Sizmek said Tuesday it intends to buy ad tech company Rocket Fuel for $2.60 per share in cash, valuing Rocket Fuel at $145 million.
Sizmek itself was acquired about one year ago by private equity firm Vector Capital at a value of $122 million.
If the transaction is completed in Q3 as expected, the publicly held Rocket Fuel will go private again. (The merger has a go-shop agreement where Rocket Fuel can solicit other offers over a 30 day period.) And Sizmek, which is known among ad buyers for its ad server, will have inherited Rocket Fuel’s DSP, DMP and all the AI-powered analytics that had helped make the embattled company a Wall Street darling.
But Rocket Fuel has floundered in recent years, despite the best efforts of CEO Randy Wootton to wrestle the company into profitability.
“The board is executing its fiduciary responsibility and decided this was the best option for the shareholders,” Wootton told AdExchanger.
Did access to cash have much to do with Rocket Fuel’s desire to sell? Following a series of layoffs in early 2017, the company's cash flow was negative $18.6 million in Q1 2017 compared to negative $7.5 million during the same period last year.
Rocket Fuel claimed the negative cash flow happened because it took longer in Q1 to collect money owed, while facing higher media costs and a “one-time restructuring cost.”
But while Rocket Fuel CFO Stephen Snyder noted the benefits of being part of Vector Capital’s fund, he added that Rocket Fuel’s “cash balance was fine.” At the end of Q1 it had $62.8 million in cash.
“We were pre-cash flow positive this quarter,” he said.
The acquisition will enable Rocket Fuel to undergo its business reformation beyond the glare of the harsh public eye.
Wootton acknowledged the difficulties of this transformation: "But one where we see promising growth in our platform business, which is up 77%." That revenue now makes up 41% of Rocket Fuel’s total. “But although we signed holding company contracts, that sort of transformation in the public eye has been extremely hard and, by going private, we can help realize our best potential.”
In any event, the acquisition by Sizmek is a merciful exit for Rocket Fuel, whose fall from grace was sparked by clients insisting that Rocket Fuel reduce what once had been massive margins topping 60%.
In an attempt to shift away from its once-profitable ad network model, Rocket Fuel purchased the ad tech company [x+1], a DSP-DMP hybrid that focused more on selling technology than services. But less than one year later, Rocket Fuel co-founder and CEO George John was out, as the company began its push for profitability.
Enter current CEO Wootton, the former Rocket Fuel sales chief who got promoted to the top spot eight months after John left. In the quest to become a self-sustaining company, he initiated a series of layoffs, placed heavy emphasis on boosting Rocket Fuel’s platform business and made overtures to agency holding companies and large enterprises.
Its affiliation with Sizmek – whose executive chairman, Mark Grether, co-founded WPP’s Xaxis – could help gin up more agency business.
And from an execution standpoint, Wootton said that with Sizmek’s roots in ad serving and rich media, coupled with Rocket Fuel’s DSP and DMP and programmatic delivery mechanisms, “we really start to span the entire media plan – bringing it all together with context and creative.” (Sizmek’s DSP StrikeAd, Wootton added, is not cookie-based and is focused on mobile.)
As for layoffs, it’s still too early to say. “We’re making no decisions until after the close, but there will be a much more clear strategic plan in Q3,” Wootton said.
It's also too early to say whether Wootton will stay on as Rocket Fuel's chief. The next six to eight weeks is all about integration and planning, he said, and the executive lineup will be announced toward the deal's close.