Ad Industry M&A Activity & IPO Wave To Hit In 2010

Despite high unemployment and little opportunity for job growth, the advertising industry should brace for a wave of consolidation and initial public offerings (IPOs) heading into 2010, according to Linda Gridley, president and chief executive at Gridley & Co., a boutique investment bank in New York.

Profitable companies garnering at least $200 million in annual revenue will begin filing IPOs, followed by increased consolidation and merger and acquisition activity that could start as soon as this quarter. Companies becoming acquisition targets will provide niche technologies, from search and Web analytics to ad optimization and mobile, to more established players.

Although M&A will rise, don't expect valuation levels to reach those seen in 2007, according to Gridley. She believes valuations will come in higher than first believed, but as acquirers look for niche technologies the companies will become less sensitive to price tags.

The industry heard a similar tune during Google's and Yahoo's recent third-quarter earnings calls with analysts and investors. Yahoo's Chief Financial Officer Timothy Morse told analysts the company is looking for "great technology" and "people" behind the technology, but declined to comment on acquisitions or divestitures in process. The company will continue to look at opportunities to enter new markets and strengthen its position in markets where it's weak. "The acquisition and divestiture group is constantly working within the business and evaluating external opportunities both in plus and negative," he says.



Aside from announcing the search deal with Microsoft during the third quarter, Yahoo revealed acquisitions such as Maktoob and Xoopit that were aimed at expanding its positions in communities and content in new markets.

Google has historically acquired about one small company per month, according to Eric Schmidt. The Mountain View, Calif. search engine's CEO told analysts last week these acquisitions have been small, inexpensive and technology-intensive.

In search, Google has looked at small companies that invented an interesting vertical search technology, for example. In display advertising, the focus has been on companies that have figured out better ways to sort data and ads. As Google builds out its enterprise business, acquiring tools built by small companies that fit nicely into Chrome or Chrome OS makes more sense than attempting to reinvent the wheel.

Small deals do not come under as much scrutiny by investors, Gridley says. Some big players pack hefty multiples. Not two to three times revenue, but between three and six times, she adds.

Schmidt also told investors that Google is looking for larger businesses to buy, but in those cases the decision would be backed by "strategic rationale," "accelerant for revenue" or a customer base the company doesn't have. These types of acquisitions, similar to YouTube or DoubleClick, might occur every year or two, rather than monthly.

The more tools a company has in its toolbox, the more services it can offer agencies and partners. Advertising optimization technologies that support ad exchanges by collecting data and target ads to consumers based on behavior have caught the attention of investors and acquiring companies. Eyes are turning to companies like BlueKai and MediaMath, as well as [x+1].

Although Stan Sandberg, managing director at Gridley & Co., could not quite put his finger on the exact amount, he says companies like BlueKai have raised a lot of financial capital in the past year. AudienceScience, for example, reported closing $20 million this week.

Innovation and the ability to demonstrate growth will lead the charge for companies in the online ad industry, but Gridley warns to expect a "tale of two cities" that emphasizes a wider divide between struggling companies and good growth companies that plan to either go public or get acquired.

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