MONEY stocks

How to Pick the Winner in a Corporate Spinoff

two men on a bike pedaling in opposite directions
Taylor Callery

For reasons good and bad, companies are dividing in two. Keep your eye on the smaller stock.

If you’re a Hewlett-Packard share­holder, your head may be spinning. In October, CEO Meg Whitman announced HP would split off its PC and prin­ter division from its technology services business so each side would gain “independence, focus, financial resources, and flexibility.”

Sounds plausible. Except three years ago she argued against this move—which was recommended by her predecessor Léo Apoth­eker—claiming that it would lead to billions of dollars in wasted costs.

Ignore the Hype, Not the Stock

This kind of CEO flip-flop may turn you off. So might Wall Street’s perpetual cycle of mergers and acquisitions, split-ups, and then new mergers. This year, M&As and spinoffs are both surging.

That said, spinoffs like Hewlett-Packard’s are the one kind of deal with a good record. “While the data is overwhelming that the average acquisition destroys shareholder value, the average spinout tends to work well,” says Christopher Davis, chairman of Davis Advisors.

Focus on What’s Being Spun

Pat Dorsey, founder of Dorsey Asset Management, says, “There comes a point when mature companies take a hard look at themselves and say, ‘We need hair dye.’ ” Often, this means concentrating on the faster-growing division. In HP’s case, that’s the tech services business, which will be dubbed Hewlett-Packard Enterprise. Whitman will be its CEO.

The spun-off hardware division will be called HP Inc.  It offers less earnings growth—but might be the better buy. A 2004 Purdue study of breakups from 1965 to 2000 found that while parent companies don’t meaningfully outperform their peers on average, spinoffs do, especially in the first couple of years. A Bloomberg index of spun-off stocks has outpaced the S&P 500 by five percentage points annually over the past 10 years.

Why? Spun-off companies are usually smaller, and history says there’s a small-stock advantage. Also, if the spinoff is unloved by the parent, it’s likely to be overlooked by fund managers and analysts, especially in the early going, Dorsey says. This creates an opportunity for bargain hunters.

Of course, “not every spin works,” says Joe Cornell, founder of the advisory firm Spin-Off Advisors. (And full disclosure: MONEY is owned by Time Inc., which was split off this year by Time Warner.)

What about Hewlett-Packard Enterprise? Dorsey, for one, can’t imagine it will grow as fast as Whitman hopes. “Servers and consulting—that’s what IBM does,” he says. “Have they looked at how IBM has been doing lately?” That stock is down 14% this year.

 

TIME Companies

Hasbro in Talks to Acquire DreamWorks Animation

Deal would combine the makers of Transformers and Shrek

Hasbro is in talks to buy DreamWorks Animation, in a move that could help it reclaim its position as the world’s No. 1 toymaker from Lego, according to the Hollywood website Deadline.com.

The deal would combine the maker of the Transformers set of toys (as well as board games like Monopoly, Scrabble and Trivial Pursuit) with the studio that produced the Shrek and Madagascar series of films, allowing the toys and movies operations to feed off each other. Deadline said the deal would take at least two months to wrap up.

Deadline reported that Hasbro’s board had visited the DWA campus recently, and had agreed in principle that DWA co-founder Jeffrey Katzenberg would chair the combined operation.

At the same time, Deadline said, DWA is also looking at a joint venture with Hearst Publishing including its AwesomenessTV, valuing it at around $300 million. The mooted JV would aim to launch three new digital channels, targeting mothers and children.

This article originally appeared on Fortune.com

TIME Silicon Valley

In Silicon Valley, You Can Forget Aging Gracefully

HP CEO Meg Whitman Visits China
ChinaFotoPress—ChinaFotoPress via Getty Images

Getting old isn't easy, especially in tech

Nature abhors the old, Emerson said. In 2014, we can add: so do technology investors. Because in the tech sector, where innovation and growth are worshipped and rewarded with obscene valuations, the esteemed companies that helped establish Silicon Valley and shape the Internet are not being allowed to age gracefully.

HP is breaking into two, despite years of its CEO saying this wouldn’t happen. eBay’s spinning off PayPal, after its CEO insisted this made no sense. Both companies knuckled under shareholder pressure. Now Yahoo is facing pressure to cash out of Alibaba and merge with AOL. That follows Dell going private and IBM ditching its low-end servers. There are even investor rumblings that Microsoft would be better broken into pieces.

