The interview below was posted on AdExchanger.com on Monday, November 29, 2010
AdExchanger.com: First, can you give a quick background on you, Blackstone and your responsibilities today?
KA: Blackstone is one of the world’s leading advisory and investment firms. The firm was originally founded in 1985 as a boutique M&A advisory firm by Steve Schwarzman and Pete Peterson and advisory has remained core to the firm’s activities for over 25 years. Our firm has advised on some of the most important and complex transactions worldwide, including advising AIG and Ford in their restructuring during the recent financial crisis, Reuters in its sale to Thomson Corporation, Microsoft in its search negotiations and partnership with Yahoo!, and Xerox in its purchase of Affiliated Computer Services.
I have led the advisory group’s efforts in the Digital Media and Internet sectors since coming to Blackstone from Deutsche Bank in 2007. I have spent 10 years covering the media and technology sectors and have advised on over $10 billion in transaction value during that period. In addition to the Yahoo! search partnership, Blackstone has been extremely active in the digital space, having advised on numerous recent high-profile deals such as Publicis in its acquisition of Razorfish from Microsoft, Sapient in its acquisition of The Nitro Group, and BuyVIP in its sale to Amazon.com.
Our philosophy for 25+ years has been to provide thoughtful, objective, and realistic advice to companies and entrepreneurs throughout all stages of a company’s lifecycle, whether during the start-up phase or as a large corporation. Within the digital media sector and with respect to high-growth emerging businesses, in particular, we find there to be a serious lack of impartial, trusted advisory services. Many of the small boutiques are simply pushing product to buyers’ corporate development departments and do not have the depth or breadth of relationships with buyers, the long-term strategic perspective, the global reach, or the M&A expertise necessary to provide best-in-class service. Conversely, the larger bulge bracket firms are not able to deliver the same senior-level attention, the objectivity, or the depth of sector-knowledge that we do. Finally, our relationship with the private equity side of the business enables us to have a principal mindset and truly put ourselves in the shoes of the companies we advise with an eye toward creating long-term shareholder value.
What's your view of the digital ad technology landscape today? Are there too many companies?
The digital ad ecosystem is one of the most exciting and dynamic areas within the entire technology sector. At Blackstone, we spend a good deal of time speaking with and advising the large technology acquirers and investors regarding where they should place their chips next. Digital advertising and marketing is front and center among nearly every conversation we have, whether with the holding companies, interactive agencies, media players, or technology infrastructure providers.
A lot has been made about this market being overcrowded. In my view, the number of companies in the sector is a reflection of the massive opportunity for growth that exists. Additionally, one’s view on the market fragmentation really needs to be formed on a sector-by-sector basis. Are there too many long-tail networks that are simply aggregating low-value inventory? Probably. However, one could easily argue that, in certain sub-sectors, such as mobile and video, there is a scarcity of companies and a need for new businesses to solve entirely new problems.
I also do not believe it is a particularly productive debate whether there are too many or too few companies in this ecosystem. As with any major market shift, as we are experiencing here, new innovators will arise to meet market demand for new products and services. There will be winners and losers, but that is not necessarily a function of the number of players, but rather whether a company has a unique enough offering that cannot be provided by others, and the skills and vision to bring that offering to market. Among the companies I work with, each has a unique angle on creating value for its customers that, I believe, will “win” regardless of how many players there are in the market today and whether or not the market is deemed by some as being overcrowded.
How do you expect this market to play out in the coming year? More M&A? Attrition?
I expect a robust M&A market within the digital advertising space over the next several years. Among the prospective buyers I speak with and advise, nearly all are closely examining this sector and figuring out what their next move will be. Most realize they have some of the elements of what they ultimately need, but are missing certain others. On the buy-side, there are a number of key strategic assets and capabilities that need to be combined, including: analytics, optimization, data, creative, business intelligence / insight, and services. These all need to be brought together in a multi-channel format, at scale, and in real-time. That is a really hard problem to solve, and no one has done it successfully yet, in my view. On the sell-side, publishers need to figure out how to maximize the value of their premium inventory and monetize their audiences in new ways. In the middle, the exchanges are commoditizing low-value inventory, ramping quickly, and expanding their analytic tool sets. And the networks need to evolve, as we all know, by rapidly gaining scale and/or optimizing targeting and media performance. All of these trends translate to change and opportunity, which historically has always been a great catalyst for M&A.
Any thoughts on macro-economic trends affecting digital media?
