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Thursday, Mar 28, 2024

Firm Spends Big on Little Apps

Mobile apps often cost about $1 or less, but Mandalay Digital Group Inc. will spend $65 million to get a bigger share of the app market. Mandalay, based in the Cahuenga Pass, helps telecom companies monetize their network by selling ringtones, songs and apps on mobile phones. On Nov. 12, the company announced a deal to acquire Appia, a mobile app acquisition network in Durham, N.C. Appia sets up websites for client companies to sell their apps. It also makes software that facilitates the download and installation of the apps on phones. If mobile users see an ad for a coffee shop or travel site, they can click on the ad and download the company’s app using Appia software. Only Facebook installs more apps on devices than Appia, said Bill Stone, Mandalay’s chief executive. The Appia acquisition fits well with Mandalay’s product line, Stone added, and will bring new market opportunities. “They do a fair amount with Chinese publishers and with Apple and (its operating system),” he explained. “Mandalay has always been with Android.” Brian Alger, an analyst in the San Francisco office of Wedbush Equity Management, said that while the all-stock acquisition does dilute Mandalay shares, it was a still an excellent move with a strategic partner. “I welcome this largely because strategically it opens more doors,” said Alger, who does own Mandalay shares. Mandalay Digital employs about 125 workers and will add 65 employees from Appia. The offices in Durham will remain open, Stone said. Mandalay operates a subsidiary called Digital Turbine, which is the brand name for its app marketplace. Following the acquisition, the company will change its name to Digital Turbine and drop the Mandalay moniker. “We are changing the public and operating name to the one that the customers know us by,” Stone said. Supportive investors Mandalay Digital was launched four years ago by a group of investors, including Hollywood executive Peter Guber, former chief executive at Sony Pictures Entertainment who serves as chairman of Mandalay Digital. Mandalay’s customers are phone carriers, including Vodaphone Group plc, T Mobile USA Inc., France Telecom, Telefonica S.A. and TurkCell. The company preloads apps onto phone for these carriers, and also sells apps to the phone buyer during their contracts. Appia was spun off as a startup from a Durham software company in 2008 to build and operate app stores for large telecoms, such as AT&T Inc. and Verizon Communications. The company transitioned to supporting “sponsored apps” in which it was paid by app publishers for each download. The acquisition of Appia involves a complex stock exchange. Mandalay will issue $100 million worth of new stock for the deal, based on a share price of $4.50. However, since its shares trade significantly below that level, Mandalay will actually pay $65 million or less. It represents a huge step up for a company with a market capitalization of $117 million. Mandalay will give Appia’s shareholders about 19 million shares, or a 33 percent stake in the post-transaction company. Since the deal was announced, shares have declined and closed Nov. 25 at $3.10. However, Alger said the decline is not a judgment on the Appia transaction but a reaction to Mandalay’s quarterly earnings. On the same day it announced the Appia deal, Mandalay reported a net loss of $5.2 million (-14 cents a share), compared with a net loss of $6.2 million (-25 cents) in the same period a year earlier. Revenue decreased 19 percent to $5.5 million, below analyst estimates of $7 million. “Everyone I have spoken to who owns shares in the company has been supportive of the acquisition,” Alger said. Most telling about the deal, however, is that the investors in Appia, which include venture capital firms Venrock, Trident Capital, and TomorrowVentures LLC, all in Palo Alto, are staying in as owners of Mandalay, Alger said. The principals in these firms, which includes members of the Rockefeller family and Google Inc. Chief Executive Eric Schmidt, are smart people experienced in mobile technology and advertising, he added. “For these venture guys who built Appia, they see Mandalay as a way to leverage their bet,” Alger said. “That says more than anything.”

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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