Spinoffs, breakups, LBOs and shotgun marriages aren’t uncommon among aging, troubled companies. But the wave of events hitting companies once considered blue-chip tech firms is unprecedented. Only a decade ago, most of these companies were at the top of their games. Even today, many are so profitable they annually pay out billions, if not tens of billions, to shareholders through dividends and buybacks. And while many of these companies have been undervalued by investors for years, they are now being treated as if they are entering a period of advanced decay.

In sectors like utilities or retail, slow growth is tolerated as long as a healthy profit margin is maintained. But in tech, profits aren’t enough without growth. And there is plenty of growth among the younger generation of tech giants like Google, Facebook, and LinkedIn. The gap between long-in-the-tooth tech giants and lithe, growing companies is getting wider by the year. While the latter are driven by innovation the former are pushed around by shareholder demands.

Tech investors have always been growth-oriented, but now it’s becoming an obsession. And why not? As the network effects long promised in the early years of the Internet finally kick in, growth at a successful startup can mushroom from seed round into large cap in a few years. Airbnb, Uber and WhatsApp were all founded about five years ago and today are valued at $10 billion, $18 billion and $22 billion, respectively.

Often, the new generation of successful startups push to stay out of public markets as long as possible to avoid the public scrutiny, quarterly earnings parades and exposure to shareholder activists that are plaguing the likes of HP, eBay and Yahoo. The world of secondary markets and venture investing have evolved to accommodate them, allowing institutional investors who can afford substantial stakes to become investors while the startups remain private.

Yet there’s a cautionary lesson here that startup founders should consider: The same forces that are accelerating tech growth curves are also accelerating the time to maturity. Grow big enough and companies will need to draw on public markets for financing. To meet quarterly targets, they need to maintain billion-dollar businesses even when they stop growing. That limits the ability to find new, financially risky areas of innovation. Soon enough, dividend and buyback programs are rolled out to placate antsy investors. That, as we are seeing this year, only placates them for so long.

No one is demanding a dividend from Google, or calling for Facebook to spin off Instagram. Both are delivering growth that often surpasses investor expectations and rewarded with rising stock prices. Others like Netflix and Amazon are getting a pass by investing profits into future growth. But as much as HP talks about, say, developing a mass-market 3D printer, investors only look with disappointment at the slow-growth business of PCs and IT services.

There are a few companies founded before the dot-com boom, notably Apple and Amazon, that have so far been able to buck the trend. But they may not be able to stay ahead of the curve for long. The campaign to pressure Apple for more dividends has halted because Tim Cook keeps promising new product categories like the Apple Watch. Amazon has lost nearly a quarter of its value in the last nine months amid concerns its spending is outpacing its promised growth.

For now, Apple and Amazon are anomalies among companies more than 20 years old that are promising more growth in coming years. That’s leaving their CEOs independent enough to pursue blue-sky innovations. But age catches up to all companies. And these days, companies in the tech sector are growing old faster than ever.

TIME Fast Food

Outrage Over Burger King’s Merger Is Totally Misdirected

A sign stands outside a Burger King restaurant on Nov. 1, 2006 in San Francisco.
Justin Sullivan—Getty Images

The bottom line is it's a solid deal

Outrage is a useful tool in a democracy, but not when it’s directed at the wrong target or ignores the facts. As the criticism of Burger King’s so-called ‘tax inversion’ deal with Canadian fast-casual restaurant and coffee chain Tim Hortons heats up in the political arena, several facts are being blatantly ignored. While it may be ideologically satisfying to label the merger as being unpatriotic because it will deprive the U.S. Treasury of tax dollars, it is also an overblown criticism.

Consider how shareholders of public corporations get taxed. Unlike investors in private companies who get taxed once on their pass-through income, public investors get a double hit.

To take a simple example, for every dollar that a public company makes in income, it has to pay 35% in federal income taxes as well as more in state and local taxes – let’s call it another 5%. The remaining 60 cents are then distributed as dividends to shareholders. Of that 60 cents, the shareholders now have to pay personal taxes in the average range of 20% to 39.6% depending on how long they have held the stock. Again, taking state and local taxes into account, in aggregate then, most shareholders pay somewhere between 55% and 67% in taxes on their investment in a public company.

