Online Ad M&A: Fears of Backfiring

The flurry of acquisition activity between the tech industry and the advertising industry has created some interesting dilemmas for companies in both camps and for investors as well. A WSJ piece points out that even as ad firm prices are rising, observers say more acquisitions are still likely – all of which has some investors and analysts wondering whether the newly-purchased interactive ad firms will be able to live up to their profitable promises. And while online ad revenues are still healthy, signs of a slowdown are becoming increasingly clear.

Case in point: last May, ad holding company WPP Group paid $649 million for interactive ad shop 24/7 Real Media. Revenue at the ad shop rose 43 percent last year. Robert Willott, editor of Marketing Services Financial Intelligence, a UK-based ad industry newsletter, tells the Journal that hat 24/7 will have to grow revenue 50 percent on annual basis for the next few years in order to provide WPP with a 10 percent return, after taxes. WPP’s response is that interactive ad shops produce higher profit margins as compared to mainstream agencies. Secondly, with 24/7 being accessed by WPP’s other clients, the company can further enhance its value overall.

So far, Omnicom Group and Havas are two ad holding companies that have resisted the hot takeover market. But most of its competitors, such as WPP, which has purchased or invested in 17 other online ad firms this past year, and Publicis Groupe, which started the M&A ball rolling when it paid $1.3 billion for Digitas at the end of 2006, don’t appear to be sated. Non-ad industry companies like Google (NSDQ: GOOG), Microsoft (NSDQ: MSFT) and Yahoo (NSDQ: YHOO), which have paid out $9 billion combined for online marketing firms this past year, also are looking as well, as evidenced by this week’s $300 million deal between Yahoo and online ad network Blue Lithium.