What are we talking about? Let’s roll:
Doubleclick, the iconic, poster child of Web advertising Phase 1, was taken private for $1.1B last year by private equity firm Hellman & Friedman. The company sold off two assets, including the much ballyhooed Abacus division, for some $535M. In other words, the company that is up for sale or an IPO is not the same one that fetched $1.1B last year.
We do not doubt that DCLK (basically, an ad serving suite employed by publishers, agencies and advertisers) is worth more than it was last year, but how much it’s worth is less than $2B, the amount Hellman & Friedman is asking for, supposedly.
Clearly, this is an example of Hellman & Friedman throwing out a figure and seeing if it sticks against the wall as it explores option, having hired an investment bank to sort through the options.
Should be noted that the company made $150M in 2006, of which $100M came from the ad serving suite, MSFT’s own Don Dodge asserts that the remaining $50M came from the divested businesses.
Clearly the different divisions had different multiples, but if DCLK’s three units had $150M in revenues and got $1.1B last year (about 7.3 times Revenue), and this year the company sold off two units for $535M - for a net asset value of 565M of which the remaining unit generated $100M, that means a multiple of 5.65 times for the ad serving suite.
Admittedly, we’re somewhat mixing apples with oranges because the 7.3 times Revenue figure is current year’s multiple, whereas the 5.65 is trailing twelve months’s revenue multiple, but any way you dice it, you get a range of the multiple that is fair.
As such, if Hellman & Friedman wants $2B for the one unit, they are probably not going to get it. Moreover, while there has been a lot of talk about Microsoft (NASDAQ:MSFT) stepping in and buying DCLK, I just don’t buy it. Sure, MSFT needs help, but it does not seem like a $2B deal makes sense. Don Dodge - who is a MSFT executive - does a far better job explaining this than I would here, and Clickz beat me to the punch to point out the fact that AOL (NYSE:TWX), one of DCLK’s largest clients, would probably bolt, making the intrinsic value of DCLK’s suite far less.
Of course, AOL could step in and buy it, as it bought Advertising.com for $435M, which today drives a lot of revenue for Time Warner’s online unit (ranking it on our Top 10 Web Acquisitions of All Time here). But, the fact remains, it’s one thing to buy an asset for $435M, it’s another to buy an asset for $2B.
Of course, Paid Content reports that WSJ had a follow up story stating DCLK is on pace to generate $300M this year, so if the $100M figure for the suite’s 2006 revenue is correct, that implies a tripling of revenues, at which point, sure, you could see a lot of demand for this, but I am not sure where the usually reliable PC got that figure…
I also doubt that DCLK could triple the revenue base because this is a very competitive, commoditized market. As VP of Ad Sales, we got calls from DCLK, aQuantive, and others for their services, and trust me, it takes a tremendous amount of added volume to get a triple of revenues.
There are many better ways for MSFT to charge ahead in online ads, and I am just not sure a $1-2B acquisition for an asset like DCLK makes sense. I have always fancied aQuantive (AQNT) (disclosure: I own shares). aQuantive is also Seattle-based. It’s also a diversified digital advertising play, with Atlas (similar to DCLK’s ad serving suite), but also with an ad agency and email advertising products. It’s a more bold play, and with a market cap of $2.14B, it is far more expensive than a purchase of DCLK would be, but when you consider the risk of DCLK losing clients if it were in the hands of MSFT, there are almost no good options here.
Realistically, I think DCLK should simply file for an IPO. IPOs will be once again in demand, and we’re seeing that already in 2007. I have written about digital media seeing large acquisitions be replaced by IPOs in 2007 onwards. Small and mid-sized acquisitions will gain steam. But the days of $1B+ acquisitions are over.
That does not mean that DCLK cannot be acquired down the line, but let public shareholders determine its price, not private equity investors.
Disclosure: I own shares in YHOO, AQNT.