When Adobe acquired the B2B marketing company Marketo for $4.8 billion last week, investors pressed CEO Shantanu Narayen to explain the gulf between Adobe’s price tag and Wall Street’s valuation of Marketo two years ago, when Vista Equity Partners snapped it off the stock market for $1.8 billion.
Private equity investors have shown they have “the dry powder and the patience” to take subscription-based marketing technology companies off the market and resell them at strategic premiums, said Elgin Thompson, managing partner of Digital Capital Advisors.
Wall Street may have been confounded by Adobe’s Marketo deal, but private equity investors see it as a sign of what’s to come. And the private equity firms that bought companies like Neustar, Sizmek and Dun & Bradstreet are all betting that marketing technology companies with subscription revenue models can sell at higher multiples than Wall Street thinks.
Marketo was trading below $1 billion in 2016 before rumors of a takeover pushed it back into unicorn territory.
“The intrinsic value of the business was more than Wall Street said it was,” said Jason Holmes, president and COO of the sales and marketing platform Showpad and former COO of Marketo when Vista acquired the company.
Many in the industry scorn private equity takeovers because they often cut headcount and relocate businesses from tech hubs like New York City or San Francisco to cheaper cities, Holmes said.
“It’s a formulaic process, but based on data and they get results,” he said.
After Vista acquired Mediaocean in 2015, one of the most important ways it grew the business was by providing cash and patience for a string of acquisitions in 2016, Mediaocean CEO Bill Wise said at AdExchanger’s Industry Preview conference in New York City last year.
And Vista likewise helped Marketo close acquisitions with the sales automation technology ToutApp and attribution provider Bizible, which Adobe valued, according to Narayen.
Vista and other PE firms tend to replace top executives with younger, less costly employees. That was the case with Marketo, Holmes said, with almost the entire executive team leaving after the sale.
“What we’re seeing more and more of is private equity making foundational changes to the balance sheet beyond engineering,” Thompson said.
But streamlining costs and minor acquisitions don’t fully explain the billions of dollars added to Marketo’s price since 2016.
The public market struggles to understand new, complex business models, which drives down the valuation of a company.
For example, LiveRamp begin trading as RAMP this month after selling Acxiom Marketing Solutions (AMS), its historic consumer data brokerage, to the agency holding company Interpublic Group (IPG) in July.
Acxiom, encompassing both AMS and LiveRamp, had a market cap hovering around $2.3 billion, the eventual price IPG paid for AMS. Now the standalone LiveRamp stock is trading at about $3.8 billion, despite the loss of AMS, which accounted for more than two-thirds of Acxiom’s overall revenue.
Wall Street became more attuned to the potential for strategic acquirers to bid up the price of ad tech and mar tech category leaders, Holmes said, after Adobe’s purchase of Omniture and Oracle’s acquisition of Datalogix and BlueKai showed how much revenue can be scaled within a major tech company.
“That timing was the most important thing in terms of what Marketo did to add $3 billion in value,” he said. “It became a priority for a company with a lot of money.”