Monday, December 28, 2009

Applabs - Strategic Sale: Analysis

VCCircle reported that Sequoia-Backed Testing Firm AppLabs is a considering strategic sale

MNC and Indian suitors may be interested in the Hyderabad-based testing firm, which may attract a valuation of $150mn.

Sequoia Capital-backed AppLabs Technologies Pvt Ltd, a privately-held software services firm focused on the testing space, is considering a strategic sale paving a way for a full or partial exit for the five-year-old investor. The company had earlier looked at initial public offer (IPO) route as an option, however, it seems to have abandoned the IPO plans and is looking at a trade sale instead.

Sashi Reddi, the founder of AppLabs, holds substantial stake in the business while Sequoia Capital is a significant minority shareholder. Sandeep Singhal, managing director of Sequoia Capital India, holds a board seat in the company.
Sources familiar with the development told VCCircle that AppLabs was actively pursuing a plan to attract new buyers, a move that may also result in stake divestment by the investors and the founder. AppLabs is believed to have mandated a global investment banking firm to carry out the exercise. AppLabs, it is learnt, initiated the strategic sale move a year back but it was shelved on account of market conditions. In effect, that process has been revived now, sources said.

It is understood that AppLabs has received good interest from both domestic and MNC technology companies who are looking at a sizeable opportunity in the lucrative testing services segment. Research firm Gartner has reportedly pegged the opportunity for Indian offshore testing companies at around $8 billion at the end of 2008. Now, the company, which is reported to be close to the $100-million revenue mark, is looking at a valuation of $150 million (or 1.5 times the top line), the sources added.

E-mails sent to both Sashi Reddi and Sandeep Singhal last week, seeking comments on strategic sale plans, elicited no response at the time of publishing this story.

Sequoia (then WestBridge Capital) first invested $7 million in 2004 in AppLabs followed by a subsequent round of $10 million in 2006. Founded in 2001 by Sashi Reddi, AppLabs claims to be the world’s largest software testing company with a head count of over 2,000 employees across US, UK and India. AppLabs provides testing services in a range of areas such as performance, ERP, security, certification, test automation and managed testing.

AppLabs has also followed an inorganic growth path to add to scale, competencies and customers. In 2005, it acquired KeyLabs, a software and hardware testing company, followed by a $37-million purchase of UK-based testing consultancy firm IS Integration in 2006.

Interestingly, serial entrepreneur Sashi Reddi is also the founder of a game development company FX Labs, which recently released the Ghajini game, after the Aamir Khan Bollywood flick. Sashi Reddi’s hands are quite full, it would appear, as he is actively engaged in running two companies in niche and fast-growing outsourcing spaces. Is that triggering a deal at AppLabs? That is the question some are beginning to ask.
According to Sashi Reddi’s profile in the company website, he started two other companies prior to AppLabs. EZPower Systems, which was a developer of products for building large web applications, was acquired by DocuCorp and then eventually by Oracle. Subsequently, he founded iCoop, a group purchasing dotcom company which went bust.

Here is my analysis:
  1. With ebitda margins at around 12 percent (Estimated) and Revenues ~100 Mn, Valuation of 150 Million looks steep (unless there is large amount of cash, which I doubt). Therefore sale to a financial  investor is unlikely (more reasons below)
  2. A large strategic investor may take a view that it can cut costs and improve margin. It offers size and entry into Testing vertial . Rules out Tier 1 Indian players (have size and testing teams already). However, given the fact that one could qualify Applabs itself as a rollup operation (it has acquired scale through acqusitions- funded by Sequoia and other investors- at much lower valuations why would they pay a premium price)
  3. Applabs' value proposition (or at least Sales pitch) has been that it is an independent testing company ie someone else builds the app and Applabs tests as independent third party and therefore/potentially does a better job does not Gel with a Services provider.
  4. Possibly, a company like MindTree could have stil acquired it but it has already made an acquisition
  5. TechM may have considered it but there are still trying to digest Satyam
  6. It already claims to be the worlds largest independent tester, so little chance of a pure play testing company acquiring it.
  7. Promoter is serial entrepreneur so he is looking for an exit
  8. CEO is professional manager so this aids a strategic sale

Likely End Game
  1. IPO by Applabs
  2. Someone would overpay (overzealous M&A team)  
  3. Re-Capitalization (Don't happen everyday in India but may be the most preferred option / should be explored)

Sunday, December 20, 2009

Google - Yelp: Deal Analysis


"...Google Inc is in talks to buy Yelp Inc, the popular website for reviews of local businesses, in a deal that could help the Internet search leader tap a lucrative local ads market, media reports say.

