For SingTel, the price is right … well, sorta

A LOT has changed since the dotcom boom of 2001, but not the infernal math of how much a tech firm is worth, it seems.

For all that has been said about Amobee – the Silicon Valley mobile ad firm that SingTel is buying for US$321 million – not much has been said about what it is worth.

Most people on the outside of the deal have dismissed the question, a la 2001. It is enough that the deal’s price-to-sales ratio of 11 is lower than that of Google’s or Apple’s mobile ad firm buyouts, they say.

But not paying as high a multiple as a peer did simply means that you are not the largest patsy in the room. It does not preclude you from being a smaller-sized patsy.

This is not to say that SingTel has overpaid for this firm. To be able to say such a thing would mean having a better handle on what Amobee is worth. So far, beyond an annual revenue of US$30 million and earnings that some analysts understand to be ‘insignificant’, not many other numbers have been forthcoming.

It is understandable that few are particularly exercised about the acquisition, given its ‘smallish’ size relative to SingTel’s cash hoard, as one analyst said. The deal by no means puts the balance sheet anywhere near jeopardy.

Besides, analysts say, look at just how much the mobile ad market is worth. One consultancy’s figures show that global revenue will total US$6.8 billion by year-end and hit US$20.6 billion by 2015.

But the problem with neat figures about the future is that they tend to have a rather messy past. Five years ago, similarly euphoric stories were written about mobile advertising. Then, one consultancy said that the mobile ad market would be worth US$3 billion in 2010. Current figures from another firm show that 2010’s actual numbers fell almost 50 per cent short, at US$1.6 billion. Either someone is wrong or the calculations were inherently done differently, and neither possibility is comforting.

Also in 2007, analysts said that by 2012, revenue from mobile ads could be anywhere from US$5 billion to US$11 billion – a range of predictions unnerving both for its generous room for error and for the wild inaccuracy of the upper limit.

Even if the common refrain of new relationships – ‘This time it’s different’ – is to be believed, SingTel will find itself in the company of behemoths already having a challenging time in mobile advertising.

Apple, which bought mobile ad firm Quattro Wireless in 2010, faced lacklustre demand for its iAd mobile ad service and had to slash rates by as much as 70 per cent just last year.

This is not an indictment of mobile advertising, which could in fact be the ‘next big thing’ (well, something has to be) – but a reflection of how opaque the future and valuation of tech firms remain.

In the online industry, the difference between being on the brink of greatness and hurtling into the chasm beneath is a dizzying result of consumer fickleness and disruptive new technology.

Five years ago, Yahoo said that it would take Google on in the mobile area with a service for Nokia phones. That might sound ridiculous now, but it did not, then.

Closer to home, local telcos have in the past launched rudimentary versions of mobile ad services which seemed revolutionary then. ‘Consumers won’t find it (the advertisement) to be annoying,’ one CEO said in 2007 of an SMS service that had ads tagged to the bottom. Imagine that.

Alongside a fuzzy crystal ball is equally fuzzy muzzy math for tech companies.

For example, LinkedIn is, for the gainfully employed, mostly a glorified alternative to Facebook-stalking. When it went public last year, it was valued at US$4.3 billion with a PE ratio of 264.

As at yesterday, its share price had almost doubled since then, to US$86.37 with a PE ratio of 731. Someone should be feeling stupid soon, but for now, the joke is on the people who stayed out of the IPO, such is the lack of clarity about worth.

And as rumours filter out about Spanish telco Telefonica having been a rival bidder with a lower offer in the Amobee deal – the lack of clarity about tech firms in general is likely to persist. What is clear to most, however, is the pressing need for telcos such as SingTel to become more than just another utility. The reorganisation that sees the group divided along business units instead of along geography in a world where location increasingly counts for less has been resoundingly seen as the right move.

To some, picking Allen Lew to head the digital business unit is a promising gambit, as some analysts see him as the most aggressive executive there. Gartner’s Foong King Yew also pointed out that the telco has of late busied itself with hiring non-telco-type people from the areas of digital media and mobile devices. ‘It’s important to remember that Amobee is just one piece of the puzzle,’ Mr Foong tells BT.

SingTel’s reshuffling is timely, then, because even as it builds a new puzzle around this digital reality, the future for telcos and its tech brethren remains a puzzle, too.

Revamp and acquisition fail to impress

Downgrade to Sell. SingTel’s organisational restructuring is broad in scope while the acquisition of Amobee is far-reaching in its implications for the future. While we have no arguments with these developments from the longer-term perspective, we expect its already-challenged margins to be squeezed in the short term. No doubt, the telco can afford the US$321m price tag for Amobee but its ability to improve dividends may come under question. We believe SingTel is poised to make even more acquisitions as it embarks on its Digital L!fe strategy. We downgrade the stock to Sell with the target price reduced to $2.80, based on 11x FY Mar13F PER.