This analysis, of course, ignores tax loopholes that large public companies are able to take advantage of but such loopholes rarely yield more than a 5-10% benefit, which still leaves shareholders paying an average of 50% in taxes.

Even those who believe in progressive taxation would be hard pressed to agree with this tax scheme. True, shareholders may also achieve gains through the appreciation of their stock, which is not taxed twice, but that is meant to be a bonus to incentivize people to invest, not to be an offset against dividend income. The latter could make tax incentives for investing a zero-sum game, which makes no sense.

From a political standpoint, it may be beneficial to demand that American companies not repatriate abroad for tax reasons, but the merger of Burger King with Tim Hortons has a lot more to do with the tight margins in the burger joint business and the more robust margins in the fast-casual restaurant and coffee chain trades. As Burger King struggles with hyper competition from McDonalds, Chipotle, and Starbucks, it needs to explore expansionary opportunities. The fact that Tim Hortons happens to be in Canada – in this case, at least – is incidental.

Moreover, the likely tax savings for Burger King by a tax inversion would only be around $3.4 million this year, given that Canada’s total corporate tax rate is 26.5% and Burger King paid an actual tax rate of only 27.5% last year, which would not be a lot for a company with more than $1 billion in top-line revenues and $340 million in profits on a run-rate basis for 2014. To put it another way, If the management of Burger King agreed to an $11 billion merger simply because of $3.4 million of cost savings, it would be bad management indeed. However, that is not the case here and all signs, when rationally examined, point to the fact that this deal is important for Burger King’s future growth, which will also benefit its employees, shareholders, and customers.

Questioning mergers based on anti-competitive factors is fine, but questioning the wisdom of patently good corporate deals simply because there are ancillary tax benefits is silly. It distracts from larger issues like labor relations and the pressures of global competition on the American economy, while doing nothing to benefit the discussion about tax reform.

This particular example has no real meat, except perhaps in the press.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

TIME mergers

Why People Are Excited About a Staples-Office Depot merger

Office Depot, OfficeMax Said to Discuss Merger Under Pressure
Bloomberg—Bloomberg via Getty Images

Analysts say the office-supply rivals should glue themselves together

fortunelogo-blue
This post is in partnership with Fortune, which offers the latest business and finance news. Read the article below originally published at Fortune.com.

By Phil Wahba

It was just a suggestion, but one that investors in Staples and Office Depot seemed to have loved: the two struggling office supplies giants should merge.

Shares in both companies soared on Tuesday after Credit Suisse in a research note recommended they combine forces to better compete against Amazon.com and Wal-Mart Stores and stop declining sales at both.

Credit Suisse analyst Gary Balter estimated that by streamlining their operations, the companies together could save $1.44 billion a year, effectively doubling their combined operating profit by 2017. What’s more, a merged entity would be more strategic about store closings: both Staples and Office Depot are cutting stores by the dozen but often keeping a store that is unprofitable not to give up market share to its rival. That would mean that under a combination, only the best stores would remain.

A merger “makes significant financial and operational sense,” Balter wrote.

Regardless of whether they take Balter’s suggestions, it’s undeniable that both chains need to pick up their game.

For the rest of the story, please go to Fortune.com.

TIME Earnings

Time Warner Posts Solid Earnings But Shares Still Lag

Murdoch Said To Mull Sky Proceeds To Boost Time Warner Bid
Pedestrians walk past the Time Warner Center in New York, U.S., on Monday, July 21, 2014. Bloomberg—Bloomberg via Getty Images

After 21st Century Fox withdraws its $80 billion merger offer

Time Warner posted solid quarterly earnings Wednesday, but investors are still punishing the company for rebuking a takeover bid by 21st Century Fox. The media giant generated a profit of $850 million and adjusted earnings per share of 98 cents during the second quarter, topping analysts’ estimates of 84 cents. Revenue for the quarter was $6.79 billion, missing estimates of $6.87 billion.

Time Warner shares took a pummeling in after-hours trading Tuesday when Rupert Murdoch’s 21st Century Fox announced that it was withdrawing its offer to buy the company for $80 billion. The offer valued Time Warner at about $85 per share, and the company’s stock rallied above that figure as some investors guessed that the merger was a foregone conclusion. With Fox out of the picture, Time Warner shares dove more than 12 percent in after-hours trading to below $75.

