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 integrating DG’s TV-ad business, which makes up two-thirds of DG’s revenue. I wouldn’t normally buy that—after all, most mergers fail quietly and miserably. But when Roland says, “I know the company so well,” he’s speaking from more than 10 years of experience competing with (and being acquired by) DG. That knowledge is worth something.
The real hurdle, he says, is “trying to bring order to the chaos of online advertising.”
That’s a process that ultimately could take 10 to 20 years, he says. “Our goal is to provide some leadership in online video and the mobile space. We know video is never going away. Sight, sound, and motion is the best way to engage your consumer, whether it’s TV, online, or mobile.”
In television, Roland says, 25 big companies control $60 billion in ad revenues. In online and mobile, it’s more like 250 companies going after $5 billion, a much smaller pie. But to Extreme Reach and its ad-delivery platform, it’s all the same—“for us it’s all IP addresses,” Roland says—so it makes sense to capitalize on the TV market now.
But why did DG sell? Its TV business was losing money and its revenues were in decline. DG is apparently staking its future on its remaining online-ad business, which will become a new publicly traded company.
It’s interesting that Extreme Reach thinks it can pick up the slack and make DG’s TV business mesh with its existing ad platform/network in a profitable way. As I see it, Extreme Reach’s software streamlines the delivery of video ads from the various agencies to online publishers and TV stations; it also helps brands and advertisers manage and measure their campaigns.
If it can do all of that well enough, the company stands to move farther upstream in the video-ad industry—and can capture a lot more business.
As Roland explains, “We looked at it as not so much, ‘Will TV win, or online win, or mobile win?’ But, ‘What is common and core to all three?’ The 15-, 30-, and 60-second commercial.”
That hints at the ultimate fate of Extreme Reach, too. Roland wouldn’t comment, but I could see the company eventually being caught in an acquisition tug-of-war between traditional TV players, like Comcast and NBC, and Internet companies wanting to move closer to the origination of all video, like Google, Amazon, Yahoo, and AOL.
If all goes well, that could mean a big payout. But in the meantime Roland will have his hands full running a much larger company—with much larger stakes.
“It’s just execution,” he says.