4. Art of the Deal:
IDT and Net2Phone
(there is also a blurb in url re what vonage is facing)
[imo, idt should have simply let ntop run forward, but howard jonas is personally going to run the ntop development at idt, so there is a reason, for idt ... and maybe need given the legacy telecom competitive pressure idt is feeling ...; what happens to delta three at at&t with at&t's call vantage in the picture; what happens to packet8 if at&t buys bell south. and ntop is still white labeling voip for mci ... with verizon using delta three. nothing public; but been that way since june 2005, when idt made the offer for ntop shares. net2phone needed to stand alone, out in the open, and that may have been better for idt ... but idt, if it needs a voip solution (and howard jonas seems to think so), would have had to pay to do business with ntop in a professional business arrangement, just as ntop's cable and telecom partners do ..)
mercatorcapital.com
IP Communications Newsletter
On February 17, IDT Corporation formally announced its acquisition of Net2Phone Inc. At face value, this deal sounds fairly simple, but as with many things in the ever-changing world of IP, this deal was not quite straightforward. We feel that this deal is of interest for several important reasons, which is why it is our “Art of the Deal” feature for March.
Both IDT and Net2Phone are IP pioneers, and N2P was actually spun out from IDT in a 1999 IPO that eventually saw N2P’s market valuation reach over $4 billion with a share price of $85 at the height of the bubble. Although IDT had always maintained some ownership in N2P, the companies have operated independently since the IPO. However, since late 2004, IDT has had controlling interest when it acquired Liberty Media’s share of N2P. That deal gave IDT a 41% share stake and 57% voting control of N2P.
The current deal was done at $28.1 million, or $2.05 per share for the shares IDT did not own – a far cry from the $85 share price in 1999. This latest deal follows two tender offers made by IDT last June at $1.70 per share, and again for $2.05 in December. When finalized, N2P’s NASDAQ shares will be deregistered, and they will again become wholly owned by IDT, though N2P will continue operating under its existing name. SEC filings indicate that the acquisition was unanimously approved by both boards of directors.
Note how this deal has been described as both a merger and an acquisition. This is one of the twists of the story. In straight up financial terms, this is an acquisition – no ambiguity there. It is also a merger in that both companies will continue operating, and it is not clear yet how management will run the businesses. N2P is really just returning to the fold, and time will tell if their brand name will live on, either within IDT, or perhaps down the road with someone else should IDT choose to divest.
The financials do not suggest any hidden value in N2P that somehow IDT will unlock. As such, the question of why still remains, as well as why the on-again off–again process took so long. The deal’s financials translate into an enterprise value of about $110 million on annual sales of about $80 million; fairly valued, but by no means a high multiple relative to other telecom service providers.
N2P certainly has longevity in VoIP, and a strong international presence – but so does IDT. Perhaps N2P’s greatest asset is their turnkey, hosted VoIP solution, which is deployed primarily by smaller cablecos looking to add VoIP services, similar to Deltathree’s turnkey offering for Verizon and SBC.
A closer look at each company’s operations and current directions provides more clues. First is the wireless market, which still supports all comers. N2P is about to enter the market with a mobile offering, and IDT has carrier arrangements already in place. This would make it easy for N2P to launch or support an MVNO offering. Another benefit will be cost reductions for VoIP transport. IDT has termination agreements across the U.S. with various CLECs, and having N2P in-house means cheaper termination, as N2P will no longer need to pay a mark-up to IDT. A third area is shared R&D expertise. This is a real strength of N2P, and IDT stands to benefit by leveraging N2P’s capabilities to drive more innovation for IDT. As recently as December 2005, N2P was awarded their 31st patent, which helps cable operators better manage the flow rate of network status messages. And finally, there should be some natural efficiencies in operations and administration from any functions that can be shared by both companies.
Initially, N2P focused on the retail VoIP space, and has routed “billions of VoIP minutes globally”. In 2003, they made a major shift into wholesale VoIP, which is how their focus on cable telephony evolved. Their strategy seemed correct, and the timing was right, as evidenced by their ability to raise $58.5 million to support this in a stock offering. Before broadband operators like Vonage were a factor, few residential VoIP platforms existed, and N2P sought to capitalize on their experience to provide cablecos with a quick route to market with VoIP. In fact, Vonage took the same path initially, as they recognized the difficulty at that time of competing head-on with the incumbents.
N2P does, in fact, have a very attractive turnkey platform for cablecos, and they have established a niche serving Tier 2/3 operators. Their solution is PacketCable compliant, and supports both SIP and carrier-grade VoIP. This means that their customers can offer both primary and second-line VoIP, as well as the ability to bundle and bill multiple services. N2P has deliberately chosen to focus here, since these cablecos are more likely to outsource VoIP than major MSOs. By choosing this path, N2P has not developed a high profile in the cable telephony space. This has led to a perception that N2P cannot compete for Tier 1 business, which is not good news for their share price. The reality is that they have chosen to not compete there, and have in fact come to dominate the Tier 2/3 cable market for outsourced VoIP.
Any of the above are plausible reasons behind the merger, but none really jump out to explain why as well as why now. Perhaps IDT is looking for N2P to grow their cable customer base as an entry point for the content produced by IDT’s various entertainment companies. Or they may simply have wanted to acquire the balance they did not already own. Regardless of the reasons, the deal is done, and the consolidation in the VoIP sector continues. |
