Appia, a Durham apps purveyor and advertiser that in recent years has been among the Triangle’s fastest-growing startups, is being acquired for stock valued at about $65 million by a publicly traded Los Angeles company.
Mandalay Digital Group announced late Thursday that is has agreed to acquire Appia, a privately held company with 65 employees. The purchase price includes about 19 million Mandalay shares – worth roughly $65 million based on the stock’s closing price on Wednesday, the day before the deal was announced; in addition, Mandalay is assuming $10 million in debt plus Appia’s transaction fees and expenses.
Appia shareholders will end up owning 33 percent of Mandalay, which plans to maintain the company’s office in Durham.
“We have had great success,” said Appia founder and CEO Jud Bowman, 33. “But we think we are just getting started.”
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Appia ranked No. 857 on Inc. magazine’s latest list of the fastest-growing private companies with revenue growth of 526 percent over a three-year span.
Bowman will join Mandalay’s board of directors and will become one of Mandalay’s largest shareholders. But it’s yet to be decided whether he will remain with the business after the sale is completed.
Bowman said in an interview that the deal was put together so quickly that he and Mandalay CEO Bill Stone are still working out details, including whether he will have a role beyond his board seat.
“I will defer to his decision on that,” Bowman said.
Stone called the acquisition “transformative” during a conference call with analysts.
Mandalay, which has about 125 workers, projects its revenue for the fiscal year that ends in March will range from $36 million to $40 million, followed by a jump to between $110 million and $130 million the following year. Deals it has struck with mobile phone carriers are expected to propel its revenue.
With regard to Appia’s overall workforce, Bowman said Mandalay expects to retain “demonstrably everybody. ... There may be a very small handful of exceptions.”
The Durham office, he added, will be Mandalay’s largest U.S. office.
Appia had revenues of $30 million for the 12-month period that ended Sept. 30. The business has raised about $30 million in venture capital.
For Appia shareholders, the deal represents a bet that combining the two companies’ operations will be a winning combination. That’s because the deal includes a “lockup” that prevents them from selling any of their shares for six months after the deal closes. And they’ll have to hold on to some of their shares for a year.
Result of partnership
When the two companies negotiated the basic parameters of the deal last month, it was based on the recent average share price at that time, which was $4.50, $1.10 per share more than Wednesday’s price. So the negotiated price was $21 million higher.
That’s why Mandalay reported that the deal was valued at $100 million when debt and expenses were included.
Mandalay offers an app distribution platform that puts targeted apps in front of consumers, according to Gigaom Research.
Appia’s business, meanwhile, has been driven in recent years by “sponsored apps,” where companies such as Facebook and Vonage pay Appia each time one of their apps is downloaded. In addition to featuring the apps prominently in app stores it has built for its customers, Appia also advertises the apps elsewhere to maximize its revenue.
Combining the companies will “position Mandalay’s Digital Turbine product suite as a clear leader in the mobile app delivery market,” Ladenburg Thalman analyst Jon Hickman wrote in a research report.
“As the number of available apps continues to climb, it is increasingly difficult for advertisers to have their apps discovered and downloaded by mobile users,” Hickman noted. “Together, the Digital Turbine platform and the Appia network provide a powerful end-to-end solution for advertisers.”
Bowman, who also participated in the conference call, said the deal was an outgrowth of a partnership the two companies struck earlier this year.
Stone said that acquiring Appia gives his company “an incredible talent pool of experts” in mobile advertising technology.
Asked about Appia’s growth rate, Andrew Schleimer, Mandalay’s chief financial officer, said: “Appia is growing at a very, very healthy growth rate. ... The business is growing, the business is healthy, the business is on its way to profitability.”
However, Appia’s workforce has shrunk from 86 earlier this year to 65. Bowman said that the earlier number included contractors and interns that aren’t part of the current tally, and that the company’s staff also was reduced by attrition and “a small handful we had to hire for various reasons.”
“We have not had any layoffs,” he said.
Appia, which spun out of Durham software company Motricity in 2008, built its business by building and operating app stores for the likes of AT&T, Verizon, Samsung and Vodaphone. Its business began to grow dramatically in April 2011 when it moved into sponsored apps.
Appia was originally called PocketGear, but changed its name to Appia in February 2011. Mandalay Digital plans to change its name to Digital Turbine early next year.
Mandalay reported fiscal second-quarter earnings after the markets closed on Thursday that included $4.5 million in revenue, below its projections. The company also lowered its revenue projections for its fiscal year.
Mandalay shares closed Friday at $3.19, down 25 cents.
But Hickman, the analyst, rates the stock a buy with a 12-month price target of $11.50.
That’s what Appia’s shareholders are betting on.