How Sizmek Fell, And How It Could Be Sold

Sizmek regained access to its cash this week after Cerberus, the investment firm that owns Sizmek’s debt and now owns its equity, seized its holdings and pushed the company into bankruptcy last Friday. Sizmek has resumed business operations and is covering payroll and employee benefits, after missing the previous pay period.

The next two to three weeks will be a busy period, as Sizmek and its private equity owners consider acquisition offers from dozens of interested parties, according to a bankruptcy filing this week. But while the future remains a mystery, the same filing reveals an interesting story of Sizmek’s slide since it was acquired by the private equity firm Vector in 2016.

From 2016 to early 2017, Sizmek was rebuilding its legacy ad server to consolidate its subsidiaries onto one platform and because “the data infrastructure underlying the old business no longer supported the scale of the business and the complexity of requirements from advertisers.”

But that effort paused in 2017, for an uncited reason, though it happened at the same time Sizmek acquired Rocket Fuel in July of that year.

In 2016, Rocket Fuel and Sizmek’s combined net revenue stood at $399 million – net revenue is the money accrued to Sizmek and Rocket Fuel, not the overall media spend.

But adding Rocket Fuel proved a bridge too far for Sizmek. The company’s liquidity dried up, because Rocket Fuel had high working capital costs in its managed service business – with traders and analysts that would run campaigns instead of advertisers and agencies managing campaigns in-house.

The managed service business was appealing, because its profit margins were higher than Sizmek’s self-serve DSP and ad server platform it was rebuilding. But the market had shifted under Sizmek and Rocket Fuel, and in 2017 brands and agencies aggressively moved their businesses from managed service to self-serve platforms.

Sizmek saw “a sharp decline in demand for Managed Service business that was not offset by corresponding increased demand in Self-Service businesses.”

As of 2019, Sizmek has migrated 40% of their advertiser clients to the new self-serve platform, but those 40% of clients represent only 10% of Sizmek’s ad spend. The company planned to complete the platform, specifically adding enterprise-grade features, and to bring all advertisers onto the new platform by 2020.

But that was too long a runway for a company bleeding cash.

As Rocket Fuel increased Sizmek’s working capital demands, revenue was disintegrating. In its second year as a combined company, net revenue dropped from $399 million to $289 million.

By 2018, Sizmek’s leadership had “come to understand that they do not have the scale (large enough share of media business) to justify costs of continuing their DSP.” And Vector, then the controlling stakeholder of the business, began soliciting sales offers.

No acquisition materialized, however, largely because Vector was unwilling to sell off any subsidiaries or to break off the ad server business, Sizmek’s most valuable asset. Vector agreed to a $30 million reinvestment in two $15 million tranches to keep the company afloat.

By 2019, Sizmek’s projected annual revenue had fallen to $170 million, for the first time dropping below the company’s accrued debt and unpaid interest, which had crept up to $172 million. In January, Vector balked at paying the second $15 million it had promised, triggering Cerberus’ takeover of the company.

Cerberus began an intensive six-week review of Sizmek’s business.

Cerberus and Sizmek’s preference was to find another private equity backer to fill in for Vector and help Cerberus shoulder a new co-investment, AdExchanger reported last month. But no backer materialized, and by March 26, Cerberus stopped funding the company and revoked Sizmek’s access to bank accounts, setting off a cascade that would send the company into bankruptcy and cause it to miss payroll.

Cerberus plans to complete bankruptcy proceedings and sell the company by April 23.

Cerberus is unwilling to continue investing in Sizmek this year, and more than 15 companies have already signed nondisclosure agreements to see Sizmek data and run due diligence for a potential deal.

And unlike Vector, which was intent on selling the business as a whole, Cerberus is considering potential buyers “with respect to the assets that they are interested in.”

So Cerberus seems willing to sell the company piecemeal, like by splitting out the ad server footprint, the Peer39 contextual targeting tech or PointRoll, Sizmek’s dynamic content optimization solution.

 

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