Neustar Inc., the MadTech (MarTech and AdTech) company that provides data and analytics to marketers, announced on Wednesday they were bought by a private investment group led by Golden Gate Capital for about $2.9 billion.
Why would Golden Gate shell out all that money to take Neustar private?
Many private equity deals focus on undervalued companies, often in out-of-favor areas, and through restructuring and financial engineering create enormous gains on their investment. Last week The New York Times chronicled how Apollo Global Management took parts of Hostess, in particular the Twinkie factories, private. The article examined the huge reduction in head count, de-unionization of the plants, investment in more efficient technology, and many of the other typical activities seen in privatizations. It also chronicled the financial engineering that secured 13 times the original investment for Apollo and its partners.
But Neustar is no Twinkie. The motivation for this deal is easy to see:
- Neustar spent more than $1 billion on acquisitions in the last decade, and its stock price in November was off more than 50% from its high of $55.70 in August of 2013.
- Neustar’s slower growing call center business can be sold off to pay down the acquisition price (and create cash for more deals, as I’ll explain below).
- Neustar is a great platform for rolling up other companies. (They are well-versed in buying and integrating companies).
- They have a strong management team.
So, while it is easy to believe Neustar is undervalued, that is not why this is such a great opportunity for growth. Unlike the Twinkie plants, this is not about downsizing, better equipment, or de-unionization.
While the general feeling about AdTech companies has been negative, M&A activity continues to grow as new VC investment remains robust for certain segments. Stock performance has ranged from weak (Rubicon, Rocketfuel) to OK (Criteo, The Trade Desk).
Where, then, does the Neustar deal fall? It’s about data and the opportunities for data growth. Neustar was planning to separate their large call center business from the data business, and I suspect that Golden Gate will sell that business in the near future. I also suspect Neustar will double down on the data side of the business. Neustar combines knowledge about people and their intent.
The narrow market for data onboarding is projected to grow from $250 million today to over $1 billion by 2020. The overall market will grow at least as fast. Data represent digital value realized. Given the recent acquisition of Circulate and Arbor by LiveRamp for $140 million, and of many other data companies by Oracle, Adobe, Salesforce and others, roll-ups of data companies are well along. However, capturing, building, mapping and leveraging data is still in its early days. While the first round of winners may be emerging, the market is still in an early stage.
Data in MadTech started largely as cookie targeting and became more sophisticated with the emergence of DMPs. Data has become much more and is now the engine that drives the MarTech and AdTech ecosystems. The interesting technologies are those that leverage multi-source data and cross online and offline sources. As these newer, cross-capability companies get traction and new VC money, companies like Neustar are becoming suppliers of the raw material.
The first AdTech area to emerge as a real business was (and continues to be) algorithms. Those algorithms took the early data sets and figured out how to target and optimize to enhance performance advertising. Even today, most programmatic media dollars are focussed on performance. We’ve seen the rise of DSPs, SSPs and ad exchanges and, more recently, large deals and IPOs (such as Invite Media, Rocket Fuel, The Trade Desk, AppNexus and Rubicon). While all these companies leveraged data, they were arguably not true data companies.
The first major data deal was when Oracle purchased BlueKai in February 2014 (although Adobe’s acquisition of Demdex was an early salvo). BlueKai was a massive deal at the time ($350 million – $400 million). Oracle has gone on to spend billions to build its Marketing Cloud business, and others continue to invest. The privatization of Neustar is likely to increase the table stakes. While Golden Gate Partners will do their share of financial engineering, I suspect that Neustar will become the most aggressive acquirer of raw data suppliers in the market. The nature of data is changing. It is growing beyond cookie targeting to new and creative ways of finding, matching, and leveraging combined offline and online information. One longer term value of data will be leveraging it into addressable TV and other emerging addressable markets.
So, now there are at least three acquisitive data companies searching for roll-up opportunities: Oracle, Acxiom (which owns LiveRamp) and Neustar. Neustar, once it disposes of its call center business, will become a single-minded data roll-up platform.