Category: advertising technology

Demanding exits on the demand side

Scott Denne

Contact: Scott Denne

While companies that help publishers sell ad space have commanded high multiples in recent transactions, businesses on the demand side haven’t seen similar outcomes. With few obvious buyers in that latter category of ad tech, the situation is unlikely to change in the next quarter or two.

Businesses like LiveRail, SpotXchange, FreeWheel Media and Nexage, which sell yield management, ad exchanges and other supply-side tools to help publishers make the most of their inventory, have commanded premiums of 6-10x trailing revenue in transactions well north of $100m. On the demand side, companies that place advertisements have seen fewer big deals, and those that have happened came in at lower multiples, like the 1.3-3.7x trailing multiples in sales for firms such as Adconion and Conversant, similar to the multiples of demand-side players on the public markets.

Why the disconnect between exits for companies that enable the buying and those that enable the selling of digital media? There are, of course, vertical- and company-specific factors that account for some of the difference in valuations. In the big picture, there is just a larger pool of companies, from Internet giants to traditional media companies and broadcasters, that are comfortable with the business of selling ad space – but historically, only ad agencies have been in the media-buying business, and they’re not buying tech companies.

Long term, the exit window for these demand-side players will open up because there are many high-growth businesses with more than $100m in revenue in this category, such as Turn, MediaMath, DataXu and Quantcast. With the exception of WPP Group, ad agencies have preferred to be customers, rather than owners, of media-buying tech – and that situation isn’t likely to change until they see a credible threat from ad-tech companies selling directly to customers traditionally served by agencies.

Over time, we expect enterprise software companies to drift beyond marketing software and into paid media, as the line between paid and earned marketing begins to blur. But today, most aren’t comfortable being in the media business.

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Common Yahoo M&A gossip lacks context

Scott Denne

Contact: Scott Denne

There’s no shortage of breathless ideas floating around about what Yahoo should do with its new-found Alibaba cash. The two most commonly touted are a $4bn purchase of AOL – an idea that now has the backing of an activist hedge fund – and buying Yelp (current market cap $5bn). While not impossible, there’s a common thread in both these ideas: they ignore Yahoo’s stated growth strategy and its past behavior.

Yes, Yahoo now has about $5-6bn in additional cash (half of which it said will be returned to shareholders), but it wasn’t strapped for capital before this. Over the last two years, its stock price rose 2.5x, giving it a $40bn market cap to spend with, and it ended last quarter with $2.7bn in cash. So, it has plenty of currency to make a big purchase, but hasn’t. In fact, CEO Marissa Mayer has only one major purchase in her tenure: the $1.1bn purchase of social media company Tumblr. Aside from that deal, the company hasn’t spent more than $500m on a deal since 2007, when it bought Right Media.

Under Mayer, Yahoo’s clear focus has been on expanding video and editorial content while transitioning to a mobile-first company, and the deals it has done this year reflect that. According to the 451 M&A KnowledgeBase, Yahoo bought nine, mostly mobile, companies in the first half of this year. And for that, it laid out an inconsequential $21m of its cash, according to its most recent quarterly report. Making one of the biggest deals in its history – to pair up with a company such as AOL or Yelp that is rooted in Web content and display advertising – would be an about-face.

Millennial adds mobile exchange in pickup of Nexage

Scott Denne

Contact: Scott Denne

Millennial Media turns to Nexage in a $107.5m acquisition to better position the mobile ad network into programmatic mobile advertising as it looks to return to growth. Most importantly, Nexage provides the publisher-facing pieces Millennial needs to offer a complete mobile ad stack that serves the entire ecosystem from advertiser to publisher – but it comes at a big price.

Nexage will cost Millennial $85m in stock and $22.5m in cash for the mobile-focused supply-side platform. For Millennial, that’s a hefty amount as it will have to print 37 million new shares (26% of the total outstanding post-close) and use up almost one-quarter of its cash. In return, it doesn’t immediately add much to the top line, as Nexage posted about $8m in trailing revenue. Roughly $45m in ads ran through its system, making it about one-sixth the size of Millennial (closer than Nexage’s revenue would suggest), but since Nexage is an exchange, rather than an ad network like Millennial, it only books as revenue the portion of the spending it keeps.