That swiveled the pressure back on Time Warner CEO Jeff Bewkes to prove that his company can be just as prosperous without joining forces with Fox. In a conference call with investors, Bewkes said he wouldn’t comment on the 21st Century Fox offer, but he went to great pains to outline his company’s rosy future. He noted that Time Warner has had the greatest shareholder returns of any company in its peer group (that would include Fox) over the last six years.

“Our strong performance this quarter and the last several years is evidence that our strategy is working,” he said. “The board and our senior management team appreciate very much the continued support of our shareholders.”

Bewkes touted the performance of HBO as a company highlight. The premium cable network generated $1.4 billion in revenue for the quarter and had the largest growth of any division. Operating income from HBO was $552 million. The medieval drama Game of Thrones was likely a big driver, as it became HBO’s highest-rated show ever during the quarter. The company is reportedly looking to expand the network’s international footprint by offering the streaming service HBO Go without a cable subscription in more countries.

Time Warner’s Turner division also saw growth, generating $940 million in operating income on $2.7 billion in revenue. However, the company’s Warner Bros. production studio saw revenues dip 2% to below $2.9 billion. The division’s operating income rose 28% to $236 million.

Bewkes also noted the spinoff of magazine publisher Time Inc. in June as a signal of Time Warner’s future as a more singularly focused company (TIME is owned by Time Inc.). The media giant has steadily shed parts of its business over the last decade, including AOL and Time Warner Cable, to focus almost exclusively on movies and television. “We’ve only just begun to reap the benefits of being a nimbler … video content company,” he said.

So far Bewkes’ arguments haven’t swayed investors much. Time Warner shares were trading at about $75.20 at 11:30 a.m., up marginally from their open of $74.90.

TIME mergers

Why Big Mergers Are Bad for Consumers

When big companies merge, it’s good for the bankers — but not so good for the rest of us

Rupert Murdoch’s 21st Century Fox wants to take over Time Warner. Comcast wants to buy Time Warner Cable. AT&T and DirecTV may hook up to compete against them. T-Mobile and Sprint are looking to connect, as are any number of other large communications firms, not to mention technology and pharma giants. We are in a new golden age of mergers and acquisitions–M&A activity was up sharply in 2014 and is already at pre-financial-crisis levels. Now bankers are salivating at the billions of dollars in fees such deals generate. The question is, Will the deals be any good for the rest of us?

Since the early 1980s, antitrust regulators like the Department of Justice and the Federal Trade Commission have tried to answer that question by asking another: Will a given merger bring down prices and improve services for consumers? If the answer was even remotely yes, then the merger–no matter how big–was likely to go through. But voices on all sides of the antitrust debate are beginning to question whether that rationale is actually working anymore.

Nobody would argue that the megamergers that have taken place over the past 30 years in pharmaceuticals, for example, have brought down drug prices. Or that the tie-ups between big airlines have made flying more enjoyable. Or that conglomerate banks have made our financial system more robust. “Merging companies always say that they’ll save money and bring down prices,” says Albert Foer, president of the American Antitrust Institute, a think tank devoted to studying competition. “But the reality is that they often end up with monopoly power that allows them to exert incredible pressure in whatever way they like.” That can include squeezing not only customers but also smaller suppliers way down the food chain.

Take the book business, for example. Though publishing is minuscule as a percentage of the economy, it has recently become a focal point in the debate over how our antitrust system works (or doesn’t), mostly because it illustrates the incredible power of one corporation: Amazon. In 2012, the Department of Justice went after tech giant Apple and a group of five major book publishers for collusion, winning a case against them for attempting to fix the prices of e-books. The publishers argued their actions were a response to anticompetitive monopoly pricing by Amazon. Apple is appealing.

Did the verdict serve the public? Many people, including star trial attorney David Boies, say no. Boies, who’s been representing large firms on both sides of the antitrust issue as well as the DOJ over the past several decades, says the verdict is “a failure of common sense and analysis.” Regulators often bring collusion cases, for example, because they are relatively easy to prove. Yet in this case, argues Boies, it led to an outcome in which the entrenched market participant, Amazon, was strengthened, and new participants–Apple and the book publishers–that hoped to create a competing platform in the e-book industry were shot down. “The result is that Amazon gets bigger, and eventually regulators will have to go after them,” says Boies. “We really need a more realistic, commonsense view of antitrust enforcement.” Amazon declined to comment.

