- Amidst a rapidly consolidating ad tech market, YuMe files an amended Annual Report on June 23 that contains "change in control" provisions regarding YuMe named executives' compensation.
- Two of the named executives are YuMe Co-Founders CEO Jayant Kadambi and CTO Ayyappan Sankaran who founded and sold StarNet to Netopia in 1999, which was later sold to Motorola.
- YuMe management has meeting with underwriter Deutsche Bank in New York, but not with company analyst.
- Recent CFO departure mirrors another ad tech acquisition that has close connection to YuMe.
- Following his firm's distribution of YuMe shares to the partners, Vinod Khosla locks just under 7% of the company away in trusts.
It is no secret that the ad tech industry is rapidly consolidating, particularly with companies like YuMe (NYSE:YUME) that focus on online video advertising. At a recent presentation, the CFO of Tremor Video (NYSE:TRMR) stated that he expects consolidation to cut the number of its competitors effectively in half. This premonition is quickly becoming the reality.
On June 19, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) acquired mDialog, a video ad tech analytics company that uses an SDK approach, similar to that employed by YuMe. Twitter (NYSE:TWTR) acquired TapCommerce on June 30, a small mobile app advertising company for a reported $100M. This company has technology that is similar to YuMe and Millennial Media (NYSE:MM), both of which feature an SDK driven mobile app monetization platform.
To top it off, on July 2, Facebook (NASDAQ:FB) announced that it acquired LiveRail. This company is an SSP, supply side platform. It is geared towards serving publishers and has an estimated $100M in 2013 sales. TechCrunch, citing sources with knowledge of the deal, says that the purchase price is about $400M-$500M.
There are really only a few more players left for acquisition that matter in the online video ad tech world. I thought that one prime candidate would be TubeMogul. When I speculated about it publicly on Twitter, the CEO quickly dismissed that theory.
This leaves Tremor Video, Brightroll, Videology and YuMe as pure play online video potential acquisition targets. Brightroll is the largest, followed by YuMe. I don't view Tremor Video as a very likely acquisition target because I think that their technology is not in line with what I'm seeing with companies being taken over.
Now I have been very bullish on Tremor Video as recently as following its Q1 earnings release, but from what I'm seeing with all of these recent acquisitions they are predominantly of companies with strong multi-screen technology. Because of Tremor Video's web-based infrastructure and its reliance on cookies it will never be a great solution for mobile, tablet or connected TV. All of the recent acquisitions that I mentioned are companies that are built specifically to accommodate multi-screen, just like YuMe.
Furthermore, Brightroll doesn't seem like a likely acquisition. While they certainly have world-class technology that is in high demand, the CEO is pretty blunt about taking on Google and AOL (NYSE:AOL) head on and becoming the prominent platform in the industry. Obviously every company has a price, but I still don't see it as a realistic acquisition target at the moment.
Videology is a very small company and could very well be acquired, but I don't know enough about its story to really speculate. Even if it is acquired I think it is a small deal and not really material to the space. So that leaves YuMe, which is the focus of this article and acquisition speculation. Allow me to present the pieces of the puzzle-which I hope can demonstrate that an acquisition of the company is imminent. First step is the motive, just like a detective trying to piece together an unsolved crime.
On June 23, YuMe filed a seemingly innocuous amendment to its 10-K Annual Report filed on March 27 that included a "change of control" provision. In particular, it enriches the co-founders Jayant Kadambi and Ayyannpan Sankaran in the case of an acquisition as their options would vest immediately and full year of salaries would be payable. So now they have motivation to sell the company.
These same co-founders of YuMe also founded StarNet Technologies, which was sold to Netopia in 1999. So selling a company is nothing new to these guys. It is a desirable exit plan. Netopia was then sold to Motorola in 2006.
I posted an article on my blog a couple of weeks ago, which outlined Q2 channel checks by Needham analyst Kerry Rice. It is definitely worth reading in its entirety, but the gist of it is that YuMe is hot right now. Rice spoke to a number of ad agencies and confirmed now only what we all know - that online video advertising is increasing rapidly - but that YuMe is receiving consistent increased spending.
On June 19, YuMe management had a meeting in New York with Deutsche Bank, one of the original underwriters of its IPO and famed investment bank. Most of the time I don't think much of these meetings as normally they are analyst discussions. The Deutsche Bank analyst who covers YuMe is named Ross Sandler.
What is interesting is that Sandler was on the Q&A of the June 25 Spring Roadshow webcast and he asked a question following which YuMe CEO Jayant Kadambi led off his answer by saying "long time no talk." So maybe the Deutsche Bank meeting with YuMe management was a strategic one, rather than a typical analyst discussion?
Along with the release of the Q1 earnings, CFO Tim Laehy resigned. In my post-earnings report, I explained why the departure is a non-event. Only a couple of weeks later Laehy joined social start-up LiveFyre, likely preparing it for a liquidity event like an IPO.
