This story has been updated from 10:32 am EDT with additional information.
NEW YORK (TheStreet) - The $2.3 billion purchase of digital ad powerhouse Conversant (CNVR) by Alliance Data (ADS) - Get Alliance Data Systems Corporation Report illustrates the continued growth and fast changing nature of the global advertising business.
Few investors understood the business of Conversant, formerly called ValueClick, which provides personalized digital marketing strategies. The Westlake Village, Calif.-based company is seen as something of an expert when it comes to so-called digital programmatic advertising, given its ability to match buyers and sellers of ad space on the web. Essentially, Thursday's deal shows the growing power of not only digital advertising, but of programmatic advertising. Shares of Conversant surged 30% on Friday to $34.85 on news of the deal. The stock is up 56% over the past year.
Research firm eMarketer forecasts the U.S. digital advertising market to almost double to $83 billion in 2018, up from $43.1 billion in 2013.
Within digital advertising, U.S. programmatic ad buying is forecast to grow by 127% to $17 billion in 2017 from $7.5 billion in 2013, according to MagnaGlobal. MagnaGlobal estimates that programmatic advertising could represent 83% of display media transactions by 2017, compared to 24% in 2011.
"We have always believed Conversant's ability to match offline transactional data to drive online purchases is a highly valuable and under-appreciated asset," Jefferies analyst Brian Fitzgerald wrote in a note to clients on Thursday in which he downgraded the stock to "hold" from "buy" following the deal's announcement.
While Alliance traditionally focused on direct marketing strategies such as direct mail, catalog, inserts, as well as digital marketing, Conversant "is one of the few long-standing players in the Ad Tech space," Fitzgerald wrote. "Post-close, Conversant will operate as part of ADS's Epsilon offering, providing enhanced anonymous, online and offline databases to enrich Epsilon's targeted marketing programs which will be highly differentiated in the market."
Alliance Data announced late Thursday that it will acquire Conversant for a combination of cash and stock valued at approximately $2.3 billion, or $35 per Conversant share. Alliance said the purchase price, which will be paid 48% in cash and 52% in Alliance shares, represents 10 times Conversant's expected forward adjusted EBITDA of $230 million for 2015. The deal is expected to be completed by the end of the year.
"The acquisition enhances ADS' eCommerce offering which should enable the company to offer more robust omni-channel solutions," Credit Suisse analyst Georgios Mihalos wrote in a note. "Going forward, Conversant will act as the digital platform for the company. The acquisition will allow ADS to marry offline SKU level data with online transactional data."
Conversant is expected to generate approximately $670 million in revenue in fiscal 2015 and approximately 30% EBITDA margins, according to Mihalos.
"The company is growing both top-line and EBITDA in the high single digit range, in-line with [Alliance Data's] Epsilon," he writes. Following the completion of the acquisition, Conversant will operate as part of Epsilon. "In 2015, we expect Epsilon to account for over a third of total company revenue and 25%+ of EBITDA," he wrote.
"Clearly the DNA of both companies are very similar," Alliance Data CEO Ed Heffernan said in prepared remarks during Thursday's conference call to discuss the deal. However, he admitted that Alliance Data was "subscale" when it came to "the huge market of data-driven, targeted display, the newly emerging market of video, mobile we could certainly use more size [there]. ... This is a company that provides all of that."
Heffernan said he and Conversant CEO John Giuliani began "chatting" over the spring about "what we could do together."
Alliance Data wasn't initially looking to do an acquisition in ad tech space, preferring partnerships or organic growth, he said, but "this happened to be a company that was relatively unique in that space in the sense that they have a tremendous track record of not only delivering the digital space but also making very significant profits and cash flow doing so," Heffernan said. "That's what really got our attention."
The deal represents a feat for Giuliani who noted during Thursday night's conference call that shareholders will have seen a "doubling of equity value" with the acquisition from two years ago.
Giuliani became a part of Conversant's senior management team in August 2011 after the company acquired Dotomi, where he was previously CEO. He was named CEO of Conversant in December 2012.
The company's name change in February was to combine the five acquisitions its completed since 1998 to combine "video and mobile capabilities, RTB and CRM infrastructure, offline measurement and device recognition to deliver one-to-one engagement at scale," the company said at the time.
"Our expertise in digital marketing is unparalleled, and as Conversant, we will lead the future of the industry through personalization," Giuliani said in the release.
--Written by Laurie Kulikowski in New York.
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