Augmented-Reality Startup Magic Leap to Explore a Sale

(Bloomberg) -- Magic Leap Inc., the startup that raised more than $2 billion to build an augmented-reality device, is exploring options including a sale, according to people familiar with the matter.

The Plantation, Florida-based company is working with an adviser to consider strategic options that could also include forming a partnership or selling a significant stake ahead of a potential listing, said the people. Magic Leap could fetch more than $10 billion if it pursues a sale, the people said, asking not to be identified because the information is private.

Tech companies have been placing bets on the promise of augmented-reality products, which have also found uses in health care and other industries.

The entire hardware sector is facing new threats, from tariffs in the U.S.-China trade war to supply chain shortages, after factories closed with the coronavirus outbreak. The pressures are resetting expectations at major companies such as Apple Inc., and may hit even more acutely at private startups that rely on outside investors to keep their operations going.

Magic Leap, which counts Alphabet Inc.’s Google and Alibaba Group Holding Ltd. among its largest investors, is gauging potential interest from large tech companies including Facebook Inc. and medical giant Johnson & Johnson, the people said.

An initial meeting between Facebook and Magic Leap never progressed to deal talks, according to a person familiar with the matter. The social media giant, already facing rising tariffs and coronavirus-related production pressures for its own virtual reality headsets, isn’t currently interested in acquiring Magic Leap’s business, the person said.

AR Competition

In addition to Facebook, Microsoft Corp. and Amazon.com Inc. have all been investing in augmented reality with their own divisions, said Jitendra Waral, a Bloomberg Intelligence senior analyst. AR hardware may be limited to enterprise uses for the next several years, he said.

For Magic Leap, the valuation of the company will be a question mark because suitors may have to take a long-term bet without substantial near-term revenue, Waral said. The scalability of the company’s technology could also be an issue, he added.

“One thing to keep in mind with AR hardware is we do anticipate mainstream adoption being a few years away, so whoever buys them needs to have the financial capacity to carry the products through as AR is still evolving,” he said.

Magic Leap’s deliberations, which may not lead to a transaction, come as the company shifts its focus to selling its products to companies in the health-care, industrial and financial sectors after slower-than-expected adoption by consumers.

Representatives for Magic Leap, Facebook and J&J declined to comment.

Omar Khan, Magic Leap’s chief product officer, said in an interview earlier that the company’s Magic Leap 2 product will be released next year and will help it build a consumer presence. He said he expects the company to develop a disproportionate share of the market, which he said will top $100 billion within a few years.

Led by Chief Executive Officer Rony Abovitz, Magic Leap has raised about $2.6 billion from investors and is valued at $6 billion to $8 billion, making it one of the most well-funded tech startups in the U.S. as it built a headset that could project digital objects onto the real world.

Among the company’s other big name investors are Japan’s largest wireless operator NTT Docomo Inc., Saudi Arabia’s sovereign wealth fund PIF, Singapore’s state-owned investment company Temasek Holdings Pte. and AT&T Inc.

Magic Leap lured investors with a promise to create a headset using spatial computing technologies that offer consumers high-end augmented reality experiences and tools to support remote working. Many big companies have been chasing the same technology, including Microsoft with its HoloLens device.

Magic Leap, founded in 2011, unveiled a $2,300 headset in 2018 after years of secretive work and has pledged to deliver technology rivaling television or the telephone in societal impact.

Big Promises

These audacious promises have made Magic Leap the subject of both intense interest and a target for skeptics, who say it has failed to deliver on its early promise and hasn’t met its own sales goals. Attracting a deep-pocketed suitor could buy the company time to roll out future products while allowing investors to cash out.

The company has also been looking at raising another $500 million since last year but the round hasn’t closed yet, according to a person familiar.

Punchy private valuations for buzzy startups don’t always translate into successful public listings. Two of the most prominent debuts last year -- Uber Technologies Inc. and Lyft Inc. -- are still trading well below their initial public offering prices. Meanwhile, the spectacular collapse of WeWork reads like a cautionary tale for money-losing unicorns headed for public markets.

There have also been signs of discord within Magic Leap. The company has faced legal disputes with multiple former employees and Chief Financial Officer Scott Henry stepped down from that role at the end of last year.

--With assistance from Riley Griffin and Joshua Brustein.

To contact the reporters on this story: Ed Hammond in New York at ehammond12@bloomberg.net;Sarah Frier in San Francisco at sfrier1@bloomberg.net

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, ;Jillian Ward at jward56@bloomberg.net, Michael Hytha

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