What I find interesting about this is that it mirrors an event that took place with cloud marketing company Responsys (NASDAQ:MKTG) where the CFO resigned in the same fashion. Responsys was bought by Oracle (NYSE:ORCL) less than 2 months later. They never did replace the CFO despite saying that they are conducting a search for one, exactly as what CEO Jayant Kadambi said that YuMe is doing.
What makes this interesting is that the ex-CEO of Responsys, who engineered the sale to Oracle, is named Daniel Springer. He is a new board member of YuMe. Since March, Springer has bought 150,000 shares of YuMe stock in the open market. Responsys went through the exact same post-IPO burnout that YuMe is experiencing right now. Springer is an important advisor on this board.
On May 19, YuMe filed an SEC Form-4 indicating a distribution of about 2.5M shares from early venture partner Accel to its partners. I am pretty sure that this triggered a sell off as I documented in an article on my blog. This is standard practice as the venture funds always inevitably distribute the shares and the partners often just cash them in for whatever they can get at the time.
However, this is not the case with Khosla Ventures. It distributed over 3.3M shares on June 6. The principal of the fund is Vinod Khosla, the founder of Sun Microsystems. He took the overwhelming majority of these shares, representing nearly 7% of the company, and locked them away in a couple of trusts. This is bullish, as the venture investors normally look to sell when given the opportunity.
To summarize, I will say that none of these seemingly unrelated events proves that an acquisition of YuMe is imminent. However, I believe that the sum of the parts paint a very compelling picture. Clearly there is rampant consolidation in the sector. YuMe seems to have the technology that is in demand in recent acquisitions. The company seems like a natural target given the pool of independent video ad tech companies.
Furthermore, sales are exceeding expectations for the quarter. A "Change of control" provision provides incentives to the co-founders to pursue a sale of the company. There was a recent meeting held in New York with YuMe management and an investment bank with which it has a strong relationship. The meeting could have very well been a strategic one. The CFO role has not been filled for nearly 2 months following the resignation, despite the exit being pre-planned and not a surprise.
New board member Daniel Springer has recently lived through this exact chain of events from post-IPO sell-off to eventual sale. He placed a big bet on YuMe with insider buying in the past few months. As an advisor and having recently designed the perfect exit for his company, he should be pushing for a sale of YuMe. Despite partners from Accel likely selling off many shares when it did its recent distribution, Vinod Khosla took most of the shares from his fund and put them in different trusts.
In conclusion, I believe that YuMe will be acquired in 2014 or early 2015. Recent acquisitions have been at 4 to 5 times sales. YuMe trades at less than 1 times sales and is projected to earn $10M in net profit in 2015. It also has nearly a third of its market cap in cash. YuMe enjoys a healthy 47% gross margin and has nearly 30% YOY sales growth.
If other acquisitions are an indication of value and we take a conservative approach, I believe that a takeout price of $15 per share would get the deal done. This implies a nearly 200% return on the current share price and still offers a significant discount to recent acquisition values. Although comparing companies like LiveRail to YuMe is akin to the apples and oranges debate.
LiveRail is more targeted towards driving performance based advertising. The advertisers using its platform are focused on metrics like CPC (cost-per-click) and CPA (cost-per-acquisition). This business inherently drives much higher growth and margins, that is, when it is working. Hence the higher Price/Sales multiple that will be put on this model.
For instance, a performance advertiser will scale campaigns as fast as it can and that is what is driving these 100% or higher YOY growth rates, which are sustainable only as long as there is not a better mousetrap. This is how Google grew so quickly. Herein lies the major market misconception and criticism of YuMe.
TV brand advertisers have different objectives and scale into campaigns much slower. YuMe is laser focused on one thing, providing reach and frequency to large brand advertisers who are slowly but surely bringing TV advertiser dollars online. There is a real fundamental shift of massive budgets that is underway.
It is impossible to ignore this secular trend, but investors must also understand the differences in the business models and the reason why YuMe has a CAGR of "only" 42% the past 4 years and "only" profit margins of about 48%. I always like to say that I think eventually logic will inevitably take over.
In any other industry, these numbers that YuMe puts up would put it at the top of the pack. I think that the opportunity to buy YuMe so cheap today exists based on unfair grouping of entirely different business models. In this respect, YuMe is more of a complement to a platform like LiveRail than a competitor.
The major risk to this takeover thesis is YuMe management's willingness or unwillingness to be acquired. Their personal sentiments remains a mystery as they have not made any public statements that would suggest that they are looking to sell the company or would entertain being acquired.
Although nobody would expect a company to regularly make statements to that effect, the silence on this matter translates to a neutral rather than a negative. I can only assume that if the deal makes sense that the management will be smart enough to take it and enrich the shareholders (and themselves). They do stand to gain a lot so their interests are certainly aligned with the shareholders.