Chinese interest in ad tech is more about financial hedges than anything else
If winter is coming for ad tech, it doesn’t seem all that bad of an autumn. There have been up to a dozen $100 million-plus acquisitions in the sector so far this year — the most recent was Salesforce buying Krux for between $650 million and $750 million — and the seller’s market has been helped by a new crop of acquirers: Chinese companies.
Last week, Chinese private equity firm Orient Hontai Capital acquired Palo Alto-based mobile ad startup AppLovin at the price of $1.4 billion. And in recent months, a consortium of Chinese investors purchased New York-based ad tech company Media.net for $900 million in August and Opera Browser for $600 million in July. Beijing-based marketing company Spearhead also bought mobile ad exchange Smaato for $148 million in June.
While there are digital media dynamics of the Chinese market driving these deals, other factors with nothing to do with the ad tech sector are at play.
“The ad tech sector is quite hot in the Chinese capital market right now,” said Si Shen, CEO of Chinese mobile tech firm Papaya Mobile that is looking to buy a U.S. programmatic platform this year.
While she declined to discuss financial specifics of Papaya’s new ad tech deal, Shen believes that the trend of Chinese companies acquiring ad tech firms globally is going to continue. “The acquirers are not just going to be Chinese ad tech companies but also Chinese media companies and the investment funds of Chinese public companies,” she said.
“It is inevitable that Chinese companies will have to look to foreign markets for growth and profits,” said Michael Wade, professor of innovation and strategy for IMD Business School. “I think this will happen both through acquisition and through organic growth.”
And Chinese companies can easily make a profit through earnings arbitrage, because they can gain higher multiples (how much investors are willing to pay per dollar of earnings) in China than what U.S. firms can get here or in Western markets, according to Ben Tregoe, svp of business and corporate development for ad automation software Nanigans.
“A Chinese company can pay a lower multiple for a U.S. company. Once the Chinese company completes the transaction and takes that [earnings] onto its books, it can get a higher multiple from the Chinese market. So it’s an instant win for the Chinese company,” Tregoe explained. “It’s important to note that these types of financially driven deals are for rapidly growing [U.S. ad tech] companies that are generating profits.”
There’s also an economical play. The recent economic slowdown and stock-market rout in China, as well as the devaluation of yuan, are pushing Chinese entrepreneurs to invest abroad, and ad tech is great for asset diversification, according to Ari Paparo, CEO for ad tech startup BeeswaxIO.
“If you have lots of revenue and investments in yuan and want to protect against devaluation, buying a cash-flow positive business in dollars or euros is attractive, even at a premium,” Paparo explained. “And when you invest in ad tech, there are no regulatory issues. If you invest in manufacturing, you may need to worry about the political environment, for example.”
Chinese companies’ acquisitions of ad tech firms globally will likely to gain momentum. China’s foreign direct investment in the U.S. reached more than $15 billion last year, and it is estimated to double this year, according to research company The Rhodium Group.
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