NEW YORK (TheStreet) - Yahoo! (YHOO) is acquiring BrightRoll, one of the leading programmatic digital video advertising platforms, for $640 million in cash, in an effort to turn around its declining display advertising business.

The Sunnyvale, Calif.-based company announced late Tuesday that the transaction will combine "Yahoo's premium desktop and mobile video advertising inventory with BrightRoll's programmatic video platform and publisher relationships to bring substantial value to advertisers on both platforms."

Yahoo! has made it clear that video advertising is a major part of its long-term strategy, which includes mobile, social, native, and video advertising. Acquiring BrightRoll will "dramatically strengthen Yahoo's video advertising platform, making it the largest in the U.S.," it said in the release.

"Video, along with mobile, social, and native, is driving a surge in digital advertising. Here at Yahoo, video is one of the largest growth opportunities, and BrightRoll is a terrific, strategic and financially compelling fit for our video advertising business," Yahoo! CEO Marissa Mayer said in the release. "As with every acquisition, we have been extremely thoughtful about our approach to the video advertising space. This acquisition will accelerate the growth of both companies - we can help BrightRoll scale to even more advertisers globally and they can bring their tremendous platform offering to Yahoo's advertisers. The combination builds positive momentum for Yahoo's broader display advertising business in 2015."

Yahoo shares were rising 0.93% to $49.51 on Wednesday. Here's what analysts had to say about the acquisition.

Brian Wieser, Pivotal Research Group (Hold, $47 PT)

Yahoo announced it is buying video platform company BrightRoll for $640mm in cash. As we wrote last month when related reports emerged, BrightRoll is emblematic of the kind of acquisition Yahoo should pursue, given the traction it has within the industry and the alignment it has with the priorities of large advertisers. While we view the transaction positively, we note challenges still follow, not least as integration will follow and more acquisitions are probably still needed. However, we raise our price target to $47 on the back of Alibaba's stock price-run in recent weeks (Yahoo's stake in Alibaba is now worth $28/share assuming full taxes on an eventual disposition).

Ronald Josey, JMP Securities (Market Perform)

We maintain our Market Perform rating on Yahoo! shares following the announced $640 million acquisition of programmatic video advertising platform, BrightRoll. We view BrightRoll as a strategic acquisition for Yahoo! that could accelerate Yahoo!'s video monetization strategy given BrightRoll's robust programmatic tools. Video is one of Yahoo!'s four core strategic pillars, and the company has invested in original and syndication content, but Yahoo! currently ranks fourth in terms of video viewers on the Internet at 59 million, behind Google (GOOGL) (MO, $640 PT), Facebook (FB) (MO, $85 PT), and AOL (AOL) (MO, $55 PT), per comScore. This compares to BrightRoll's leading online video advertising reach of 52.4% of domestic users, and we note that it currently works with 87 of the AdAge Top 100 U.S. advertisers, all of the top 15 advertising agencies, and BrightRoll is expected to be on-track to generate $100+ million in net revenue this year, while also being EBITDA positive. With Yahoo!'s acquisition of Flurry this summer, and its announced acquisition of BrightRoll, we believe it is now better positioned to benefit from two of the fastest-growing advertising trends of the Internet: Video and Mobile. While the acquisition makes strategic sense to us, and we are incrementally positive on the potential turn-around of Yahoo!'s core operations, we remain on the sidelines until we can see further progress across Yahoo!'s core display business. For 2014, we project net revenue of $4.39 billion, EBITDA of $1.32 billion, and PF EPS of $1.54.

Peter Stabler, Wells Fargo Securities (Market Perform, $53-$55 price valuation)

We view brand advertising spend as the next sustained driver of the digital advertising shift. Though many media agency executives would argue that the once clean line separating brand and performance budgets has blurred, we note data suggesting significant marketing categories are still substantially underspent in digital forms when compared to industry totals. While marketers with strong search and e-commerce opportunities (tech, travel, telecom, financial services, auto) have led first 10-15 years of spending migration, we see the next leg as being driven by categories lacking the search/e-commerce imperative. Better audience measurement, formats (video!), programmatic execution, and attribution are combining to create a media imperative for brand oriented marketers. We believe these underspent categories (CPG, personal care, restaurants, entertainment...) represent the next great digital prize and have been the leading catalyst behind growing online video demand.

Though Yahoo remains a top scaled player in online advertising, the company has ceded significant market share to both established and emerging competitors. We view company's pivot toward mobile and video as providing greater opportunity, but believe Yahoo continues to lag on programmatic offering. We see significant upside potential to shares should solutions appear to minimize Yahoo's Asian asset tax burden, but expect valuation of core assets to remain muted.

Justin Post, Bank of America Merrill Lynch (Neutral, $55 PT)

We think the proposed acquisition should enhance Yahoo's video ad serving capabilities and put the company in a more competitive position with Facebook's LiveRail, AOL's Adap.tv and YouTube. We expect Yahoo to place its own video ad inventory into the BrightRoll platform, and also maintain BrightRoll as an independent company which will continue to serve its customers. At a $640mn price tag, the proposed deal represents around 6.0x 2014 Price/Sales (exact sales estimate not provided), slightly above Tubemogul's at 5.5x and Adap.tv's acquisition price which was at around 2.7x price to current year sales.

While investors have been concerned that Yahoo management will utilize cash for acquisitions versus shareholder returns, this proposed deal represents what we would consider a reasonable use of cash that is unlikely to change the Yahoo thesis or result in a new sum-of-parts stock discount. The transaction will boost Yahoo's video and programmatic capabilities, and will have some synergies. We have underestimated the rapid rise of Alibaba stock which has a positive impact on Yahoo's shares, are raising our Price Objective to $55 (from $48) in our sum-of-parts model to reflect increase in BABA stock price since October 21 (we use a 19% tax rate on BABA value, using a 38% tax rate would yield a PO of $47). We continue to see BABA as offering better exposure to the BABA stock price, but Yahoo (with 384mn shares) also has high exposure to BABA share price moves.

"We rate YAHOO INC (YHOO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity and reasonable valuation levels. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet Software & Services industry. The net income increased by 2183.5% when compared to the same quarter one year prior, rising from $296.66 million to $6,774.10 million.
  • YHOO's revenue growth trails the industry average of 27.5%. Since the same quarter one year prior, revenues slightly increased by 0.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • YHOO's debt-to-equity ratio is very low at 0.03 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 2.75, which clearly demonstrates the ability to cover short-term cash needs.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Internet Software & Services industry and the overall market, YAHOO INC's return on equity exceeds that of both the industry average and the S&P 500.

-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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