M&A Alert—July 18, 2017
Sizmek acquires adtech competitor Rocket Fuel for an enterprise value of $145 million.
Author: Eric Risley, John Ascher-Roberts
Transaction Size: $145mm
On July 18, 2017, Sizmek, a portfolio company of Vector Capital, announced its acquisition of public adtech company Rocket Fuel (NasdaqGS: FUEL) for $2.60 per share, an enterprise value of $145 million.
Rocket Fuel offers brands and ad agencies its Predictive Marketing Platform, which uses artificial intelligence to run targeted ad campaigns. The company has traditionally offered the platform as a “high-touch” managed-service offering where its internal team would operate the platform on behalf of their clients, help them plan and manage individual campaigns, and then take a margin of their advertising spend. However, as brands and ad agencies demanded more transparency and advertising margins suppressed in 2014, the company began transitioning to become a self-service demand side platform (DSP) in order to shift to a more labor efficient model for themselves, allow their customers more control of the process, and benefit from a recurring subscription-based revenue model vs. episodic, campaign driven. After making up only 9% of Rocket Fuel’s revenue in 2015, the self-service offer made up 32% of Rocket Fuel’s total revenue in Q2 2017. The company also acquired data management platform (DMP) [X+1] in 2014 for $230 million (2.7x 2014E gross revenue) to offer its customers a unified platform for managing, understanding and applying their consumer data to ad campaigns.
George John, former CEO, Abhinav Gupta, and Richard Frankel founded in the Redwood City-based company in 2008. The company received $84 million in funding from Akkadian Ventures, Comerica Bank, Cross Creek Advisors, DLA Piper, Labrador Ventures, MF Capital (Marc Friend), Mohr Davidow Ventures (Bill Ericson), Nokia Growth Partners (John Gardner), Northgate Capital (Alex Kurland), and Summit Partners.
The company went public in September of 2013 and priced at $29.00 per share. It raised $116 million at a market capitalization of $942 million. The value of Rocket Fuel peaked at $66.89 per share or a $2.2 billion market capitalization in January of 2014. Its competitors include AppNexus, AOL’s Millennial Media, DataXu, Google’s DoubleClick, MediaMath, PubMatic and The Trade Desk. The company has over 1,500 customers and serves 96 of the AdAge 100 list.
The company has LTM net revenues of $237 million.
Founded in 1999, New York-based Sizmek operates an online ad campaign management and distribution platform that provides brands self-service programmatic mobile, video and display ads. Its ad-serving platform, Sizmek MDX, helps advertisers purchase digital ads and test ad campaign performance across any device. It also launched its data management platform, Datahub, in January of 2017. Datahub manages data from ad serving activity while also integrating with other DMP platforms to give brands and ad agencies a centralized view of their audience segments and campaign performance. Together, the platforms enable marketers to employ sophisticated media buying and dynamic creative targeting strategies. Sizmek connects approximately 19,000 advertisers and 3,700 agencies to audiences in over 60 countries
Sizmek was spun out of TV advertising company Digital Generation in February of 2014 when Digital Generation merged with Extreme Reach. Upon the spinout, Sizmek was a public company with a market capitalization of $315 million. Vector Capital then acquired Sizmek in August of 2016 for $122 million (0.7x LTM net revenue).
Sizmek is acquiring Rocket Fuel for $2.60 per share in cash, which, including the assumption of Rocket Fuel’s debt, represents an enterprise value of $145 million
Enterprise Value: $145M
TEV/ LTM Net Revenue: 0.6x
Purchase price premium: -3%
Comparable DSP transactions include Time’s acquisition of Adelphic in January of 2017 (undisclosed), Samsung’s acquisition of AdGear in June of 2016 (undisclosed), AOL’s acquisitions of Millennial Media in September of 2015 for $238mm (0.8x LTM rev, covered here), and Google’s acquisition of Invite Media in June of 2010 for $70mm (14.0x invested cap, covered here).
Comparable DMP transactions include Amobee’s acquisition of Turn for $310 million in February of 2017 (1.7x invested capital, covered here), Salesforce’s acquisition of Krux Digital in October of 2016 for $700mm (14.0x invested capital, covered here), Rocket Fuel’s acquisition of X+1 in August of 2014 for $230mm, Oracle’s acquisition of Bluekai in February of 2014 for $350mm (5.5x LTM revenue, covered here), Neustar’s acquisition of Aggregate Knowledge in October of 2013 for $119mm (1.9x invested cap) and Adobe’s acquisition of DemDex in January of 2011 for $58mm (8.3x invested cap, covered here).
The combination of Rocket Fuel’s DSP and DMP platforms with Sizmek’s ad serving capabilities provides Vector Capital a cost-effective and compelling alternative to the adtech duopoly of Google & Facebook, which, eMarketer estimates, control 77% of the new digital advertising spend in the U.S. While Rocket Fuel has had its struggles, it is still considered one of the premiere DSP platforms, according to Forrester. By creating an ad management platform with both demand and supply side capabilities, Vector is positioned to grab a sizable piece of the $83 billion U.S. digital advertising market.
Architect Partners’ Observations
Rocket Fuel’s decline from a $2 billion market cap company was the result of both industry-wide problems as well as company unique challenges. After reaching a high $66.89 per share in January of 2014, the company lowered their 2014 guidance after their Q1 results showed ad agencies decreasing their advertising spend through managed-service providers. As Randy Wootton, CEO, pointed out on their earnings call: “…agencies feeling like there is strategic value in managing their ad campaigns themselves with software solutions” that Rocket Fuel couldn’t offer. However, even after acquiring [X+1] for $230 million in 2014 to improve its ability to use data to target ads and their transition to a self-serve model, Rocket Fuel continued to struggle to regain revenue growth. Sales increased in 2014 and 2015 by 69.8% and 13.0% respectively, but decreased by 3% in 2016. Momentum continued to decline with sales in Q1 and Q2 2017 dropping by 44.0% and 18.0% year-over-year, respectively.