deliver faster development of the next generation of mobile computing products.

It wouldn’t be all that surprising if Intel woke up one morning and decided to acquire Arm or Imagination Technologies. However the transaction came as a bit of a surprise because nVidia seemed very happy to continue focusing on their niche in various discussions with the firm. Still – a smart decision. Their stock had been taking a bit of a hammering in recent times.

Pricing: Lets take a look at the investors in Icera – an absolute rollcall – Accel Partners, Amadeus Capital Partners, Atlas Venture, Balderton Capital, DFJ Esprit. Debt financing was provided by ETV Capital and MMV Financial Inc and then by SVB in 2011.

Investments have been made since 2002 but in more recent times, Icera raised $45 million from the VCs in 2010 and then a further $10 million from SVB in 2011. Not particularly self sustaining, was it? And then if you look at the VCs - Amadeus, not sure when they last raised a fund and well, there is a limit to the depth of VC pockets. Atlas Ventures has long since packed their bags and moved to the US. DFJ’s presence may have to do with their acquisition of the 3i VC portfolio though they did invest out of their own fund last year, to keep a hand in I suppose. That leaves Accel and Balderton with relatively recently raised new money.

In 2010, Icera was talking about an IPO at a market cap of £618 million ($1 billion). But considering the state of markets, perhaps, even Accel and Balderton’s patience ran out.

And so we have an acquisition for $367 million. No, not stellar by any means. How can you not help but wonder if the story would have been different across the pond.....

Pond Ventures is a VC I have been following for quite a while now. The first interaction was while working on an early stage fund-raising for a semiconductor firm in early 2008. While searching for VCs who may be interested, it was disheartening to note how few there were – that is firms interested in investing in:

-        Early stage

-        Capital intensive

-        Semiconductor

Pond Ventures was the only one which fit the bill on all counts. There were a few others but they had diversified portfolios. Pond had a very semiconductor focused portfolio which was quite surprising for Europe. But then unfortunately I didn’t see much activity from them over the last 2-3 years; had started wondering if they have gone under and have just enough financial bandwidth to do follow-ons in existing investments. It does happen to the best of us.

Well, I haven’t seen them raise any new funds but on a positive note they have had a spate of interesting exits. So let’s hope that their model of a ‘capital efficient investment model...to commercialise ground-breaking technology’ continues for some time (http://www.thedeal.com/magazine/ID/038545/community/a-new-model-for-vc-investing.php). After all we can’t have all venture capitalists investing in facebook, groupon, color and other social/digital media upstarts, can we?

Some of the recent Pond exits:

Nanotech Semiconductor was acquired by Gennum Corporation (6^th April 2011) for $34 million with $6 million in potential earn-outs over the next twelve months. The firm is focused on analog and mixed signal driver and receiver ICs for fibre optic networks. Revenues for the FY 2010 were $7.4 million; a 5x P/R exit. They have received $13.5 million of total investments since 2005; approximately a 16% IRR.

Gigle Networks was acquired by Broadcom Corporation (22^nd November 2010) for $75 million with $8 million in earnouts. The firm focused on S-o-C solutions for home networking on power lines. The firm received $31 million in investment over 2006-07; a 24% IRR.

4Home was acquired by Motorola (3^rd December 2010). The firm focused on energy management, home security, home health and media management through a carrier grade software platform. The firm had raised $9 million in funding. Terms of the transaction not disclosed; hence no IRR calculation.

Broadway Networks was acquired by Finisar (20^th September 2010), all cash transaction, terms not disclosed. The firm had developed a pluggable transceiver that allowed switches and routers to connect directly to passive optical networks.

They still have a few other investments like PicoChip, Mirics and Acco in their portfolio. All in all nothing sensational in terms of exits but slow and steady. I wonder if such a performance helps in raising a new fund. I would sincerely hope so. After all someone has to invest in hard core R&D and technology innovation.

I have been meaning to write a paper on the mobile payments industry for a very long time but for some reason or the other the task kept getting postponed. And now I find FirstPartner has done an excellent coverage of the market space. So why re-invent the wheel. For those interested, a visit to their website is certainly warranted (http://www.firstpartner.net/research-releases/downloads-market-maps/).

The topic is all the more sujet du jour thanks to all the talk from major handset vendors about all phones being NFC enabled over the next few years. The Samsung Nexus S is NFC enabled as will be the next Apple iPhone. RIM too will be launching their NFC enabled version by the end of the year. A previous look at the NFC growth (http://www.seedcatalyst.com/joomla/market-trends/mobile-payment-arrives-finally)

I was once asked what mobile payments encompassed and how it was different from m-commerce. Well, m-payments would be anything ranging across fund transfer, over the counter proximity payments, bill payments, account check, ticketing, mobile purchases and now even virtual good payments...the list is long. M-commerce is one sub-set of this world.

FirstPartner has split mobile payments into the various sub-categories of

-        digital content, app stores, social media

-        m-commerce and utilities and finally

-        physical retailer and transit.

