Not ad(d)ing up

-Email Thomas Rasmussen

Contrary to our pronouncement last year, the online advertising industry is in a tough spot at the moment. Venture funding for these companies has been shut off as the slumping demand for Web-based advertising has hit the sector harder than it anticipated. (At least it’s not as bad as the regular advertising market. As one VC quipped recently, “While the online ad market has caught a cold, the offline ad market has caught pneumonia.”) Still, the decline in the space has created numerous opportunities for buyers looking to pick up scraps.

One such company having a field day in the current environment is Adknowledge. Just this week, the company picked up the advertising business of struggling MIVA for the bargain price of $11.6m. The division has estimated trailing 12-month revenue of about $75m, down sharply from $100m a year ago. The acquisition came after Adknowledge tucked in two small social networking ad networks for less than $2m, much less than the more than $4m the two raised in venture capital. Furthermore, Adknowledge, which has raised an estimated $45m, tells us that it is still shopping.

Of course, it’s not all gloom and doom for the online ad market. One area where there’s actual growth – and at least the promise of rising valuations – is in online video advertising. VCs have put hundreds of millions of dollars into this sector. Their bet: More Web surfers will increasingly look to online videos for information and entertainment. Granted, it’s still a small space. (Consider the fact that YouTube probably contributed only a few hundred million dollars of revenue to Google’s total revenue of $21.8bn in 2008.) Still, the promise is there. Also encouraging VCs in this market is that the online ad giants (Google, Microsoft, AOL and so on) may well need to go shopping to get video ad technology. We recently published a more-thorough report on that, matching potential buyers and sellers.

Ad networks: What recession?

-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase