BRIAN ANDERSEN: That data-driven marketing is hot – and will continue to be in 2016. The leading companies, such as Datalogix (acquired by Oracle) and MarketShare (acquired by Neustar), received premium valuations since they were highly strategic targets. The leaders in areas such as DMPs, attribution, marketing planning and identity are likewise very well-positioned for similar outcomes.
Another theme would be the high volume of deals. There are an increasing number of transactions in both ad tech and mar tech. However, many of the ad tech deals are out of necessity: We saw a lot of “capitulation” transactions where sub-scale private companies were acquired for relatively low valuations.
These will definitely continue, if not accelerate, in 2016 since there are hundreds, if not thousands, of businesses that will realize they have a better chance of success as part of a larger company.
We saw a lot of ad tech going to private equity last year. Why is that?
Private equity buyers typically need the target to have three characteristics for them to be realistic buyers: 1) scale, 2) predictability of revenues and 3) positive cash flow and profitability, or very strong visibility to positive cash flow.
While there were a number of private equity deals last year, I look at them as being more focused on “mar tech” rather than “ad tech.” Since mar tech companies are generally SaaS software models, they satisfy the “predictability” requirement, and all were scaled businesses.
The only ad tech deal above is MediaOcean. However, MediaOcean has a virtual monopoly in the market and therefore is a very stable, predictable business as well, so well-suited for private equity.
While I do believe there will continue to be private equity deals going forward, it will be a small number of deals since there are still few targets that fit the private equity target characteristics. But one factor that could accelerate more private equity deals is if scaled private ad tech businesses feel the IPO market is not an option, then they could evaluate liquidity through a sale to a private equity firm instead.
For an ad tech company getting purchased by a private equity firm, what are the unique pros and cons?
There are a few pros. First, it is a liquidity event for shareholders. If it is a VC-backed company and the investor requires liquidity, such as if the fund is at the end of its life, private equity can provide that. Second, private equity deals typically are structured so that the transaction can be very lucrative for the management team over time. Finally, private equity firms like to acquire businesses to be a “platform” on which to pursue additional roll-up acquisitions and will fund these acquisitions. This can enable businesses to create scale through acquisitions – which can then go public in the future. Look at what GTCR has done with its acquisitions of Cision, Vocus, PR Newswire and other businesses. They now have the largest PR software business in the market – by far.
The main con is that private equity buyers do not typically pay top dollar. Since many transactions are “financial engineering” deals, PE firms are price-sensitive and VCs only turn to them if the strategic buyers do not materialize.
Investors are down on ad tech. Do you envision that changing in 2016 or beyond?
In general, no. Ad tech is an overfunded, competitive environment with massive competitors like Google, Facebook and AOL. However, there are pockets of ad tech that are still seeing investment interest, such as some areas of programmatic video, mobile and native. But only the leaders in these areas will receive investor interest.
But an area I am still very bullish on is the area that is the intersection of ad tech and mar tech. These are areas that are generally, but not always, SaaS businesses and are focused on data that I mentioned earlier: DMPs, attribution, marketing planning, identity solutions. These are going to remain hot for both investors – as well as buyers.