They have listed these as individual categories but I have grouped them such because the service provider will tend to vary according to these sub-categories. The first bullet is addressed by micro-payment providers linked to banks or operators. The second i.e. m-commerce can be bank transactions, utilities payments, online ticketing and can be provided by banks or platform providers linked to these banks. Finally we have NFC-based mini-payments which would include transport, the morning cuppa at Starbucks or supermarkets. The players here are diverse because the service overlaps across banks, handset vendors and platform providers. Operators and SIM card vendors are the one category which could be eliminated from the value chain but they are trying their best to remain relevant!

So that brings us to the common element across all - platform providers. In most cases, account check, bill payment and fund transfer (m-commerce) are being provided by banks with a downloadable mobile application from a provider e.g. Monitise. If the service is bill payment, mobile purchases and fund transfer but not integration with the bank account, the scope of participants increases to include operators tied up with emerging payment service providers such as Obopay, Paypal, Bill2Mobile etc.

Emerging markets have operated slightly differently due to the maturity of a different set of players i.e. banks and operators rather than platform vendors.  In terms of services, mobile enabled fund transfer and mini-payments take on a significant role due to the financial exclusion of a significant proportion of the populations. We have looked at the sector before (http://www.seedcatalyst.com/joomla/new-developments/mobile-banking-the-multi-dimensional-opportunity) where local operators have tied up with banks enabling banking transactions as well as transfers. However the platform vendors are also gradually maturing. For mobile purchases, there are home-grown payment service providers such as Eko Mobile (http://www.seedcatalyst.com/joomla/market-trends/financial-innovation-shades-of-emerging-and-developed-markets-in-mobile-banking) and Obopay. In fact, not to get outdone, recently Western Union has signed an agreement with State Bank of India, one of India’s largest banks with 100 million subscribers, enabling a WU mobile transfer from anywhere to an SBI account via a mobile transaction.

I think the significant development we need to see is that the traditional payment providers are not left behind in the battle for the mobile handset. We are gradually beginning to see the two worlds merging together. A recent transaction which exemplified this trend was the acquisition of Playspan by Visa. Playspan is an online game monetization-as-a-service provider. A leader in the micro-payments market, they will further drive Visa’s presence in the m-commerce and digital payment domain. There are still a number of players like Bango, Boku et all in this space waiting for Mastercard to wake up.

Another sub-sector which needs integration is enablement of mobile payments at physical retail outlets aka proximity payments. There has been recent news of Visa showing an interest in start-up Square. The firm has created a small device which enables any mobile device to accept credit card payments. Will there be an acquisition? It’s hard to believe that Visa would acquire a hardware manufacturer. However that is a sector which certainly needs closer integration.

Perhaps a way forward for them would be with a firm like Obopay. Doubt they are up for acquisition though?

I was recently in a discussion with a colleague about the spate of consolidation underway in the IPTV and online video sector. There are a number of factors driving the M&A activity:

•   There is an increasing emphasis on place-shifting video in addition to the ability to time-shift content. As a result technology providers need to consolidate horizontally and enable solutions across the multiple markets and modes of content delivery i.e. terrestrial, cable, satellite, broadband, over-the-top and increasingly mobile.

•   There is a focus on vertical expansion as players move into new technologies along the value chain to address pricing and margin pressures. The trend is towards increasing percentage ownership of the complete solution. Hence the movement of encoding technology providers into ingest, DRM, CAS, billing and other delivery solutions or the movement of equipment vendors into middleware and customer premise equipment.

I think the diagram below illustrates this ‘movement’.

•   Third, a huge chunk of the transactions are also distressed deals. As the larger players consolidate and acquire adjacent technologies, smaller vendors with niche technologies find themselves increasingly isolated and struggling to address telco requirements. Raising funds to continue operations has also been increasingly difficult in the current economic environment making them easy bolt-on technology acquisitions.

Here are a few examples of the deals we have seen over the last 12-18 months.

HORIZONTAL EXPANSION ACROSS MULTIPLE MODES OF DELIVERY

June 2010 saw the acquisition of the real-time video transcoding firm Ripcode by RGB Networks in an all-stock deal. RPG Networks provides a video processing gateway which enables the delivery of a single video feed to multiple devices. Ripcode with its focus on on-demand and streaming video for mobile devices enabled their entry into the cellular frontier. The newly combined company has a valuation today of over $220 million.

At the same time we saw the acquisition of ExtendMedia by Cisco in September 2010. The acquisition reinforced Cisco’s focus on video by extending their coverage across multiples screens (IPTV, web and mobile) and across the lifecycle from ingest to monetization middleware. ExtendMedia provides content management across ingestion, DRM, billing, ad insertion and campaign management with their solutions implemented at the operator end. At $80 million, internet reports claimed the transaction was a 4-5x multiple on revenues.

We may still see some horizontal developments in the CPE market space. Currently CPE providers have been focused on the traditional – terrestrial, cable, satellite - markets or else gateways like Boxee, Hulu have laid claim to the over-the-top video market. Integration across these markets is rare as is integration with mobile services.

VERTICAL EXPANSION INTO NEW MARKETS AND TECHNOLOGIES

One of the most acquisitive players in recent times has been Google. In our market segmentation, the company would be positioned both as an internet platform provider (Youtube) as well as a CPE middleware vendor (Android/ GoogleTV).

