On November 11, 2014, Yahoo! (YHOO, Financial) announced that it will be acquiring BrightRoll for approximately $640 million in cash. This article discusses why the acquisition of BrightRoll is positive for Yahoo! in the long term.
BrightRoll is a programmatic video advertising platform with audiences across desktop, mobile and connected TV. According to comScore, BrightRoll served more video advertisements and reached more consumers in the U.S. in 2014 than any other platform. For 2014, BrightRoll revenue is expected to be $100 million and Yahoo! expects to enhance the company’s EBITDA after the acquisition.
What is clear from the overview on the company is that BrightRoll is a leading video platform and in an industry-leading position provides significant growth traction to Yahoo! in the video advertising industry.
The growth and strong presence in the video advertising industry was lacking for Yahoo! before the acquisition and Yahoo! was looking to make inroads in the surge in digital advertising globally. The acquisition of the leader in U.S. gives Yahoo! a perfect platform for growth in the digital advertising industry. By possessing the technology to power advertisements, Yahoo! can monetize through approximately 2 billion requests per day to BrightRoll making it the largest video platform in the U.S.
I also believe that the acquisition comes at a right time due to two reasons – First, Yahoo! was desperately looking for some traction on this front, and second, the proceeds from the Alibaba (BABA, Financial) IPO can be used to fund the acquisition and also look for further potential acquisitions in the sector.
I must add here that this is not the first acquisition for Yahoo! related to the digital advertising space and the company’s focus is clear on gaining more market share. Earlier, Yahoo! bought Flurry to build on the mobile advertising network. While the impact of BrightRoll on mobile business remains unclear, the former acquisition supports the mobile business advertising growth.
Display advertising revenue has not be particularly impressive for Yahoo! in the recent past and the acquisition of BrightRoll means that the decline in display advertising revenues will be more than offset by growth in digital advertising in 2015.
Therefore, the decision to acquire BrightRoll seems very attractive for a long-term point of view and from the perspective of gaining a leading industry position in the digital advertising space. I am of the opinion that the $640 million investment might have a relatively longer payback time for Yahoo!, but the impact on growth will be significantly positive and it aligns with the company’s broad growth strategy. The valuation consideration is not so important at this point of time.
While the company’s 3Q14 results were not particularly impressive in my opinion, the company’s investment in mobile platform and products is likely to show relatively better results in the quarters to come. The company expects gross revenue in mobile to exceed $1.2 billion in 2014. Therefore, there are bright spots and can translate into revenue and margin growth in the coming quarters.
From a stock upside perspective, I believe that investors can consider Yahoo! even at these levels. For 2014, the stock has moved higher by 25%, but with the acquisitions in 2014, the growth outlook for the coming year is bright and the stock is likely to continue trending higher.
In conclusion, Yahoo!’s acquisition of BrightRoll is certainly positive from the company’s long-term objective point of view. While the price of acquisition can be debated, the value it brings to the company is certainly positive and should result in the stock moving higher as Yahoo! uses its financial flexibility to further expand on the digital platform.
