An investment bankers’s view on the adtech sector from ATS London 2016.
It’s an interesting time in the adtech sector, especially when it comes to financing, M&A, and for those big enough, the decision between selling to one of the industry’s major acquirers or taking the plunge and floating on the stock exchange.
Those that have taken the latter decision have faced much hardship in recent years - one need only look at the torrid time experienced by Rubicon Project after its most recent quarterly call as a prime example.
Pair this with earlier reports of adtech outfits facing increasing hardships when it comes to even getting a meeting with investors, it would appear, that the dark clouds are gathering over the sector. Some have gone as far as to compare this to the infamous ‘dotcom boom’ of the early part of the century, especially with the encroachment of traditional martech players (such as SalesForce, etc., into the media buying game).
However, these feelings are not universal, and some of the most influential players in the industry – and more importantly financers - are quick to distinguish between the current rise of adtech – or ‘programmatic’ – and the early follies of the internet economy.
Speaking earlier today at ExchangeWire's ATS London, Julie Langley, a partner at investment banking outfit Results International, told attendees that despite the recent “bloodbath” of adtech companies in the public markets, and the beginning of an overall slowdown in the number of mergers and acquisitions (M&A) in the sector, there are reasons to be cheerful.
There is still demand (ergo value) in the sector, it’s just that this is coming from different areas, below is an outline of Langley’s keynote presentation from this morning.
The number of adtech M&A deals is slowing
“In 2013, there were 61 M&A transactions in adtech, in 2014, that soared to 135, and in 2015 it grew again to 155. While in the first half of 2016, there has been 60 transactions going on in adtech. So If that continues at the same pace, there’ll be 120 transactions globally in adtech this year,” explained Langley.
Explaining her thoughts on the reasons behind this stuttering performance – despite the clear strategic interest from investors – she said: “I think it’s very similar to what we saw in 2000, and 2001, too much money has been raised at too high valuation(s),” she explained.
“Nearly every adtech company that has gone public is currently trading at beneath its IPO price. And if you look at the venture capital market, too many companies raise Series A, Series B rounds at a $60-100m valuation, and haven’t been able to get the exits that make their investors happy.”
But it will work itself out…
“What we have is a fundamentally attractive, high-growth market, where too many investors have had their fingers burned, but that is a temporary (albeit painful) problem, and it will work its way through its system,” Langley went on to say, highlighting that there has been over 200 M&A deals in the adtech sector in the last 18 months, with over 186 different buyers.
“That is a huge number of buyers that want to be in adtech,” she went on to say, broadly subdividing the buyer community into a number of categories. These can be broadly defined as the below.
Strategic adtech buyers subdivided
‘The usual suspects’ of pure-play adtech players and agency networks -
‘new entrants’ – outfits she defined as “anyone that wants to enter the landscape”.
There is also a broad category of players broadly consisting of outfits such as data providers, e-commerce outfits, outfits such as Facebook and Google, as well as martch providers.
Add to this ‘emerging players’, also new entrants with one distinction: they’re players we’ve never heard of - these have been acquired by traditional media players such as RTL which acquired SpotX and Sky which bought BetaXU.
“What’s interesting about the last 18 months is that 42 per cent of the 215 deals have been from pure-play adtech players (the AppNexuses, and MediaMaths of this world), but this is by the number of deals, not by value," said Langley. "These players have been doing very small transactions.”
Marketing service providers
“These are the WPPs, and Dentsu Aegis Networks of the world … and while they had been relatively quiet for a couple of years – they felt they had their tech stack completed – but they’ve emerged as big buyers in recent years,” she said, citing WPP’s purchase of Exchange Lab at the close of last year, as well as Dentsu’s more recent purchase of Accordant Media.
“Traditional media players have been very aggressively acquiring, and particularly ComCast [which recently bought StickyAds, and RTLs [which bought a controlling stake in SpotX] of the world,” she said, pointing out that such companies are trying to learn from what happened to print publishers. “They’re trying to get on to the front foot and take control of the value of their audience, as well as monetisation. They’re in an interesting situation, as they own ‘must view’ original content.”
“A lot of telcos have been buying adtech, such as Verizon Wireless’ AOL and Yahoo deals, and there’s others such as Singtel, Telenor, etc., and they’re the ones that have been writing the really big cheques,” she added. “The interesting features of these buyers are that they have huge numbers of subscribers and huge amounts of data,” she said, adding that if they can figure out the privacy conundrum around location data then that will be a key point-of—difference to advertisers.
“Another thing is that their core market is flat - and they’ve got deep pockets – so they see adtech as a really interesting growth segment to get into,” she went on to say.
“The data providers trying to move from offline to online, internet and e-commerce (such as eBay and Twitter). Google and Facebook, they belong in there – just look at some of the deals they’ve been doing, and they’ve been writing some pretty large cheques,” she explained. “Plus then there’s the marketing technology players like Adobe, and Oracle.”
“These are also new entrants, but with one distinct difference: these are players we have never heard of and entering the completely from the leftfield,” she told attendees, citing companies like Mitteo which recently bought MediaNet for almost $900m recently. She observes that most of the players in this category are from Asia. “We have a team on the ground in Asia,” said the investment banker. “And this is just the tip of the iceberg.”
She went on to point out that 47 per cent of adtech deals are now being performed by ‘new entrants’. “It’s that high level of strategic interest, that’s driving my reasonably cheerful outlook in the sector,” Langley said, adding that most of these new entrants have paid “healthy, or very healthy” fees to get into adtech.
The reasons behind the differentiation between public adtech companies, and the prices paid in private deals is simple, demand over supply, with fewer private deals readily available to be made.
Langely went on to explain the reasons behind the difficult times experienced by adtech outfits that have chosen to list publicly, such as Rocket Fuel, and Rubicon Project (after its most recent quarterly call, despite the company posting double-digit growth in terms of revenue), compared to the more recent big exits of others, i.e. the scarcity of adtech, compared to the abundance of publicly available stock.
“What are the reasons behind this difference?, she asked. “Scarcity and synergy.”
Public investors can hold the stock of any company they want – regardless of what vertical it operates within – whereas if a major acquirer wants to leverage a certain type of adtech capability then there are relatively few options for them; market economics kick in from there, she explained.
“There is also synergy value, if I’m a Quantcast, and I want to by a cross network business, I can buy at $20m and then turn that into a $60m a year business, then that gives them [the potential acquire] synergy value,” she said, adding that the fact that many of these companies already work with potential acquirers gives the potential buyer even more confidence that they’ll get ROI.
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