Extreme Reach Goes to Extreme Lengths With $485M DG Deal
Before autumn arrives in full swing, let’s take a closer look at one of the biggest deals of the summer. I’m talking about Needham, MA-based Extreme Reach, a video-ad delivery startup, buying the TV advertising business of Digital Generation (NASDAQ: DGIT), based in Irving, TX, for $485 million in cash.
Here’s why the deal is interesting. One, Extreme Reach started in 2009 and has raised $60-some million in venture and private equity funding. Why would a private startup—even a fast-growing, profitable one—take on debt to buy out the majority business of a public company?
Two, the founders of Extreme Reach came from FastChannel Network, a video-advertising startup that was bought by DG Systems (which became Digital Generation) in 2006. Now they have turned the tables on their former acquirer and competitor. But why do that when integrating DG into Extreme Reach isn’t an obvious slam-dunk in terms of future revenues and profitability?
And three, the whole video-advertising sector is poised for upheaval. People have been talking about TV ad spending moving to online and mobile for years, but online and mobile are really only taking off now. So what role will Extreme Reach play as the titans of tech—think Google, Amazon, Yahoo—move deeper into video and begin to challenge the established TV networks?
To get some answers, I spoke with John Roland (pictured), the co-founder and CEO of Extreme Reach. He didn’t say anything earth-shattering, but if you read between the lines, this is one of the biggest bets in the tech sector—and one of the more unusual plays in recent memory.
First, his overall thoughts and reaction: “It’s definitely the minnow swallows the whale,” Roland says. On the buying-out-his-competitor front, he adds, “Sure, there’s an element of satisfaction. With that being said, the shareholder is what I’m focused on.”
The mechanics of the deal are straightforward, according to Roland. Extreme’s biggest investor, Spectrum Equity, is putting in up to $47 million more to help finance the deal. But the vast majority will be debt financing: J.P. Morgan and SunTrust Robinson Humphrey are arranging a $475 million term loan.
That’s a big debt, but Extreme Reach sees this as an opportunity to dominate the market quickly. Assuming the deal goes through by early next year—it needs to clear antitrust regulations, the SEC, and DG shareholders—the combined company will have 1,100 employees, based primarily in New York (the biggest office), Chicago, Los Angeles, and Boston, and revenues of some $300 million, Roland says. Extreme Reach has about 230 people, prior to the merger, and is on pace for $61 million in revenue this year—with a run rate of $100 million by the end of the year, he says.
According to Roland, the challenge lies not in … Next Page »