The wave of dealmaking engulfing the online advertising sector isn't over yet. The most recent evidence came Nov. 1, with news that Francisco Partners, a private equity firm in Menlo Park, Calif., is investing $100 million in Specific Media, a company that specializes in placing and targeting online ads.
Specific Media plans to use the funding, which follows a $10 million venture capital infusion in June, 2006, to purchase smaller ad outfits capable of expanding the company's ad-delivering capabilities and the markets its ads reach. "The capital is going toward acquisitions," Specific Media CEO Tim Vanderhook says.
Specific Media's peer group has already seen its share of deals. The world's largest Internet companies, including Google (GOOG), Yahoo! (YHOO), Microsoft (MSFT), and Time Warner's (TWX) AOL, have spent more than $10 billion in recent months (BusinessWeek.com, 5/18/07), snapping up online ad networks in hopes of boosting revenue from the placement of display ads, the graphic and multimedia messages that run in fixed places on Web pages.
Staking Out a Position
Specific Media won't say how much ownership it ceded in exchange for the investment, making it difficult to estimate the company's current value. According to the Venture Beat blog, the company was worth $200 million before the investment.
Specific Media's worth will become paramount in the runup to any initial share sale—or if the company becomes a takeover target. Thanks to revenue-sharing deals with sites across the Web, Specific Media placed clients' ads in front of more than 130 million U.S. Web surfers in September, more than 70% of the nation's online population, according to comScore Media Metrix.
Despite its size, Vanderhook sees Specific Media as David in a battle against an army of Goliaths for share of the nonsearch advertising market. "There is maybe one other company that has the scale to compete with the portals aside from us," says Vanderhook, referring to ValueClick, the leading independent ad network. "We will be the independent ad network of choice."
A Growing Share of the Ad Market
And plenty of online players are hoping Vanderhook is right. Since the spate of ad network acquisitions this year, some Web site owners have expressed concern that the companies placing ads on their pages are now owned by some of their largest competitors for online traffic and advertising dollars. The extra control Google would receive from its yet-to-be-approved $3.1 billion acquisition of DoubleClick has some particularly concerned, especially since many feel the dominant player in search advertising already wields too much power (BusinessWeek.com, 4/9/07).
The stakes in the ad network buying frenzy are high and rising. Search advertising makes up the largest share of the $21.4 billion online advertising pie, but other forms of advertising are growing their share. Roughly 40% of all online ad dollars go to search, according to an October report by research firm eMarketer. Together, video and display advertising, the forte of ad networks, account for almost 30% of the market. But by 2010, when the online advertising market reaches nearly $40 billion, both will make up 34%, compared with 39% for search, eMarketer says.
Eat or Be Eaten
To win in this growing field, the players that remain will need scale, experts say. "There are going to be four or maybe five really scaled platforms," says Dave Morgan, founder and chairman of Tacoda Systems, the ad targeting network acquired by AOL in July for $275 million (BusinessWeek.com, 7/24/07).
Specific Media wants to be among them. After increasing its scale through ad network acquisitions, Vanderhook plans to take the company public. "We will move quickly," says Vanderhook. "We are talking with a couple of acquisition targets."
His company could find itself in the crosshairs of a suitor itself. Although major players such as AOL, Google, and Yahoo have already purchased advertising networks, they have proved they are willing to acquire more than one. AOL, for example, acquired Advertising.com in 2004 and then added to its reach this year with the acquisitions of Tacoda, which tailors ads to the surfing habits of individual computers, and mobile network Third Screen Media. This year, Yahoo acquired both advertising exchange Right Media and ad network BlueLithium. Other potential acquirers include advertising agencies that want a firm foothold on the Web. In May, WPP Group (WPP) acquired 24/7 Real Media for about $649 million.
If Specific Media does go public, Vanderhook will have competition in his quest to be the leading independent ad network. ValueClick, which has been the subject of acquisition rumors itself, has a market cap of nearly $3 billion and has aggressively acquired smaller ad networks in the past to increase its scale and reach. Currently, it also can serve ads to more than 70% of U.S. Web surfers. "Certainly [it's] one of the big differentiators in this business," says Gary Fuges, ValueClick's vice-president of investor relations. "Scale matters."