Millennial already faced competition from several dozen ad networks and DSPs, and with this deal will add a smattering of ad exchanges to that mix. But in one way, this purchase pivots it away from much of the competition in mobile. Most of the mobile ad-tech industry – especially the programmatic portion – is aimed at serving performance-based advertisements, particularly geared toward driving app downloads. While this is still part of Millennial’s business, it’s a shrinking segment and the company has turned to brand advertising to fill the gap. Nexage, with its focus on larger publishers, brings Millennial an inventory set that’s desirable to those advertisers.

GCA Savvian advised Nexage on the sale, while LUMA Partners advised Millennial.

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Alliance becomes biggest dealmaker in move from offline to online marketing

Scott Denne

Contact: Scott Denne

Amid similar moves by its peers, Alliance Data Systems makes the biggest leap from marketing data to marketing software in its $2.3bn acquisition of Conversant. Like other offline marketing data service providers, Alliance sees a move into digital marketing as the only real way to grow its offline marketing data business.

Alliance is handing over 7% of its stock (worth $1.2bn) as well as shelling out $1.1bn in cash to get its hands on Conversant; despite that, the stock is up 2% on the news. That’s as much a reflection of Conversant’s financial metrics – the target has better margins than Alliance’s Epsilon and will boost the EBITDA margins of that unit (which will be home to Conversant) from about 22% to above 25%.

At a multiple of 3.7x trailing revenue, the transaction is on the high end of valuations for ad-tech firms – again, reflecting Conversant’s unusually high profit margins in that sector – but lower than the 10x and beyond paid (in smaller deals) by Alliance’s peers Acxiom and Neustar.

This isn’t Alliance Data’s first move into digital marketing: it picked up a handful of email marketing businesses last decade and again in 2011 and 2012 when it bought a pair of digital marketing agencies – Aspen Marketing Services and Hyper Marketing – for a combined $820m. The company has also dabbled in other areas of digital marketing and ad tech, but has found little success beyond email and has remained a services-heavy business.

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Rocket Fuel ignites first acquisition

Scott Denne

Contact: Scott Denne

Rocket Fuel built a business on delivering advertisers more clicks for fewer dollars, launching its revenue growth well beyond most other ad tech companies. That growth, however, is decelerating as its lack of a software offering and perceptions of fraudulent clicks on its service caused it to lower its guidance and carved away one-third of its stock price this morning. Now it’s picking up [x+1] in a $230m bid to solve its underlying problem: beyond the results it delivers, Rocket Fuel has little hold on its customers.

The target’s core offering is a data management platform on which advertisers mix third-party data with audience data gathered from their campaigns. Managing marketing data for customers (rather than just promising cheap clicks) will help Rocket Fuel build a case for longer contracts with advertisers, as well as enable the company to apply its artificial intelligence to other marketing applications, such as website optimization.

Rocket Fuel will burn up $100m in cash and $130m in stock ($100m after today’s drop) for [x+1], with an estimated trailing revenue multiple of just below 3x. That’s quite a bit lower than what [x+1]’s peers, such as Aggregate Knowledge and BlueKai, have fetched – mainly because a significant portion of [x+1]’s revenue comes from low-margin media sales, rather than licenses of its data management platform.

We’ll have a more in-depth report on this deal in our next 451 Market Insight.

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RTL Group latest to jump into video ad fray

Scott Denne

Contact: Scott Denne

German broadcasting company RTL Group’s $144m pickup of SpotXchange pushes independent video ad exchanges to the brink of extinction. The programmatic video market is still in the early stages, but a series of acquisitions has left few independent players.

SpotXchange’s sale comes weeks after one of its closest competitors, LiveRail, was picked up by Facebook, and a year after AOL bought Adap.tv, the early leader in programmatic video exchanges. RTL is taking a 65% stake in the business (valuing the company at $221m), with an option to buy the rest plus a performance-based earnout. We believe SpotXchange has trailing revenue of $40-50m, which would give this deal a multiple that’s in line with those transactions.

This acquisition leaves BrightRoll as the only remaining independent video exchange with substantial scale, and that company (which is a combination of video ad network and exchange) is several times larger than SpotXchange in terms of revenue and would be an expensive purchase.

