TiVo Looks Like a Takeover Target
Now that TiVo has settled a seven-year patent dispute with Dish Network, the unprofitable pioneer of digital-video recorders is ripe for a takeover, according to analysts and money managers. Mark Harding, an analyst at investment firm Maxim Group, believes the company could fetch $2.4 billion, or $20 a share—nearly double its $11 closing price on July 5. The settlement “has opened the door for a deal,” he says.
The settlement, reached in May, calls for Dish to pay TiVo $500 million for using its “time warp” technology that simultaneously records and plays back television shows. Harding believes the resolution of that suit means TiVo may now get at least $300 million in settlements from AT&T and Verizon, which it has also sued for patent infringement. Spokesmen for TiVo, AT&T, and Verizon declined to comment.
While TiVo’s name has become the default verb to describe the act of digitally recording TV, it has lost money in 10 of the past 11 years. The company’s customers, both direct and through TV distributors, dwindled to 1.96 million in April, from 4.4 million in 2007, according to regulatory filings, as generic DVRs became widely available. TiVo subscribers can record, pause, and replay shows in progress and access movies, shows, and videos through services such as Netflix and Google’s YouTube.
Chief Executive Officer Tom Rogers is trying to move TiVo beyond selling directly to consumers by striking more deals to supply set-top boxes or license TiVo technology to cable and satellite-TV operators, including Charter Communications and DirecTV in the U.S. and Virgin Media in the U.K. TiVo shares have climbed 47 percent this year and now trade at 6 times the company’s sales. That makes TiVo the second-most expensive consumer company in the Russell 2000 index, where the average price-to-sales ratio is 1.1 times, data compiled by Bloomberg show. “The current price doesn’t fairly account for the revenue streams as well as the settlement and potential future licensing agreements,” says Harding, who expects the stock to hit $18 in 12 months if there is no takeover bid. Skeptics abound: In June, short interest, or bearish bets that the stock will decline, reached the highest level since September 2008.
Potential buyers for TiVo include Microsoft and Google. Microsoft has wanted to offer a set-top box and have a presence in television systems through cable operators, says Tony Wible of Janney Montgomery Scott, who estimates a takeover price of $17 a share. TiVo’s television search capability would appeal to Google as it tries to gain a foothold in living rooms with Google TV, which lets users search online video and other content on their TV screens. It also would complement the company’s acquisition last month of SageTV, a DVR software maker to be integrated with Google TV, Harding says.
Rovi, the provider of on-screen guides for TV program listings and audience measurement services for advertisers, is another plausible acquirer. TiVo measures DVR viewing habits with second-by-second data. “If you were to combine the two, you’d have a very powerful set of patents and technology—all around living room digital media,” Wible says. Spokesmen for Microsoft, Google, and Rovi declined to comment on takeover speculation.
“The Dish settlement validated their intellectual property,” says Christopher Marangi, a portfolio manager at Gamco Investors, which owns TiVo shares. TiVo “would be attractive to any company trying to become a more important part of the new video ecosystem.”