Massive restructuring, major acquisition. SingTel has announced an organisational restructuring that cuts across all business segments and geographies, in a clear break from the traditional country-centric model. It also announced that it has staked its claim in the mobile advertising market via a US$321m acquisition of Amobee. Revenue for the worldwide mobile advertising market is estimated by Gartner to double from last year to US$6.8b this year.

Bold, necessary but slow off the mark. We have mixed feelings about SingTel’s restructuring. In our view, it is a bold move as it illustrates how serious the group is in addressing threats to its business, and also necessary as its space has been encroached upon by nontraditional rivals. However, as in any restructuring, operating costs could spike in the short term and further affect margins that are already under pressure. Implementation, too, will be a concern.

Further acquisitions may cap dividend upside. The valuation SingTel is paying for Amobee does not seem out-of-line with acquisitions of similar companies by others. Nevertheless, it is still a big chunk of change. The acquisition cost represents 27% of the group’s cash holdings as at end-3QFY Mar12. While it will probably not affect SingTel’s dividend, it may cap upside beyond the 55-70% payout range and could dash hopes for further capital management.

SingTel bets US$321m on mobile ads

In the battle against the disruptive influence of smartphones on voice call and SMS revenues, SingTel is fighting back with a US$321 million acquisition of Silicon Valley mobile advertising firm Amobee.

As part of its virgin investment in a digital services firm, SingTel will trade its customer data for Amobee’s mobile ad savvy as it tries to crack mobile marketing in emerging markets such as India and Indonesia. These markets account for a growing portion of SingTel’s 434 million customers.

The acquisition of the 100 per cent stake in Amobee will be an all-cash one and will give SingTel access to more refined marketing tools like targeted deals and coupons for its subscribers. The deal is slated to be completed before June.

At the same time, SingTel will use its position as a telco to fill in the blanks in demographic information that have frustrated marketers thus far. ‘There’s a wealth of data that’s available – age, gender, socio-economic status . . . handset model, real-time location – gathered with customers’ permission,’ said Allen Lew, SingTel’s newly designated head of digital business.

While the US$321 million investment works out to a price-to-net-asset-value ratio of 535 based on Amobee’s net asset value (NAV) of US$0.6 million, SingTel Group CEO Chua Sock Koong said that the telco had considered the discounted cash flow (DCF) valuation parameters of other deals and that its valuation of Amobee was ‘in line with market parameters’.

A report by DMG & Partners Research yesterday said that the SingTel- Amobee valuations implied a price-to-sales ratio of 11 – below similar deals’ price- to-sale ratios ranging from 13 to 30.

In previous years, Google and Apple have been involved in large-scale buyouts of mobile advertising firms – AdMob and Quattro Wireless – respectively. Google paid US$750 million for AdMob while Apple reportedly paid US$275 million for Quattro Wireless.

In that respect, the DMG report deemed the Amobee valuation ‘fair’ and placed it on the ‘low end of similar benchmarks’.

While the largest spate of mobile ad firm buyouts happened in 2007, heavyweight interest in mobile advertising appears set to continue into the year, with Facebook courting mobile ads and Starbucks working with mobile ad firm Celtra on a campaign.

SingTel’s designs on this space are similarly ambitious. The telco said yesterday that it wanted to not only be the top mobile ad firm in the region but to also rank among the top three in the world.

If it achieves this, it will have leapt across a rather large distance in the mobile advertising landscape, considering its starting point.

Mr Lew said that up till now, ‘most of (SingTel’s) efforts have been SMS- and MMS-based. We have not participated in the agency aspect of mobile advertising or creative design.’

The DMG report also said the research house viewed the deal ‘as positive for SingTel given Amobee’s expansive platform covering the entire value chain of mobile advertising’.

‘This will allow the group to capitalise on and further monetise mobile advertising across the (operating companies),’ it added.

DBS Group Research’s Sachin Mittal noted, however, that ‘mobile advertising is a promising area but selling solutions is something new for SingTel’.

In the mobile ad field, the stakes appear to get larger every year. Gartner data cited by SingTel showed that global revenue from mobile ads is set to grow from US$6.8 billion this year to US$20.6 billion in 2015 – of which Asia Pacific is expected to account for 35 per cent.

This deal was announced alongside a sweeping organisation reshuffle that points to a growing focus on SingTel’s digital interests.

From April 1, SingTel Group will have three main business units: consumer, digital services, and information technology for enterprises.

Mr Lew will serve as CEO of the group digital business, while Paul O’Sullivan – who heads up the Optus business – will be CEO of the group consumer end.

The search for someone to lead its IT segment for enterprises, however, continues, with Mr Lew standing in meanwhile.

‘This reflects the focus on selling innovative solutions rather than being an operator in an era where voice is being commoditised and the value is in selling solutions,’ DBS’s Mr Mittal commented in his note yesterday.

The group’s counter closed two cents lower at $3.13 in trading yesterday.