NQ Mobile reported paying $34.4mm in cash and $45.5mm in restricted stock to acquire Tianjin HuaYong Wireless Technology, Ltd. (vLife).
Analyzing Management
- Float was reported to have been raised by 3,900,000 so this is obviously the number of shares paid for vLife
- Share price used for acquisition was $11.66 considering they paid $45.5mm in stock with 3.9mm shares.
- Either management thought their shares were overvalued at $11.66 or they made an acquisition in stock while their shares were undervalued (either way that's not smart).
Analyzing Valuation
- vLife Live Wallpaper only has 100,000-200,000 downloads on the Android Store.
- vLife Live Wallpaper has very few downloads (less than 100,000) on the few Chinese app stores I looked at.
- Their website is ranked 15,087,379 via Alexa so they have very little web presence (app can be installed from their website, which is why I included this).
- Because most Chinese users go through a variety of app stores, rather than Google Play, let's assume my numbers are way off and they actually have 5,000,000 downloads.
- vLife Live Wallpaper is always on and is a free application, so we can probably gauge advertising revenue generated to that of social media.
- Facebook makes $6.40 in annual advertising revenue per user.
- Assuming that vLife Live Wallpaper can generate the same advertising revenue per user as Facebook (unlikely) then they would still only generate $32,000,000 in revenue annually.
- Even with 100% margins, being generous in estimates of user downloads, and being generous in estimates of advertising revenue per user, they would still make less than half of what NQ paid.
Now obviously my numbers could be completely wrong. They could have far more users and far higher advertising revenue per user, but I think my estimates are fairly accurate. There is no way to know with certainty until NQ releases that information. However, even if the valuation is fantastic, why are they paying with stock when it's valued so low? Assuming share prices reach pre Muddy Waters levels of $25.90 then the value of their acquisition in stock alone would be a whopping $101,010,000. I understand that vLife was an integral part of the development of NQ Live, but I simply don't see the value of this acquisition. Anyone that knows all of the Chinese app stores, or at least a majority of the large ones, feel free to research a more accurate number of users.
Note: I certainly think it was a smart acquisition to integrate the original creators of the NQ Live concept, it will be a great addition. My only concern is the valuation and the decision to use stock while it was so ridiculously cheap. Hopefully we can realize the benefits of this acquisition in the future but, until then, I don't see how such an expensive acquisition will reach the bottom line any time soon.