How much was invested in Oz Communications, which became Nokia’s operator messaging business? How much in Neustar’s Next Generation Messaging business, which included its own acquisition of Followap? How much In Colibria’s operator-focussed Instant Messaging business? How much in iseemedia? How much in Synchronica itself, and its Mobile Gateway product?
How much are several Tier 1 Western operator contracts (including major US carriers) with monthly recurring revenues of three million pounds worth? How much are emerging market operator-led messaging contracts worth? How much is the mass-market mobile social messaging opportunity worth?
Bundle up all the sunk investment in all those companies, and all that opportunity and you come to…£23 million. For that is the offer that Synchronica has accepted from Myriad Group, after succumbing to a hostile takeover process begun in earnest in November 2011.
The formation of a merged Myriad-Synchronica company may well create, as its CEO Simon Wilkinson calls it, the world’s largest social mobile messaging business. But the acquisition also tells two other stories: the destruction of value in Synchronica, and the difficulty of building a profitable business on top of mobile operators’ next generation (ie not SMS) messaging services.
Synchronica
First, to Synchronica. When founder and previous CEO Carsten Brinschulte left last year, it was over a difference of opinion with his board as to the company’s future strategy. There was clearly a fear within the board that the company had over-reached itself, was spread too thin and needed to consolidate operationally.
At the time, new CEO Angus Dent, who had been Brinkschulte’s CFO, described this to me in the following terms: “We have bought a lot of land, and now we must farm the land.” Dent’s team were keen to grow organically and not pursue any further funding. Dent added that his cost-cutting measures would mean that the company’s operating costs would run at a lower level than its recurring revenues of $3 million month. The company would “really see the benefit of this”, he added, in the first Quarter of 2012, and move to profitability.
Instead, the share price fell to just under 5p by December 2011, having stood at 27p in April 2011, and the company was targeted by Myriad, who cast doubt on Synchronica’s ability to meet repayments to Nokia, following Synchronica’s purchase of Nokia’s messaging business for $19 million in June 2011, and therefore to keep trading. Merging with Myriad, becoming part of a bigger company, would offer the best future value to Synchronica’s shareholders, it argued. Synchronica briefly fought by by seeking funding from Canada’s Intertainment Media. By the first quarter of 2012, though, Synchronica had been forced to accept a £3 million loan as part of its sale to Myriad, just to keep trading and meet payroll.
There are two odd aspects to this story, though. The first concerns a share purchase by Dent of 800,000 shares at just over 6p per share, three weeks after Myriad’s offer but before the offer had been publicly declared. Synchronica’s share price then rose to 12/13p per share following public notice of Myriad’s offfer. A statement on Myriad’s website said it was “surprised and disappointed” to see the purchase.
When The Times picked up on the share purchase and ran with the story, Dent responded by saying that the deal was a “vague approach that was firmly rebuffed’. That was clearly meant to give the impression that that the share purchase was allowable, as no offer from Myriad was currently valid. Yet four days later Synchronica released a statement saying that Myriad’s offer did contain an indicative price per share and a number of pre-conditions, and it should not have been described as a “vague approach”.
The statement insisted that the offer had been rebuffed, though, and that meant that in Synchronica’s board’s opinion the share purchase was “permissible”. Myriad disputed that version of events, howevere, stating that Synchronica had in fact asked for further details.
The second strange aspect concerns the approach to Intertainment. After rejecting Myriad’s initial offer, Dent apparently led an effort to secure investment from the Canadian company to secure $10 million funding that would enable Synchronica to fight off the offer. But the deal fell through when it became apparent that a key clause in Synchronica’s Asset Purchase Agreement (APA) with Nokia stated that any investment over $5 million should be used to pay down the Nokia debt. In other words, Nokia had the right to insist that the Intertaiment investment would not go towards Synchronica’s operational costs, but to servicing its debt.
Who was the man who negotiated the APA with Nokia? Angus Dent, then acting as CFO. So did Dent forget the clause just a few months later, or hope Nokia would not invoke it? Or was the investment always a wild Canadian goose chase?
Whatever the background to these two slight oddities, when Myriad’s offer finally went through yesterday Chairman David Mason and Angus Dent, CEO, both left their positions with immediate effect
So what could Synchronica have done differently? One possible cause of action would have been to seek a more organised trade sale, attracting a higher price, rather than fight a hostile offer after describing an initial approach as “silly”.
Former CEO Carsten Brinkschulte provided Mobile Europe with the following statement, outlining this as his preferred option, once the decision had been made not to seek other forms of funding.
“Given the situation of the company and its difficult financial and strategic position, I think accepting the revised £23m offer from Myriad is the right choice. Personally, I find it disappointing to see that the company is sold at this stage and at this valuation as I continue to believe that Synchronica was on the path to become the worldwide market leader in next generation mobile messaging – a strategic position which I think could have justified a much higher valuation.
“Maybe Synchronica should have initiated a proper trade sale process rather than fighting a hostile takeover battle, but I guess that is a question the board has to ask itself.”
Operator-led messaging, RCS-e, all of that
So that takes us on to the second aspect of this story. If one of the prime providers of operator-led messaging – the delivery of messaging services including IM, video, voice, social media, (the RCS-e vision, if you like) – cannot pay the bills, is there a substantive opportunity for social messaging platform providers such as Myriad?
Myriad obviously thinks so. After all, once it has paid off Nokia’s debts, it still sits on those recurring operator revenues, and can bundle Synchronica’s platforms and services business in with its handset software business. It has 100 operator and 25 device vendors amongst its customer base.
“This deal will create a powerhouse in the rapidly growing sector of mobile-social convergence,” said Simon Wilkinson, CEO.“ It will establish a global service organisation serving over 100 Carriers and 25 OEMs around the world. At a stroke, it increases the addressable base for our award-winning product portfolios to over 1.8 billion subscribers with pre-installation of our products in over 100 million new devices each year.”
And Brinkschulte, who built the company on that vision, obviously still thinks so too.
“I think Synchronica’s technology, its staff and its vast customer base may be able to unfold its true potential in the combination with Myriad as I can see substantial synergy on the product and customer side. I hope that this combination will deliver the shareholder value derived from the potential of an excellent product in a high-growth market.”
Yet WhatsApp, Viber, iMessage, Facebook, Google, all provide what you might call social mobile messaging alternatives. The danger for the business going forward is that the global social mobile revolution is well under way, and it doesn’t involve operators specifying pre-integrated apps and services on devices.
Whatever the opportunity going forward, however, it seems incredible that so many businesses begun and built with such belief just three, four or five years ago have met this end. Some may see that as the natural consolidation that occurs when too many players addres too small an opportunity. But it demonstrates that the winners so far in social mobile messaging have not been those that took the operator path. Can Myriad be the one to turn that story around?