MIVA Media – Inorganic Growth

-Contact Thomas Rasmussen

Rumors of the sale of Super Rewards (also known as SR Points) have been swirling for quite some time. On Wednesday, acquisitive Adknowledge announced that it is indeed the winning bidder in a competitive sales process for Vancouver-based Super Rewards, a bootstrapped, 40-person incentives-based online advertising startup. (We understand that Super Rewards is profitable and generating approximately $60m in gross revenue – a number the firm says could hit as much as $100m this year. Of course, the company’s net revenue is much lower, likely in the neighborhood of one-fourth the gross amount after revenue share.) The purchase of Super Rewards marks the sixth acquisition for Adknowledge in less than two years, and we estimate this transaction is by far its largest yet. The deal also marks a shift in the M&A strategy of the Kansas City, Missouri-based online advertising giant, which has typically been more inclined to pick up heavily discounted distressed assets.

Nonetheless, Adknowledge, which we estimate was running profitably on close to $200m in revenue prior to the acquisition, has made a smart purchase in reaching for Super Rewards. Incentives-based advertising companies like Super Rewards have received quite a bit of attention recently because they seem to have found a way to actually make money off of social networks. (The fundamental business principle of profitability has largely eluded the social networks themselves.) Much like other online advertising niches, it is a sector that stands as a small, faster-growing piece of a much larger overall market. But in order to reach their full potential, incentives-based advertising vendors need the scale brought by established and wealthy companies like Adknowledge, which boasts more than 50,0000 advertisers. Because of that, we weren’t surprised to see Super Rewards gobbled up – and we wonder if the same thing might not end up happening to the firm’s two main rivals.

We’re thinking specifically about Fremont, California-based Offerpal Media and San Francisco-based Peanut Labs, which have taken approximately $20m and $4m in venture capital, respectively. The largest independent startup remaining in the niche sector, Offerpal Media recently said it was doing around $40m in revenue. Potential acquirers include dominant online advertising players such as Microsoft, Google, Time Warner’s AOL and ValueClick. In particular, we suspect ValueClick could be ready to shop as a way to stand out from its larger competitors. The Westlake Village, California-based company certainly has the means to do a deal, since it has no debt and some $100m in cash. Other potential suitors for incentives-based advertising startups include large-scale application platforms such as Facebook and NewsCorp’s MySpace that would benefit greatly from bringing the ad service in-house.

Adknowledge M&A

Date announced	Target
July 22, 2009	KITN Media [dba Super Rewards]
March 12, 2009	Miva Media
November 6, 2008	Lookery (Advertising business assets)
November 3, 2008	Adonomics [fka Appaholic]
December 6, 2007	Cubics Social Network Advertising
November 8, 2007	Mediarun (UK and Australia divisions)

Source: The 451 M&A KnowledgeBase

-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.