Sonic Solutions sees "strategic sense" in $323 million DivX acquisition

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By Surojit Chatterjee | June 4, 2010 1:35 PM EST

Digital media software maker Sonic Solutions (NASDAQ.SNIC) said on Wednesday that it saw "overwhelming strategic sense" in the $323 million acquisition of digital media firm DivX Inc. (NASDAQ.DIVX).

Sonic, based in Novato, Calif., is best known for making the digital media suite called Roxio. The company said it will pay $3.75 a share in cash and 0.514 shares for each share of DivX. That amounts to a 41 percent premium over DivX's closing stock price of $6.95 on Tuesday.

Sonic, which is developing a Web-based infrastructure that enables studios and retailers to sell movies and television shows directly to consumers, expects that the acquisition, scheduled to complete in September, will double its non-GAAP earnings per share (EPS) in 2012. The company reported Q4 earnings of $1.2 million or 4 cents a share (GAAP basis) on revenues of $26.4 million.

The deal will give DivX shareholders 35 percent control over the combined company and two DivX directors will join the Sonic board. DivX CEO Kevin Hell, CFO Dan Halvorson, and general counsel David Richter are expected to leave the merged company once the transition is complete. If the deal falls through, Sonic will pay DivX a break-up fee of $8.35 million.

In 2009, 70 percent of DivX's revenues came from licensing its codec technology, which enables high quality video transmission, to consumer electronics makers such as Samsung and Sony. DivX technology - software for formatting video, for playback, and for digital rights management (DRM) - has been installed in over 300 million devices in the global market by all major consumer electronics makers, including over 8,500 models of digital televisions, and DVD and Blu-ray Disc players, as well as over 80 different mobile handsets. DivX's competitors include Apple, Adobe Systems, Google, Microsoft, and RealNetworks.

The acquisition will help Sonic, which already makes a range of digital media software and runs the cloud-based RoxioNow online movie and TV distribution service, consolidate its position in the Internet-based video delivery market. Currently, Sonic's RoxioNow digital media platform, which is used by Best Buy, Blockbuster, and Lions Gate, for streaming and downloading digital media, competes with Netflix, Amazon Video on Demand, and Vudu (recently acquired by Wal-Mart).

"The combination of Sonic and DivX promises to be the foremost provider of platforms, tools, and technologies for the efficient delivery of premium video entertainment to virtually any type of consumer electronics device. We expect DivX's deep technology and broad deployment in the consumer electronics and mobile areas to give us significant leverage as we expand and enhance our RoxioNow premium entertainment platform," Sonic President and CEO Dave Habiger said in a statement.

"We believe this combination will greatly accelerate our premium content strategy. Our mission is to make it easier for retailers, Hollywood studios, consumer electronics manufacturers, and online merchants to more easily deliver premium content over the internet," Habiger said during a conference call. "The combination will help us expand our existing relationships with Hollywood studios, our store-front partners, and especially consumer electronics partners."

According to Habiger, DivX complements Sonic in several ways. For instance, DivX can help accelerate partnering with consumer electronics companies. Also its relationships and its high profile in the consumer electronics business will be valuable to Sonic as it expands in the premium digital content service market.

DivX also brings significant technology to Sonic, especially digital rights management software. "The DivX format incorporates one of the few DRM solutions to receive approval from major Hollywood studios," Habiger said.

DivX makes "overwhelming strategic sense," Habiger says, because "DivX encoded content drives demand for DivX certified devices which offers the highest-quality playback. Millions of DivX devices in the field encourage studios to produce more content in the DivX format, which in turn drives downloads of DivX technology [by consumers] and further proliferation of DivX devices."

On Wednesday shares of DivX closed up 26.47 percent at $8.79. Shares of Sonic closed down 9.47 percent at $10.71 because of concerns that Sonic paid too much for DivX.

[As the Sonic-DivX merger shows, big changes are afoot in the way Americans watch movies. For more about the enabling technology, see story about Sonic and DivX in the Technology section.]

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