The “Bigger Is Better” ethos of the 1980s and 1990s grew not only out of conservative, markets-know-best thinking. It was also fueled by a belief on the left that antitrust enforcement was wasteful and that regulating big companies was preferable to trying to stop them from becoming too big in the first place. Neither side got it right. Big companies aren’t always concerned first about the welfare of their customers–or particularly easy to regulate. The idea of letting companies do whatever they want as long as they can prove that they are decreasing prices may be far too simplistic a logic to serve the public–or even the corporate–good. Amazon shares have tumbled as investors worry about the future of a company that has so successfully compressed prices that it generates as much as $20 billion in revenue a quarter but no profit.

How to fix things? We need a rethink of antitrust logic that takes into consideration a more complex, global landscape in which megamergers have unpredictable ripple effects. We also need a new definition of consumer good that encompasses not only price but choice and the kind of marketplace diversity that encourages innovation and growth. Tech and communications firms today are like the railroads of old: it will take a strong hand to rein them in. That’s a task not for regulators but for Congress and a new Administration. Until then, with corporate coffers full and markets flying high, the big are only likely to get bigger.

TIME mergers

Tobacco Mergers Are Creating a More Efficient Killing Machine

Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012.
Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012. Bloomberg/Getty Images

It’s been a year of colossal mergers or proposed mergers among some consumer goods and services companies. Comcast wants to take over Time Warner Cable (not affiliated with TIME) to form the nation’s largest cable company. AT&T and DirectTV want to combine to compete against them. The market also expects T-Mobile and Sprint to hook up, further reducing competition in mobile phone service.

Now add to that the tobacco industry. Reynolds American announced a deal to acquire Lorillard Inc. which it values at $27.4 billion. It’s a combination of the second and third largest cigarette makers after Altria Group, which owns Philip Morris USA. As part of the deal, British American Tobacco Plc retains its 42% stake in Reynolds by providing $4.7 billion in funding.

That’s a lot of dealmaking for the Federal Trade Commission and the antitrust division of the Justice Department to bless or deny. The goal of antitrust statutes is to preserve competition in any industry segment. Trustbusters don’t care who provides that competition, just as long as enough of it exists. That’s the ongoing debate in the proposed cable combination. It’s axiomatic that when two dominant players mergers prices rise and consumers suffer.

The proposed tobacco merger has a similar competitive profile. Combining the second and third largest companies will certainly reduce competition, giving Reynolds a 34.1% market share after divestitures. Unlike the media mergers, though, this one takes place in a shrinking market, as smoking continues to decline. Consolidation in a declining market certainly makes sense from an economic point of view. And there’s a clever wrinkle in this deal, in that Reynolds will sell off the KOOL, Salem, Winston, Maverick and blu brands to Imperial Tobacco for $7.1 billion—the idea is to create a stronger No. 3 competitor to keep the antitrust forces at bay.

There’s one other big difference, though: the merger will allow these two companies to be more efficient in killing people with their products. In its merger document, Reynolds says the deal would produce $800 million in cost savings and produce double digit profit gains by the second year. Not that Reynolds is a laggard. The company had already doubled its operating profit margin to 36.7% since 2004. And its 10–year return to shareholders of 542.2% has dwarfed the S&P’s return. This is a profit machine, even if a lethal one. According to the American Cancer Society, about 224,210 new cases of lung cancer will be diagnosed this year and 159,260 people will die from lung cancer—that’s more than colon, breast, and prostate cancers combined, says the ACS.

The new company will feature brands including Camel, one of the top premium smokes, and Vuse, a fast growing e-cigarette, but the prize in deal for Reynolds is Lorillard’s Newport, now the No. 1 menthol brand. Newport now owns a 12.6% share of the entire cigarette market in the U.S. and it’s growing —33.7 billion menthol “sticks” were sold last year. According to the Reynolds’ presentation, Newport has an “attractive demographic profile.” That profile, says smokefree.gov, includes blacks, women, Hispanics and younger people, all of whom are higher-than-average consumers of menthol cigarettes. These very characteristics have put menthol under the regulatory spotlight, leading to speculation that the Food and Drug Administration might ban menthol. But Reynolds clearly doesn’t believe that the feds will make any such move. “While cigarettes are dangerous there is not a significant difference between a menthol cigarette and a non menthol cigarette,” noted Murray Kessler, Lorillard’s CEO. “And ultimately the science will prevail.”

