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A $405 Million Price Tag for Adap.tv? AOL Paid Way Too Much!

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In July, AOL announced it would buy ad technology platform provider Adap.tv for $405 million in cash and stock. The strange part is that for all the news outlets that covered the deal, more than 86 by my count, none of the more than 2 dozen articles I have read even mentioned what Adap.tv’s revenues are.

Adap.tv has been around about 7 years and last year did less than $100 million in revenue. No one at the company wants to give an exact number, but sources I spoke to put the number at about $85 million. Some at the company have been quietly telling people since the beginning of the year that they are on a run rate of “under $140 million in revenue for 2013,” but realistically, I expect 2013 revenue to be more in the $120 million range. Based on that 2013 projection, AOL paid 3.5x revenue for Adap.tv. Keep in mind that AOL said Adap.tv has “grown global revenue over 100 percent per year in each of the last three years.” Whenever a company grows revenue by 100 percent for many years in a row, you know the base number it is working off of is small. The one post I did read that mentioned revenue numbers said AOL paid 5x Adap.tv’s 2012 revenue, but these deals are done on the projected run rate of revenue for this year, not what it did last year.

Some might suggest that Adap.tv used the recent initial public offering (IPO) of Tremor Video, which has a market cap of just more than $400 million, as a way to measure value, but Tremor Video had raised 2x more cash than Adap.tv ($116 million versus $50 million), yet their revenues weren’t 2x higher. Tremor Video did $105.2 million in 2012 revenue and wasn’t profitable. Adap.tv wasn’t profitable in 2012 either, but with the scale and resources it will now get thanks to the AOL platform, it probably could be.

I’m sure this is a long-term play for AOL, and it is looking at what the future of online video advertising will grow into, but keep in mind that every projection made for this segment of the industry has historically been wrong. When the largest vendors in any space are doing $100 million in revenue, the market is not as big as pundits suggest. And when you go to CNN or ESPN or any of the other major web portals and they deliver you the same video preroll ad literally 10 times in a row, it’s clear there are plenty of problems with the market. Video ad targeting does not truly exist. Video cost-per-million (CPM) rates have been stagnant for years. All the vendors will say otherwise, but we all see what kinds of video ads we get.

While you may not think it from what I have written so far, I actually like this acquisition. Adap.tv was doing a good job in the market, it has a smart executive team, and the company fills a void in AOL’s video strategy. But AOL overpaid, and based on how AOL’s CEO Tim Armstrong is talking about the deal, realistic expectations aren’t being set. During an interview on CNBC, Armstrong said the size of the TV advertising market is $240 billion, and that’s going to move online over the next decade. What he does not say is what percentage of that AOL predicts will move online and over what time. He said Adap.tv is the No. 1 technology in this space, yet it doesn’t even capture 3 percent of the programmatic ad-buying market, which eMarketer estimates will be more than $3.36 billion this year. Also, while I see others using the eMarketer estimates, note that they say that number is for “all digital display spending,” not just video.

AOL has a long way to go before it can show it got $405 million in value from this deal. I hope it gets its money’s worth, but it’s going to be many, many years before AOL can show justification for paying the price it did.

This article appears in the October/November 2013 issue of Streaming Media magazine as " Why AOL Paid Too Much for Adap.tv."

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