Google may pay more than $500 million for Yelp, according to reports confirmed to Reuters by a person familiar with the situation. It came as the Web giant embarked on an acquisition spree that has netted at least five companies since August.

By swallowing privately held Yelp, Google would own one of the Web's most popular repositories of local restaurant and small-business information, including more than 8 million reviews penned by Yelp's users.

That trove of content and a heavy focus on local businesses could provide a valuable foothold for Google as it seeks to convince local merchants to shift their advertising spending to the Internet.

"The local advertising market is a multibillion dollar market that for all intents and purposes is still untapped on the Web," said Needham & Co analyst Mark May.

In July, Internet portal Yahoo Inc teamed up with AT&T Corp in a partnership that involved the phone company's 5,000 sales people selling Yahoo advertising inventory to local businesses.

News of the recent talks between Google and Yelp -- backed by Benchmark Capital and other venture capital firms -- and the $500 million price tag were first reported by the blog TechCrunch.

The source familiar with the situation said talks were currently bogged down by concerns among some Yelp investors that the company could be selling itself prematurely, and that it could be worth far more than $500 million if it had a chance to develop its business.

The source added that Friday's news stories may have been floated to put pressure on for the deal to be consummated at a price that was too low.

Apparently, Google has had its eye on Yelp for some time. According to one former Google executive, the Internet company had had "early discussions" with Yelp about an acquisition several years ago, but ultimately passed on the deal.

"Yelp doesn't monetize very well, so it's always a bit hard to justify an acquisition," the person said.

The local businesses that Yelp sells online advertising to are more interested in promoting their businesses through coupons than online ads, he added, noting he believed Yelp was still an unprofitable business.

Yelp was founded in 2004 and has received $30 million in funding from Benchmark Capital, DAG Ventures and Bessemer Venture Partners.

The acquisition talks are the latest in a string of recent deals by Google, including the $750 million acquisition of mobile ad firm AdMob announced in November, that are designed to extend Google's reach into new advertising markets.

The world's No. 1 Internet search engine generated roughly $22 billion in revenues last year, but has seen its top line growth slow from the 40 percent-plus clip it was managing as recently as early 2008.

Google has stepped up efforts to court local merchants recently, encouraging businesses to register their information on its small-business online directory.

But some analysts say Google will have its work cut out trying to sell online ads to local merchants more comfortable with traditional channels like local television, newspapers and the Yellow Pages.

Needham's May estimated that Yelp, which had 8.9 million unique visitors to its site in November according to comScore, is generating revenue at an annual rate of $15 million to $20 million.

"That's a pretty tough nut to crack," May said about selling online ads to local merchants. "Whether Google can crack the code on it, is still to be seen."


Here is my analysis of the (potential) Google - Yelp Deal

  1. With growth slowing down, it is becoming difficult to justify the high revenue multiple on its stock price, so its seems it is buying growth or, at least in this case, a (potential) growth engine
  2. Google has been trying to tap the locals market for some time but has not been able to make a splash despite its obvious strengths in search. Hopes Yelp would help it make a dent. 
  3. 8 million + reviews (on Yelp) are useful (think user reviews on Amazon),  but you know, these are not exactly like product reviews on Amazon. Restaurants change and so do people's tastes. So while there is a network externality, it may not be as strong.  
  4. If Yelp's reveneus are really only 15-20 million then the quoted price ($ 500 Mn) is really over the top.  Am sure if Google really commits even half of the money on local search it can do a better job.  (Build Vs Buy)
  5. Surely, its not to get another bunch of great engineers ( Not at this price)
End Game:

I think this deal (if it goes through) would be paid for mostly through Google Stock. One over expensive stock (currency) for another. Perhaps it would be best for both companies. Yelp's investors would happily cash out by selling Google stock in the open market and as for Google, it would  would have acquired another growth engine where it has been unable to make a huge headway by itself.

 PS: On second thoughts, Yelp + AdMob could be an explosive combination and help Google recover the price paid, many times over.

Thursday, December 17, 2009

Avatar: Fantastic!

Watched Avatar yesterday. Loved the movie. I don't know if this qualifies to be the greatest movie ever but it was fantastic. Visuals were simply out of this world.

Three cheers for Cameron and his team!

Friday, December 11, 2009

IIM falters in CAT and Mouse game, on debut!

CAT 2009 got off to a disastrous start and despite huge efforts by the Prometric and its partners. The exam did not finish on schedule and is continuing to cause anxiety to students, parents, IIMs and even to the HRD ministry. However, what was has been most interesting is the clamor we have seen from the players not involved.

