Letter from Geoffrey Precourt: Online ad networks hit bottom as US media deals dry up
Market maturity essentially defines risk. When television first became a mass-market medium, it didn't take long to see that the airwaves were an effective way to reach large audiences and move products and services.
A half-century later, investors rushed into the internet. The winners reconfigured the way we speak to customers. The losers fully demonstrated the immaturity of the digital market. For the businesses which struggled with day-to-day survival, ad networks seemed like an eminently reasonable proposition. Just as TV networks had dumped remnant airtime through third parties, so these electronic consolidators could provide a cost-efficient way to reach potential customers.
But, experience informs: The 2009 DeSilva+Phillips M&A Report - recently published by the New York-based media investment banking firm - strongly suggests that the investment market for ad networks has bottomed out. The report details just how bad a year 2008 was for all media M&A activity. But it was particularly noticeable for the all-but-complete disappearance of ad networks as an attractive investment target.
In 2007, major media players such as digital-savvy organizations like Hachette and Meredith had made considerable investments in technology. Indeed, according to the 2008 DeSilva+Phillips annual M&A report, Hachette's acquisition of Jumpstart Automotive Media, a digital companion to Car & Driver and Road & Track magazines, was the 15th largest media deal of the previous year.
But experience informs: The report on 2008 media-investment activity completely ignores ad networks. With a focus that's wide enough to include announced transactions for US consumer and business magazines, medical media, trade shows and conferences as well as internet, database, and marketing-service companies, there's not a single online network deal - even a failed deal - that meets the high standards of DeSilva+Phillips's reportage. (The study excludes deals in other sectors, such as book and newspaper publishing, radio, TV, outdoor and pure Internet or online transactions).
"There was a lot of M&A activity in ad networks in 2007. And, for the moment, it may well be that all the big players have paired up," explained Jeff Dearth, a DeSilva+Phillips partner. "Think of it as a kind of musical chairs; the music just stopped. The major networks-the DoubleClicks, and aQuantives-had found partners and were already off the dance floor." And the remaining players, Dearth advised, may well have to wait for the music to start up again.
The big deal that happened, he added, was Cox Enterprises' purchase (for $300 million) of Adify in April, 2007. "It wasn't an ad network, per se," Dearth said. "What it really does is give Cox the technology to build other networks. It may seem like a lot of money for an ASP, but it does demonstrate that the concept of ad networks is still an attractive one."
Just before the news of the Adify acquisition went public, ESPN dropped its ad-network affiliations, asserting it was heading down "a different path." At the time, MediaWeek reported, "Sources say that ESPN would like to rally support from other publishers behind this move and ultimately tamp down ad networks' growth." And, in June, Turner stepped away from network alliances, creating, marketing, and selling its own brand-specific network.
Wenda Harris Millard, president/media of Martha Stewart Living Omnimedia, likened the ad-network process to selling "pork bellies"- an analogy that carries the implicit double-whammy of decreasing brand value of the sponsoring medium and compromising relationships with existing advertisers.
"ESPN and other large media organizations can say, 'Look, the ad networks don't add value to our inventory,'" Dearth explained. The big companies may not need third-party networks, he continued. "But they do make a lot of sense for a lot of mid-to smaller-sized websites - places with a million page views, not tens of millions page views."
Lucrative transactions of the past few years have created high expectations for company valuations, Dearth added. But until the US economic environment improves and investors can once again envision a growth mode, the prospects for high asset pricing - and the kind of quick deal-making that such incentives can drive - are not encouraging.
And, when the music does start to pick up for investing in ad networks, Dearth cautioned that "there are more networks than you can shake a stick at. A lot of ad networks that are eating each other up and driving prices down."
Mobile and specialized video networks are the next untapped frontier for ad networks. "They're not huge yet, but they will be…. We're already seeing some real interest in mobile and video networks looking for early-stage funding."
It's not as if the rest of the media M&A picture was terribly bright. In a dozen years of analysis of the US, only three- 2000 (102 deals), 2002 (90) and 2003 (83) - had a lower deal count than 2008 (109). Compared with 2007 (135) and 2006 (151), the drop-off is considerable and equates to more than 27.5 percent in just two years.
An even sharper measure of interest in media properties is the total annual dollar volume. In 2000, which marked the peak of the internet frenzy, investors dropped $25 bn dollars on US media properties; in 2008, the figure was a paltry $2 bn. And, if the comparison with 2000 seems unfair, last year's performance comes across as slight in comparison with the last two years: $9.6bn in 2007 and $20.5 bn in 2008.
Moreover, the nature of investments in recent years is every bit as revealing: Since 2001, private equity has been the strongest driver in media M&A. Starting in 2004 and running through 2006, such financially-focused investments have accounted for two-thirds of the category's deals. And, in 2003, the figure topped out at 93 percent. But, in 2008, strategic buyers - organizations looking to add to existing value instead of creating new value - became the dominant force, with a 53 percent deal share, for the first time in DeSilva+Phillips' reporting history.
The shift was "unsurprising in this year of the credit implosion, with its absolute freeze on bank debt. Strategic buyers have not led the pack since 2001." On the other hand, anyone has to admire the tenacity of private equity in the face of the debt crisis, closing nearly as many deals as the strategic buyers, including two in the fourth quarter, when the credit crunch went from severe to merciless.
While the ad-network category was at the bottom of the pile, the results were not impressive in any of the categories studied by DeSilva+Phillips:
- Healthcare media "showed the most resilience in this wretched M&A climate." B2B highlights: Wolters Kluwer's acquisition of UpToDate (reported $400 million), and Halyard Capital's acquisition of HCPro. Consumer highlight: Waterfront Media's merger with Revolution Health in a deal that valued the merged company at $300 million).
- Digital sector deals accounted for the same share (17 percent) of media M&A activity in 2008 as in 2007. But that same-sized slice was part of a much smaller pie. "In 2008 traditional media continued the steady accumulation of digital properties which began the year before, with small acquisitions by Hearst Business Media, The Economist Group's Roll Call, Meredith, Martha Stewart and Modern Luxury. The acquisition tempo continued, but, like everything else, on a smaller scale."
- B2B sector highlights: the$180-million sale of Randall Reilly to Investcorp for $180 million; the $101-million sale of Virgo Publishing to Arlington Capital for $101 million; the sale of Oakstone Publishing to Boston Ventures; and the sale of Asset International to Austin Ventures.
- The Consumer sector was led by some venerable names on the 2007 M&A list : Time Inc. (founded 1923) acquired Quality School Plans (founded 1963) from The Reader's Digest Association (founded 1922) for $110 million. OpenGate Capital acquired TV Guide Magazine (founded 1953) in a deal whose valuation included the magazine's $50-to $70-million subscription liability. Another highlight: Martha Stewart Living Omnimedia picked up Emeril Lagasse's consumer media business for $50 million.