Regarding the macroeconomic environment, while we are out of the woods and, I believe, the risks of a double-dip are low, we are still not where we should be by historical standards at this point in a recovery. Much of the world today is taking somewhat of a wait-and-see approach to investments, whether they be in people (hiring), R&D, capital equipment, or M&A. Despite the multiple factors I have noted that are tending to drive M&A, it is rather remarkable that M&A has not in fact been more robust given many of the economic factors in place today. Technology and Media companies are sitting on all-time high levels of cash. Debt is cheap and abundant by historical standards. Valuations are reasonable. And yet, technology M&A spending globally in Q3 was down nearly 7% vs. Q3 2009, which was near the cycle low (or so we thought). In October of this year, the picture looked even worse, with y/y volume down 22%. This somewhat anemic rebound in M&A is due to the significant amount of uncertainty – around the political and regulatory climate, tax policy, and the pace of economic recovery – in the market today. Until this uncertainty is lifted, M&A will continue to be muted.
Among the companies I advise on the sell-side, I often get asked the question whether now is the right time to pursue a sale process. The answer, of course, is entirely situation- and company-dependent. However, I will say that, if you are trying to maximize value over the long-term and you have no need for liquidity today, it is not necessarily the best time to pull the trigger. There is a lot of supply in the market right now, and demand for M&A is still modest. Among our clients, the most successful exits over the past year have resulted from in-bound buyer inquiries, which have in turn catalyzed a process. In certain situations, we are advising clients (if they have the luxury of doing so) to continue to build business momentum and wait until valuations improve and buyers are more open with their checkbooks before approaching the market proactively.
Much has been made about today's stock exchanges and how they relate to advertising exchanges. Do you think the financial market analogy is appropriate in media? Why or why not?
I agree that this is a rather easy and obvious comparison to make (they are both called exchanges, after all!). The question is not whether inventory will be bought and sold in an exchange format (I believe a majority of it will, someday), but when and how? With all of the hype around the migration to exchange-based buying, some have extended the analogy and made the assumption that in the next few years the vast majority of inventory will be transacted directly by brands through trading desks linked to a small number of exchanges (e.g. that there will be virtually no difference in the way stocks and ads are traded). I think this oversimplifies the complexity of how digital ad inventory will be bought and sold in the future; I also believe adoption will be slower than some suggest due to a number of important differences between the financial and ad exchanges, including a lack of (high-quality) inventory, regulation, unit standardization, information asymmetry, governance, transparency, and adoption by the buy-side. I will go into each of these differences and their implications in a separate post, but the headline is that I believe such differences will limit full-scale adoption, particularly for the highest-value inventory. The exchanges are going to make a significant impact, for certain, but I do think this impact will happen a bit more slowly than the many predict.
What are your predictions for investment in the sector going forward, including how the VC/Angel landscape will evolve, if at all?
Venture Capital, as an asset class, has not performed well over the past decade and we continue to have too much money chasing too few deals. We haven’t seen a major shakeout (yet) as many funds have 10+ year lives and as such, the wind-down cycle will take time. I do, however, think there will be plenty of examples of firms that are not able to raise their next fund (or need to significantly downsize) in part due to bad bets they have made in this sector.
Some have argued that there has been too much capital poured into this space on the part of the VC/Angel community. While that may be true with respect to the majority of companies that won’t have successful exits, let’s not forget the significant aggregate value that has been created in the sector as a direct result of the investments made. There have been some tremendous exits; by my math, since 2006, there has been over $18 billion in value realized across 20+ “scale” exits such as Admob, Quattro, Omniture, Interwoven, Blue Lithium, Right Media, aQuantive, DoubleClick, etc. Most VC’s I know would be pretty happy with the >7x return (based on $2.5 billion invested) that this market has generated. Of course, the returns have been generated across only a small number of firms. But in aggregate, the sector has created, and will create, significant value relative to the capital invested.
I think there continues to be very attractive opportunities for investors in this sector. The overall global advertising market stands at over $200 billion in aggregate value, versus only ~$45 billion allocated to digital. Not only will core online segments, such as search and display, continue to show robust growth in the future, but over time an increasing percentage of media spend will become addressable (TV among the most notable examples) and therefore present new opportunities. Buyers, for their part, will become increasingly comfortable with the online channel, further driving digital marketing spend.
Among the VC’s I spend time with, key investment themes tend to be around mobile, video, and multi-channel (particularly online / offline) analytics. In the exchange / DSP space, I am seeing a lot of interest around platforms that not only facilitate RTB transactions, but also technologies that optimize RTB campaigns by leveraging both 3rdparty and primary CRM data. Given the abundance of data, new tools are needed to add an “intelligence layer” and to optimize audience buys based on that intelligence. And as I have mentioned, there is a void that needs to be filled by a new breed of technology-enabled marketing services company that can act as a trusted advisor in media planning and campaign management, and that has the proprietary tools to optimize campaign performance across channels. I believe that these themes, as well as others we have not yet thought of, will continue to create significant opportunities both for investors and strategic acquirers for some time.
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