Why Private-Equity Firms Are Suddenly Smitten With Digital

Increased Web Spending, AQuantive Deal Up Appeal of Investing in Interactive

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NEW YORK (AdAge.com) -- Don't expect the credit crunch to deter private-equity firms from making a play for digital-advertising agencies.

Though once they were hesitant to invest in people-oriented businesses such as advertising agencies, private-equity investors now are competing alongside advertising-holding companies for a piece of the digital action. As many as 40 firms are said to be vetting the market.

Driving the change is the shift in ad dollars from traditional media to digital media: Online ad spending will total $21.4 billion this year, according to eMarketer estimates.

"People are starting to understand that the dollars are shifting for real and there is sustainable online growth in the internet. It's no longer a bubble," said Linda Bornhuetter Gridley, CEO of Gridley & Co., the investment bank that advised Digitas' acquisition of Modem Media.

Paying off
Private-equity firms are also noticing the big pay-offs that come with investments in digital advertising, such as Microsoft's $6 billion purchase of online-ad agency aQuantive and Google's $3 billion acquisition of ad-serving company DoubleClick, which yielded a nice payday for private-equity investors Hellman & Friedman.

"The entrance of Google and Microsoft into the marketing-and-media-technology sector is a huge disruption of a market that was traditionally holding companies," said Michael Seidler, CEO of Madison Alley Global Ventures, which advices interactive transactions.

A few major private-equity players already have emerged on the scene with a business model that resembles a sort of a mini-holding company, some with the goal of transforming the model for marketing services.

"They all tend to have in common the thinking that they are building the next business model. I think, in reality, there are very few giant winners. But there are a majority of guys who are building interesting companies and making money doing it," said Seth Alpert, managing director of financial advisory firm AdMedia Partners.

Many paths
There are different ways to invest in digital ad agencies. Some private-equity firms have bought companies outright, such as General Atlantic, Greenwich, Conn., which in February bought a majority stake in AKQA. Since the purchase, AKQA has diversified its offerings with the purchase of search-engine-marketing firm Search Rev. Other private-equity firms have joined a group of investors to build out the services of firms, such as Oak Investment Partners and Goldman Sachs; both purchased equity in search-marketing firm iCrossing, which has gone on to buy web-development shop Proxicom.

Other private-equity firms are attaching themselves to big industry names and making strategic investments from there, such as Halyard Capital, which has teamed with direct-marketing legend Stan Rapp to form agency Engauge.

A firm's decision on where and how to invest depends on "what type of services you want to put together. People are having a tough time trying to figure that out, which is why we haven't seen more moves like an AKQA," Ms. Gridley said.

Another reason is that the pool of sizable independent agencies (or agencies that bring in more than $10 million to 15 million annually) interested in selling continues to shrink. Some, like Vancouver based-interactive agency Blast Radius, which recently sold to WPP Group, are going the holding company route. And others, such as IMC2 in Houston, have pledged to remain independent. One banker estimates there may be less than 10 sizable independents left over, "and believe me, every other broker and PE firm has called all 10 of those guys at least three times," the banker quipped.

Service technology next?
But even if there are many sizable digital agencies for a private-equity investor to build a platform, there are still a good chunk of specialty shops that can be rolled up into existing investments to ad skill sets, such as AKQA's purchase of SearchRev, which was a fairly small deal.

If the first wave of the private-equity dollars went to large advertising or media networks, the next likely will be in niche capabilities of service technology, such as search, e-mail, widgets, desktop and mobile applications and analytics, according to Mr. Seidler. Private-equity investors may also start looking to larger marketing companies that may be rooted in offline, but have digital capabilities, said Mr. Alpert.

"You will see a resurgence across the board in terms of people who are looking at all the different areas and saying, 'Who are the better players and who is available for sale?' The consolidation has just begun and it will continue," Ms. Gridley said.
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