David Siemer Discusses 2012 Ad Network M&A and IPO Trends with MergerMarket

Ad Networks Aim for 2012 IPOs, but Many Will Be Forced to Sell, Bankers Say

• Video and mobile ad networks may have best IPO prospects
• Collective, Undertone and Tribal Fusion of scale to sell

By Sarah Cohen, Stuart Newman and Monique Lewis in New York; and Louise Bleakley in San Francisco for MergerMarket

New York, NY and San Francisco, CA (January 18, 2012) ─ A clutch of USD 100m-plus revenue ad networking companies are on track to finally find an exit in 2012, four industry bankers said.

Many of these have their sights on a public offering, but will likely be forced down the sale path because of uncertainty in the public markets, two of the bankers said.

Leading candidates for a public offering will be companies with more than USD 100m in revenue and growth in the 30-40% range, Siemer and Associates Managing Director David Siemer said. Several ad networking companies are already rumored to be working with underwriters, Siemer said.

Two other bankers were less optimistic about IPO prospects. The markets are risky, they argued. The debuts of Groupon, Zynga and Renren were “underperforming” if not “disappointing,” said the first banker. The only certain IPO activity is Facebook’s in the second quarter, and it would be foolish to attempt anything until it goes public, he added.

That said, some ad networks have reached scale in terms of revenue and consistent profitability, their venture backers have been in them for a long time and may be pressuring companies for an exit, the second banker said. Adconion, Adknowledge, Collective Media, Specific Media, Tremor Video, Undertone, Tribal Fusion and YuMe were all high on the bankers’ lists of likely sale or IPO transactions.

Many ad networks, such as Adknowledge, Tremor Video and Specific Media were rumored to have been planning for an IPO as early as 2009, according to reports by this news service. Others like Collective, Undertone and Tribal Fusion are targets that have the scale to attract buyers, said the second banker.

Still, not all ad networks are created equally. Some are display ad networks, an older technology which has already undergone considerable consolidation. This sector of digital advertising experienced a flurry of deals years ago when the likes of AOL, Google and Microsoft purchased companies, said the second banker. The number of auctions and the universe of potential ad network buyers since dropped. Late in 2011, Yahoo agreed to acquire Interclick for USD 270m. Interclick had “one other bidder” coming from an “unexpected” area of technology, the banker said. This company has yet to acquire an ad network.

Collective and Specific are examples of display ad networks. Private equity firms such as Spectrum Equity, Welsh Carson Anderson & Stowe, Summit Equity, TA Associates and General Atlantic are the most likely buyers in the display ad network space, the second banker said, since most strategics have already placed their bets.

Millennial Media, which recently filed to go public, is one of the remaining independent mobile ad networks. Others are AdMob, acquired by Google for USD 750m in 2009 and Quattro Wireless, acquired by Apple for USD 250m in 2010. Video ad networks with scale are Tremor, YuMe and Brightroll.

Mobile and video ad network business is experiencing quarter-to-quarter double-digit growth as more people watch online video, said YuMe CEO Jayant Kadambi. Consumers are also expected to make a “massive push” into connected and smart tvs and advertisers will “need a way to monetize” these upcoming products.

“It’s not about being an ad network,” said Tremor CEO Bill Day. “It’s about proprietary technology that determines buyer interest. This points toward video and mobile.”

Large Internet concerns with video investments, like AOL, Microsoft, Google and Yahoo may want to acquire video ad networks, said Kadambi. Others could be advertising concerns like Publicis and WPP who prefer to buy rather than build an ad network to gain immediate access to an audience with scale. A third banker said MDC Partners might also look to acquire capabilities.

YuMe and Tremor are focused on execution this coming year, but both believe the IPO market is valid for growth companies, Kadambi and Day said.

The ad networking industry is dominated by AOL, with Advertising.com, Google, with DoubleClick and Yahoo, which is undergoing a strategic evaluation process. The market is fragmented, with estimates of perhaps 400 startups. Private equity firms have been active in ad networks, and late last year BrightRoll, YuMe and Tremor Video raised late-stage funding rounds.

Ad networks are coming under pressure because publishers are beginning to develop their own networks to get higher CPMs (cost per mille) rather than allowing ad networks to sell their inventory, the third banker said. “There are going to be some losers, a few will IPO at some point, but I think right now there is a lot of doubt in people’s minds about the viability of ad networks in the long term,” he said.