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Yahoo lands a Flurry of mobile data

Scott Denne

Contact: Scott Denne

Yahoo tops off its push into mobile apps by picking up Flurry, a vendor that offers an app analytics service and generates revenue through an ad network that leverages the data and publisher relationships from the service.

While Yahoo has been among the most acquisitive companies over the past few years, its purchases have been focused on expanding its mobile development team and its content. In fact, Yahoo hadn’t acquired any technology to help monetize content since the $270m pickup of interclick in late 2011. Though terms of the Flurry buy weren’t disclosed, various reports put it in the same neighborhood as that acquisition ($200m-300m).

Flurry’s business is operating a mobile ad network. Those companies rarely fetch high multiples because the business is precarious and driven by individual ad campaigns, rather than long-term subscriptions or licenses. Recently sold ad networks such as AdColony, Adconion and Jumptap have fetched 1.3-2.7x trailing 12-month revenue. In Flurry’s sale, however, we expect that the value of the target’s deep mobile audience data drove the multiple above that range.

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TubeMogul’s IPO getting fuzzy reception

Scott Denne

Contact: Scott Denne

TubeMogul has had a tough time finding reception on Wall Street. The company, which sells software and services to enable brands to advertise in online videos, cut the expected range of its IPO to $7-8 per share from $11-13, and its existing investors have informally committed to buy more than half of the $47m offering.

Some of the difficulty stems from the performance on its closest peers – Tremor Video and YuMe. Those video ad networks went public last summer and have seen their value drop 57% and 34%, respectively. TubeMogul is transitioning itself to a provider of software (41% of revenue last quarter), not just services (58%, down from 76% a year ago), giving it higher gross margins and potentially a higher valuation – at the midpoint of its range it would have a pro forma enterprise value of about 2.3x trailing revenue, double what YuMe and Tremor command.

Despite the potential for TV ad dollars – which currently account for about half of all ad spending – to move online, the transition is in its early days and while TubeMogul has managed to capture a chunk of the first phase (desktop video accounted for 95% of its revenue in each of the past two years), Wall Street may be wondering if it will be able to post the same growth (more than 2x YoY last quarter) selling ads into mobile devices, connected TVs and other emerging forms of video consumption.

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Could [x+1] equal 3?

Scott Denne

Contact: Scott Denne

[x+1] looks set to be the next audience data manager to find a buyer. We understand that the company is nearing the end of a sale process that will likely value it above $200m.

Founded in 1999, [x+1] has been through its share of strategic shifts and name changes (Poindexter Systems, Ru4.com), though its core technology – predictive optimization for digital advertising – has been fairly consistent. Today, its core product is a data management platform (DMP) built around its optimization engine that provides marketers with a central repository to mix first-party audience data with third-party data and sync multiple marketing and advertising applications together.

Owning a DMP is an attractive option for enterprise software companies looking to deepen their marketing portfolios (Oracle and Adobe have already made moves here). One important difference, however, between [x+1] and other independent DMPs (which we profiled in a recent report) is that most of its revenue comes from customers purchasing slots for digital ads through its system. The low margins that come with media buying could make an enterprise software vendor uncomfortable with owning [x+1] or, at least, lower the multiple such a buyer would be willing to pay.

More likely, [x+1] will go to an ad-tech firm that already has similar margins and is eager to expand into other parts of the marketing stack. Rocket Fuel and Criteo would be at the top of the list as both, like [x+1], have price optimization at the core of their offering and both are flush after IPOs last year.

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Opera hits a high note

Scott Denne

Contact: Scott Denne

Opera Software departs from its measured mobile advertising M&A strategy with the $75m purchase of AdColony, which operates a mobile ad network for HD video ads. Opera has built a mobile ad business with $133m in trailing revenue, having spent only about $40m (excluding earnouts) on a half dozen companies, starting with the acquisition in January 2010 of AdMarvel for $8.3m.

This deal is very different. For one, a $75m upfront payment makes it Opera’s largest. And though the mobile software firm is no stranger to earnouts, it’s on the hook for as much as $275m more in cash and stock payments should AdColony hit its revenue and EBITDA targets. Unlike Opera’s previous targets, AdColony comes with substantial revenue: it finished 2013 with $53m in revenue, up from $11m in 2012, and is expected to contribute $170m to Opera’s 2015 top line (25% of total anticipated revenue).

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