August 2009 Google announced they were acquiring video compression technology provider On2 Technologies for $133 million. On2’s compression and encoding technologies enable video delivery on desktops and mobiles and claim better quality than the industry standard H264.

December 2010 Google acquired Widevine Technologies, a digital right management and video optimization firm. For the lay person, DRM services range from encryption to watermarking – encryption of content and insertion of watermark.

A digression - with growth in over-the-top video delivery services and the focus on multiple screens, DRM and watermarking services are gaining in importance. This will increase further with the provisioning of premium content online and on-demand by studios. One of the positive regulatory initiatives for the DRM and watermarking industry was the decision by the FCC in May 2010 permitting ‘unprotected outputs on set-top-boxes (STBs) to be disabled for video on demand (VoD)’.

Another positive development is the technological innovation in watermarking. Previously, watermarks were inserted in the baseband video after the content was decoded at the STB for display. Therefore, the technology needed integration with STB chipsets and was limited in scale and scope. Now an encrypted watermark can also be inserted at the head-end. At the CPE end, a software program or assembly extracts the digital watermark which in turn provides the key that is able to decode and play the media file. In addition if the output from the STB is being distributed illegally, the watermark will be inserted into the video stream thus identifying the source.

We should be seeing more activity in this space.

Anyway, coming back to consolidation in the head-end middleware arena, Feb 2010 saw the acquisition of Bitband by Motorola for $10 million. Bitband focuses on the on-demand IPTV market with streaming servers for content delivery and other over-the-top video services for IPTV QoE. The middleware business will integrate with Motorola’s home and networks mobility business unit. In Jan 2010, Motorola acquired SecureMedia, a security and DRM provider for IP video distribution and management.

May 2010 saw Harmonic’s acquisition of Omneon for an enterprise value of approximately US$273m in a cash and stock deal. The acquisition extends Harmonic focus from video distribution to video optimised storage, production and media management systems. For the year end 2009, Omneon’s 2009 revenues were $105 million – a 2.6x revenue multiple.

At the CPE end, November 2010 saw the acquisition of Latens Plc by Pace for £28 million. Latens’ software based CAS is deployed across OTT, cable, IPTV markets and further strengthens Pace in middleware solutions.

Pace has actually been in a very acquisitive mode for their middleware expansion. It started last year with the acquisition of Philip’s STB assets followed by the French Bewan and their gateway solutions and finally US based 2Wire for $475 million in July this year. At 2009 revenues of $667 million, the 2Wire transaction is a 0.7x multiple on revenues pretty much in line with our analysis of the sector a while back. (http://www.seedcatalyst.com/joomla/market-trends/motorola-integrates-cpe-and-mobile-divisions). However, Latens is the first acquisition initiating Pace’s entry into IPTV head-end middleware.

TECHNOLOGICAL  BOLT-ON ACQUISITIONS

There has also consolidation at the video encoding end of the chain. Optibase, a provider of video encoding solutions for IPTV networks was acquired by Vitec Multimedia, a provider of video acquisition and management products for the IPTV market for $8 million in March 2010.

The watermarking sector also saw some consolidation in July 2009 with the acquisition by Civolution of the Software & Technology Solutions (STS) watermarking business from Thomson. The aim was to bring under one roof a broader portfolio of content identification and tracking technologies.

Further in December 2009, another market leader in content protection solutions, Irdeto, also strengthened their offering with the acquisition of Philips Electronics white-box cryptography patents and applications. Like Civolution, this was product enhancement rather than market expansion.

Another interesting transaction was the acquisition of Anystream by Telestream in September 2010. The acquisition enables Telestream to provide video ingest and encoding facilities across content providers, operators and now even the enterprise sector.  Terms not disclosed.

A mention is also needed here of the sale of the content distribution business of Ascent Media Group to Encompass Digital Media in December 2010 for $113 million. While Ascent’s focus is more on cable and satellite services, this is a reversal of the general trend. Ascent seems to have decided to focus more on the ingest end of the chain and is gradually moving away from distribution. We should be seeing some accretive acquisitions from them in this space thanks to their current cash rich position.

There are still several independent names – Anevia, Ateme, Conax, Dreampark, Edgeware, Verimatrix – and this continues to be a sector worth watching.

So which are the areas where I think there is scope for further consolidation and expansion:

 - CPE equipment as we see the consolidation across delivery modes and further integration with femtocells and other mobile technologies. At the chip level there has been significant activity from Broadcom over the last few months. It now needs to play out across the customer premise equipment providers like Motorola, Pace and DLink

- DRM and CAS solutions will be more and more in demand with the increasing provisioning of premium content on demand and online. Instead of partnerships we should be seeing expansion  into these technologies by both the head-end middleware and equipment vendors and platform providers

- VOD servers, real time encoders and other associated technologies being integrated with head-end equipment vendors as the industry moves from a pure sale and deployment model towards provisioning solutions in a managed services model. Rather than pay a recurring fee to external vendors it would make sense to acquire and bring them in-house.