1. Media: Of course media had a field day. TRPs were up, confusion reigned and they kept adding fuel to fire. Well you could argue that It is their business to do so, even if media would say that they do this only in public interest (I’ll be damned if any of the coverage was inspired by concern for these students)

2. Other Online Testing Providers: Sore losers and vultures. You could almost see them laughing secretly and were happy to see Prometric fail. Are now clamoring that if they had been given a change they would have done a better job. Please guys, you were part of a bidding process, if you can do a better job, you should have done a better job at that time. (I can bet my shirt that Prometric and its Indian partner would do a much better job next time, what are these vultures betting?)

3. Coaching Institutes: Most vocal (after media). Want current exam to be scrapped, return to pen and paper format for this year (So they can charge students again for preparation). Act like they are acting in students' interest while a large silent majority was actually able to complete the test.

4. Other Xenophobes - Want contract to be given to an Indian company (yes, we have xenophobes in India too). These are racists, casteists, fascists in new avatar. There is no talk of merit.

Which brings me back to the organizers of the CAT exam. Poor show guys! You need to get your act together. You should make sure that every student who suffered is given another chance, and that this is not repeated the following year.

Monday, December 07, 2009

Twitter, Facebook and MySpace give into Search Seduction!

After holding out for a long time, Twitter, Facebook and MySpace are now falling in (like dominoes) to provide feeds to search engines for real time search. Makes sense, the search engines had to get just one of these to get the others to fall in line. The public bloggers (and in this case micro-bloggers) do suffer from varying bouts of narcissm  or maybe are lonely or  just too desperate to be heard (read 'read') and therfore the advantage to a social network to being visible in real time. Having a rival micro blog network available while you are left behind is a (doubly) huge disadvantage.

Of course, this is one more battle field for Bing and Google. My fear is that both will end up overpaying for this ability to search but can't do without it either.

Sunday, December 06, 2009

What is Jugaad? - And, do you need some of it?

The western world, it seems, has suddenly taken a liking for ‘Jugaad’. Indians have always held ‘Jugaad’ very close to their hearts. Jugaad may be trade-marked Indian, but the concept is not uniquely Desi. However, still, the current fascination of the developed world is amusing. Refer two interesting posts on Jugaad in Techcrunch by Sarah Lacy (who was in India doing research for her upcoming book on entrepreurship) and in Businessweek, which calls it Indian style of Innovation and Invention.

As a verb, Jugaad is the antithesis of ‘Process’. It is improvised (and sometimes very creative) problem solving and with the end result sometimes called a ‘Jugaad’ (noun) or described as ‘Jugaad’ (adjective). Which brings me to, why I find this amusing?

Over the past many years, the western (and pseudo western) trained managers have derided the ‘Jugaad’ solution. I remember an external speaker at the ISB, a few years ago, who was convinced that India is underdeveloped back only because of its ‘Jugaad’ mentality (everything else he said in his hour long speech was just gibberish).

Anyways, now, that the world is now discovering Jugaad, one must be careful not to over use it. Here are my thoughts on Jugaad

1. It provides an improvised quick fix but no long term warranty
2. It can certainly help you solve problems (especially if you are desperate)
3. Its gels perfectly with entrepreneurship, especially while starting out and want to ‘get it done’ ever which  
    way. Has a lot of overlap with 'Bootstrapping' in VC parlance
4. It is low ‘immediate’ cost, but long term costs may not be immediately apparent

PS: A person practicing Jugaad is called ‘Jugaadu’

PS, PS: The article in Businessweek mentions that TCS and Infosys gained world stature by having oodles of Jugaad. Having worked in one of these for over five years, I can tell you that while Jugaad had a role to play, do did 'Process'.

PS, PS, PS: There is a blog detailing list of Indian 'Jugaads'

Saturday, December 05, 2009

Better Product = Market Leadership?

Split right down the middle. I am talking about the first poll I conducted on this blog. The question asked was
"Does having the best product ensure market leadership?". Fifty percent of the voters agree, while the other half disagree. I belong to the latter category.

Now, I am not saying that having a good product is not important and that it does not help. It does, surely. But It takes more than just having the perfect product to gain market leadership. Sales and Marketing for example, Distribution reach is other, Price is equally important. And, sometimes it is something purely superficial such as color etc

Internet based markets are democratizing some of these effects. But product managers would do good to take some of the other considerations in to account and not fall into the hype of their own products

PS: More importantly how do you conclude a product is better.  For whom. Humans are (some economists may diagree) not completely rational. I wonder if it is sometimes "Arbit' and more importantly "Is it Luck". Which brings me to the next poll?  How important is luck to business success?
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