Cash-rich companies opt to buy instead of build, to the benefit of NY's entrepreneurs facing a still-thin IPO market.
Silicon Alley watchers were wowed with Google's announcement last month that it had agreed to buy Admeld, a Manhattan-based firm that helps websites sell ad space. They were even more impressed by the reported purchase price, an estimated $400 million.
Google-Admeld could be just the beginning. Analysts expect the M&A market to get hotter when Facebook, Groupon and Twitter go public and start spending IPO cash to shore up gaps in their services. Google made 26 purchases last year and has toted up 14 deals so far this year. Eric Schmidt, Google's executive chairman, has said that the search giant is making more deals for small companies.
“I don't see this as some kind of bubbly, short-term phenomenon, but an active sector for some period of time,” said M&A adviser Terence Kawaja of Manhattan-based Luma Partners, which counseled Admeld in the deal. “The amount of innovation is only accelerating. I think we're in for a long run. … My business is exploding.”
Being acquired is emerging as a popular exit strategy for founders facing a still-weak IPO market, in which hurdles for going public have been rising. Smaller startups, in particular, may have customers and compelling technologies, but not a long-term stand-alone business. They occupy “a very tentative and unpredictable life space,” said Bruce Niswander, director of technology transfer at Polytechnic Institute of New York University. “If Google changes one thing or Facebook does something different, it could cut the legs out from under many of these applications.”
Although companies in the ad space are among the hottest acquisition targets, the Google-Admeld deal has reportedly attracted antitrust interest from the Department of Justice.
Buyers, meanwhile, are trying to develop soup-to-nuts capabilities in an increasingly fragmented and inefficient market for online ads. For example, there can be as many as five players between creation and delivery, with each player taking a cut.
“There's a need among marketers and publishers for simplification of the process of buying and selling,” said Joe Apprendi, CEO of Collective, a Manhattan-based firm that has bought three companies in 2011 as it builds an integrated platform to serve advertisers and publishers. “The market is begging for simplicity; it's begging for consolidation.”
The acquisition trend began last fall and started picking up steam this spring. At least 10 New York companies have been acquired in the 12 months through June—five of them in just the past six months. Last summer, Google picked up Invite Media, an ad-tech startup that works with advertisers to deliver display ads across various websites.
Adobe acquired Demdex, which helps advertisers target online audiences, in January. In April, Chicago-based MediaBank bought AdBuyer, whose technology helps companies purchase ad space; Dallas-based DG announced last month that it would buy publicly held MediaMind.
New York-based companies are emerging as buyers, too. Last fall, Operative Media acquired a fellow New Yorker, Solbright, which helps websites manage their advertising. During the same period, Undertone scooped up video company Jambo Media, both local firms. And two months ago, Manhattan-based Spinback sold itself to local player Buddy Media to speed “product development and expansion in a shorter period of time than … through any typo of Series A financing,” said Andrew Ferenci, co-founder of Spinback and director of product development for Buddy Media.
Being acquired is not an unalloyed boon for sellers' companies. Facebook bought two New York firms last year, hired the founders and shut down the operations. Google, criticized for poor integration, recently said it was taking steps to make being part of a big organization easier for entrepreneurial types by giving an acquired groups more autonomy, as it did with YouTube.
Additionally, payoffs in acquisitions are often not as big or widespread as they are in a successful IPO. That includes venture capitalists, although they can redeploy their money rather than wait for an uncertain IPO. Investors don't necessarily favor companies whose only possible endgame is being acquired.
“Investors are looking for return on capital,” says entrepreneur and angel investor Jeff Stewart of Urgent Group. “They like to see multiple choices, because that's how you get the best deal on your exit.”
Still, “there's enough money in the ecosystem for folks to see getting acquired as a good, reasonable exit,” said Ben Kartzman, CEO of Manhattan-based Spongecell, a company that helps brands deliver video and interactive ads.
While Mr. Kartzman said that Spongecell isn't looking to be acquired, he acknowledged that “there are definitely companies sniffing around.”
