Why Do Public Companies Jump To Private Equity Firms?
By Kelly Liyakasa for AdExchanger
What really happens during – and after – a private equity (PE) investment?
While the experiences of different companies vary, one thing is certain: PE interest in advertising and marketing tech isn’t letting up.
Golden Gate Capital’s acquisition of Neustar for $2.9 billion last week is the latest in a long string of private equity exits in the space.
In late November, private equity-backed SintecMedia acquired Operative for $200 million, which rounded out investor Francisco Partners’ portfolio of TV and digital planning tools.
In August, Vector Capital dropped $122 million on ad tech company Sizmek, while Vista Partners, which bought Mediaocean in the summer of 2015, acquired then-public Marketo for $1.8 billion late last spring.
A Peek Into The Private Equity Playbook
PE firms basically expect two things from the companies they acquire: demonstration of growth and an improvement in cash flow. In turn, they help strengthen the acquired company’s management teams and technology or products.
“This is particularly important with larger private companies that have not yet instituted and learned the processes – organizational, management, financial, go-to-market, service, et cetera – required to sustain an enterprise at scale,” said Tolman Geffs, co-president of global independent investment bank, Jordan, Edmiston Group (JEGI).
For publicly traded companies taken private after a PE investment, such as Sizmek, Marketo and Neustar, public shareholders and boards want a premium return relative to the company’s trading value.
And PE investors often look for complementary assets in what you’d term a “roll-up,” meaning that investors snap up several companies in an adjacent category and merge them.
And for public companies, PE firms have another allure, notes Ray Wang, principal analyst at Constellation Research – the opportunity to clean up, restructure, integrate tech, develop new products or explore new business models outside the glare of the public markets.
Perpetual PE Deal Climate?
Geffs foresees more PE firms angling for ad and marketing tech. According to an SEC filing, three PE firms sniffed out TubeMogul before Adobe closed the deal for $540 million.
It’s impossible to know which companies will go that route, but Geffs points out some telltale signs.
“Either the stock has to have been pretty badly beaten down in relation to cash flow or to the underlying market opportunity, or the PE group has to own or target other assets that they intend to combine and [gain] significant cost synergies from,” he said.
What follows are some brief synopses of companies that have been acquired or made private by PE firms.
“It’s hard in the public market, especially for a company like Neustar, where you’ve got to keep a growth rate that sometimes keeps you from investing for the long term,” Wang said.
Wang expects Neustar’s capital investor Golden Gate to put a halt on new product development while rejigging Neustar's business plan.
“People know what Neustar does, but it’s confusing,” Wang said. “Is it a telecom company or a marketing company? What’s the synergy among all the different parts of the business?”
Elgin Thompson, managing director of investment bank Digital Capital Advisors, was part of the underwriting team behind Neustar’s IPO back in June 2005.
Neustar tried to transition from a clearinghouse with phone numbers and web domains to a digital marketing player, but it was difficult to innovate in the public eye.
So Thompson predicts that companies like Marketo and Neustar will be better off now that they’ve been taken private by PE.
“PE investors are patient, focused on growth and don’t manage their portfolio based on quarterly EPS (earnings per share),” Thompson said.
Mediaocean Can Make More “Long” Bets
Mediaocean funded new acquisitions to help longer-term growth as a result of Vista Equity Partners’ investment.
“We now manage investments into new products based on a long-term view of success, whereas public companies are under pressure quarter-to-quarter with each earnings release,” said Bill Wise, CEO of Mediaocean. “We can thus make investments that may not pay off for a year or two years. As a public company, often you cannot have that level of flexibility.”
Mediaocean can also tap into expertise or tech from the 40 other companies Vista owns. For example, Mediaocean recently implemented Marketo and uses Sovos for tax compliance – both Vista-owned solutions.
"I personally have access to the other portfolio CEOs and we’re able to share best practices,” added Wise. Vista also houses Vista Consulting Group (VCG), a 100-person Bain- or McKinsey-like consulting service for its portfolio companies.
“Since Vista only invests in software and data companies, this is extremely valuable to us,” Wise said.
How Sizmek’s PE Path Shook Out
Vector Capital’s investment in Sizmek helped its management team focus on both day-to-day operations and down-the-road opportunities without the scrutiny of public shareholders and Wall Street expectations.
“One of the most valuable pieces of input from our partner was a thorough, outside-in and inside-out analysis of the company through all aspects of our businesses to enhance our overall operations,” said Neil Nguyen, CEO of Sizmek.
It’s still early innings in Sizmek's and Vector’s relationship, but both are exploring where they should allocate their capital and energy in a rapidly evolving ad tech marketplace.
Sizmek claims it is re-energizing its focus around providing an “open” data platform that syncs up with 60-some-odd companies, including marketing clouds, measurement companies and demand-side platforms.
“Sizmek was born out of a significant restructure when DG MediaMind sold its TV assets for $525 million to another PE-backed company, Extreme Reach and Spectrum Equity,” Nguyen said. “We had a different vision back then, and Sizmek as a standalone business today is all in on digital under a scaled business.”
Aprimo Gets More Acquisitive
After Teradata dismantled its marketing stack in November 2015, it sold some assets to Marlin Equity Partners.
John Stammen, the CEO of distributed marketing platform Revenew, was brought in to do due diligence. Marlin targeted Stammen because he was an Aprimo employee before its 2011 Teradata acquisition, so he could identify business synergies.
Marlin ended up acquiring Revenew, merging it with Aprimo, and named Stammen as the CEO of the newly independent Aprimo.
“In the case of Marlin, they’re so focused on us retaining customers and growing our client base and innovating on this platform versus squeezing and throwing off cash,” Stammen said. “Yes, there’s a financial model to PE, and some would say there’s an image that they’re all bottom line-focused, but a PE firm really allows you to restructure your company to make sure you are growth-oriented.”