In the past month and a half there has been a tremendous consolidation in Internet advertising.
- May 18: Microsoft announces it will pay $6b in cash for aQuantive, parent to digital agencies Avenue A, Razorfish, Atlas and DRIVEpm. That price constitutes a huge premium relative to $442m in ’06 revenue (net income was $54m)
- May 17: British advertising giant WPP Group, which is known for its offline ad services, announced it would acquire 24/7 Real Media for $649m. (the price represented a premium of approximately 17x EBITDA)
- April 30: Yahoo acquired the 80% of internet ad auction exchange Right Media it didn’t own for approximately $680m.
- April 13: Google acquires DoubleClick for $3.1 (price represents approximately 20x EBITDA) (more here)
Much commentary referring to these deals has focused on extreme valuations. Quite a bit has also suggested each new acquisition was an answer to the one that came before; a suggestion as if each acquisition had been a part of a game of competitive one-upsmanship between Yahoo, Google, and Microsoft.
These deals didn’t happen overnight – they happened over weeks and months. Several of these deals were in discussion at the same time, and most were on internal target lists for more than a year. While the time lines for the deals closing, or pricing discussions that went on, might have been influenced or accelerated in response to announcement of the other deals, these acquisitions are largely independent and, in many ways, they’re best viewed as singular events.
As unrelated transactions, there’s a theme - three of the biggest companies in Internet advertising believe the ad market is changing and growing, and doing so dramatically.
All three deals (four if counting WPP Groups purchase of 24/7 Media) also closed at significant premiums whether valued by market valuation or projected sales. (At $6b for aQauntive, Microsoft payed more than 2x the prior day’s trading price.)
Why the premium? Did the companies overpay to make these deals happen or do they know something the market doesn’t?
People will form their own conclusion on that question; and only time will put a final answer on the debates- which are plenty. But Microsoft, Google and Yahoo are three companies with more data on net advertising than just about any others. You’ve got to wonder if their data is telling them something. I think it is.
Forecasts put the size of the Internet Ad Market between as much as $25-40b this year with projected growth of 15-20% per year for the next five years. Microsoft is among those forecasting on the higher side of those numbers.
Most forecasts (whether from independent analysts, tracking agencys or companies selling in the market) don’t account for the possibility of ad buyers shifting their ad–spend from television (or print or radio) to the Internet. Even relatively subtle shifts of ad spending from the $300b US ad market could make the forecasts incredibly conservative.
It’s not unreasonable to think that kind of shift could be possible sooner than later, especially from Television to the Internet. As it stands now, premium Television content is increasingly available on the web. All of the major networks are rebroadcasting programming online (not to mention the volume of IPTV startups vying to participate; or the availability of downloadable programming from places like iTunes.) The increase in viewing outlets increases the possibility of audiences shifting their viewing habits away from TV. and ad-spending will follow the viewers. Mix that fact with the wealth of user-generated content on sites like YouTube or Revver that could be host to display ads. Then ad to the equation the fact that more than 20% of US households own already own DVRs and when watching recorded shows, often skip the commercials – which poses another threat to the value proposition of traditional TV advertising. As a bonus, you can also add the prospect of selling video ads bundled for inclusion in in-game video game advertising (which both Microsoft and Google are equipped to do following acquisitions in the past year).
In these major acquisitions, Yahoo, Google and Microsoft have all helped position themselves for this kind of change if it does in fact happen. And even if it doesn’t, by consolidating customer lists and services offerings the three can make a more compelling argument for a one-stop bundled ad buy when selling to customers. There is likely significant revenue upside in the cross-selling that will come out of the deals.
As to the valuations, and whether or not they’re reasonable, that’s a tricky question. There’s a lot of criticism and amusing comments floating around. Kevin Kelleher of GigaOM noted that for $6b Microsoft could have hired 60,000 employees for a $100k each but instead is paying a sales price equal to about 2.85m for each of aQuantives existing employees. That is pretty crazy sounding math but I’m not convinced the folks up in Washington are on the pipe just yet.
On the surface considering only bottom line, and the growth the acquired companies projected had they stayed private (where that info was available or estimated) – it would seem some of the numbers are indeed extreme. Microsoft may have $35b in cash but that doesn’t mean they should spend it recklessly.
Trouble with those kinds or arguments is they do not consider how much larger growth could be with the added resources of the larger organization. Nor do those viewpoints consider other, more indirect, factors. In my eyes, all of these deals, and their pricing, should be valued from at least three perspectives beyond the direct benefit to the bottom line. In no particular order:
- Customer’s– in each case, the acquired company has had a sizeable client list, many of which were not represented previously by the acquiring company. By means of the acquisitions each buyer made significant changes to their client rosters thereby increasing their pools of qualified sales leads and the possibility of selling new packages of bundled services. Additionally, there may be strategic benefits (offensive/defensive) in the acquired customer list.
- Technology – All of the big players in the internet ad marketplace have their strengths and weaknesses. By buying the underlying technology platforms used for ad management, distribution, metrics, etc, at the target company, the acquiring company can quickly strengthen some of its weaker areas (assuming successful post merger integration.) In the case of Microsoft, for example, it says there is little overlap between their business lines and aQuantive. Based on their published statements, this is an opportunity for Microsoft to rapidly bolster its advertising products with complimentary components.
- Defensive strategy – keeping client lists, or desirable technology away from competitors can be a significant value proposition. In the case of the Google- DoubleClick deal: DoubleClick had display ad contracts with both AOL and MySpace. Google had its own deals with AOL and MySpace – and paid in the ballpark of $2b to make them happen. Had a competitor bought DoubleClick and gained access to both AOL and MySpace, there’d have been potential for them to undermine the deals Google already had in place when the contracts are next up for renewal. In buying DoubleClick, Google insured that for now, it would remain the sole ad partner for both companies.
Similarly, in buying DoubleClick, from a defensive technology standpoint: Google kept the highly regarded Performics search and affiliate marketing tools away from competitors. Had Microsoft acquired the tools and client list, it might have been better equipped to compete with Google on affiliate and search marketing; areas where it struggles.
Considering all of these factors, it may be harder to play critic to the valuations. I suspect time will prove a few of the deals shrewd on the part of the buyers and a few shrewd on the aprt of the sellers.
One thing is clear, overpaying or not, these are all clearly strategic transactions and all three companies have similar strategic visions for advertising. They’re also not afraid to spend.
What’s next? – My crystal ball doesn’t say much, nor does my Magic 8-ball but The people at Revenue Science, Blue Lithium and even Value Click (if the FTC– review doesn’t deter buyers) probably feel like they’ve got a good shot at getting a prom date too.