The same science holds the view, which none of these companies disputes, that tobacco use is deadly. And smoking costs our health care system billions of dollars annually to treat smokers. Should the FTC or Justice factor public health considerations into the deal? For instance, if the FTC believes that cigarette prices will increase, would it still bless the deal because rising prices might help ration demand—force more smokers to quit. Conversely, would blocking the deal, and keeping the competitors in place, have the opposite effect and lower prices, thus attracting more smokers?

That’s not necessarily an analysis that antitrust regulators are willing to make. Typically the antitrust agencies look only at the competition effects. As a former FTC official told me: “The traditional view has been that if the health and safety regulators wish to impose conditions, that’s their call entirely.” Expect the FTC to stick to the economics, which will be great for the tobacco companies, and their investors. The customers are on their own.

TIME mergers

Dish Network Slams Potential Comcast-Time Warner Cable Merger

Dish Network
A satellite television system is installed at a residence in Denver, Colorado, on Aug. 6, 2013. Bloomberg—Bloomberg via Getty Images

Satellite operator Dish Network has come out against the proposed merger of Comcast and Time Warner Cable.

Updated July 9, 4:45 p.m.

Satellite operator Dish Network has come out against the proposed merger of Comcast and Time Warner Cable. The pay-TV giant voiced its concerns with the pending merger in a meeting with the Federal Communications Commission earlier this week, according to a filing released Wednesday.

“The pending Comcast/Time Warner Cable (“TWC”) merger presents serious competitive concerns for the broadband and video marketplaces and therefore should be denied,” Dish wrote in its filing. “There do not appear to be any conditions that would remedy the harms that would result from the merger.”

Specifically, Dish said that a merged Comcast-Time Warner Cable would be able to undermine over-the-top video services such as Netflix by altering streaming speeds either on the so-called “last mile” of the Internet delivered into people’s homes or at interconnection points where video content is transferred among various Internet providers. Dish also argued that the merged company would be able to leverage its size in anti-competitive ways by forcing programmers to offer content at a lower cost. Smaller providers such as Dish would end up being forced to pay more to make up for networks’ lost revenue, the company argued.

In a response, Comcast Vice President of Government Communications Sena Fitzmaurice said Dish not wanting stronger competitors wasn’t surprising or new. “Dish has long been one of our most vigorous competitors, and unlike us has a national footprint available in tens of millions of more homes than a combined Comcast –Time Warner Cable,” she said in an email. “Any issues regarding NBCUniversal programming and other video services, whether they be traditional or over the top are already amply covered by pre-existing FCC rules and deal conditions.” (As part of the terms of its deal to purchase NBCUniversal, Comcast agreed to adhere to certain net neutrality principles until 2018).

Dish is one of the odd men out at a moment of mass consolidation in the pay-TV industry. In addition to the proposed Comcast-Time Warner Cable deal, AT&T and DirecTV are also seeking regulatory approval to merge. Dish said that merger also presented “competitive concerns” because the combined company would be able to leverage programming content to the detriment of customers.

TIME Companies

Google Buys Music Streaming Service Songza

The music streaming service says its product will remain unchanged, for now

The music streaming service Songza announced Tuesday that it’s being purchased by Google, adding to the tech giant’s already sizable presence in the online music sector.

“We can’t think of a better company to join in our quest to provide the perfect soundtrack for everything you do,” Songza said in a statement. “No immediate changes to Songza are planned, other than making it faster, smarter, and even more fun to use.”

Songza didn’t reveal a purchase price. The New York Post, citing unnamed sources, reported last month that Google was offering about $15 million, far less than the billion-dollar-plus valuations of online music behemoths Spotify and Pandora. Songza streams music in “smart playlists” curated by experts and tailored to an individual users habits.

The acquisition adds to Google’s subscription music service launched in 2013 as well as its ownership of YouTube, already a heavyweight in the online music sector, which the company says will be launching a paid streaming service.

The news comes after Apple’s announcement in May that it would buy Beats Electronics, which sells high-end audio equipment in addition to a music streaming service.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser