5 reasons Kenshoo won’t be sold anywhere close to $400mil

Reports are rolling in that Kenshoo is being shopped around for an acquisition. They seem to want $300-$400mil, while potential acquirers (like Google) are valuing them around $78mil. I can’t speak to the credibility of these reports, but I agree! Kenshoo must think it’s worth $350mil, but their actual worth is close to $75mil.

Here are 5 reasons I think Kenshoo is more likely to be sold for ~$150mil to IBM or SAS, rather than for $350mil to a high-tech buyer like Google or Yahoo.

#1: Kenshoo’s product won’t fit well inside Google or Bing

Kenshoo’s basic premise is that SEM networks like Google or Bing don’t have the right features in their product, to allow large companies to manage their SEM spend well, and that marketers need another layer on top of AdWords to run SEM campaigns.

Well, feature after feature after feature, Google is intent on ensuring their core product has what even the most sophisticated marketer needs. They are also making sure vendors like Kenshoo don’t just ride Google’s coattails by simplifying what’s already simple, and hiding  new features being launched by them.

These days, many agencies are switching to using the new Google Adwords features directly, instead of paying Kenshoo. Certainly, there’s no talent, tech or business hole Kenshoo would be filling for Google.

#2: Mismatched expectations – they think they’re a tech company, but they’re just building tools

Kenshoo boasts how deep-tech it is, but more than half of the company isn’t R&D. Even the engineering is mostly clients, integrations and interfaces – not core algorithms and infrastructure. This is totally fine and entirely expected of an enterprise company, but this posture might be why they think they’re worth more than then actually are.

To be clear, this is about mismatched expectations, no more – as marketing companies go, Kenshoo has a deeper talent bench than most others (with a notable exception or two) – but it’s still a tool vendor, not a cross-channel marketing optimization company like some others.

#3: One-horse pony in a multi-dimensional marketing universe

Kenshoo started as an SEM agency, and it shows. Their attempts to bolt-on Facebook have been shoddy at best, making the now-classic mistake of equating Facebook advertising with SEM – like optimizing campaigns based on ‘keywords’. Keywords are a concept that barely exists in Facebook, and are certainly not semantic analogs of the SEM counterparts.

Another example: after years of well-documented proof that display advertising is crucial to any big marketing campaign, and incontrovertible evidence that retargeting boosts site conversions, all Kenshoo has to show for is a partnership with Criteo!

In short, Kenshoo has a lot of growing up to do, and it’s possible Sequoia is losing patience.

#4: Low defensibility in the SEM market

Even in the core SEM market, there are no long-term switching costs for moving from one tool vendor to another. This is particularly true for Kenshoo, whose model is ‘we build the Cadillac, our customers drive it’. This means that they have no inherent intellectual property in keywords, creatives or optimization, that don’t go with the customer when they switch over to a new tool provider (with the same Adwords account)

Even the multi-year deals are really only about the training/switching inertia of clients, rather than any long-term hold on the clients. This has got to put a damper on high acquisition price tags.

#5: Cumbersome stack to move downstream

eCommerce is blowing up, no more so than in the long tail. A focus on tools that are built to be used by expert marketers (spending > $100,000/month) means challenges in moving downstream. Even companies like Efficient Frontier shuttered their long-tail programs after trying to make them work for years.

Not that I don’t have respect for such an endeavor. Lexity has been building a cross-channel marketing solution for the long tail for a couple of years now, and we have battle scars to prove it. We had to develop a whole breed of algorithms that work well with ‘small data’, something that just doesn’t come easy when your target market is Wal*Mart and Walgreens.

Efficient Frontier got lucky with its sale price – $400mil lucky.

In November 2011, Efficient Frontier sold to Adobe for $400mil. Unfortunately, Adobe is one of the few companies that really are a tools vendor – they excel in building products for other people to make money off of. This is true for their core franchises like Photoshop, analytics software like Omniture, and now tools like Efficient Frontier. For them, acquiring EF fits well into their strategy, and justifies the price tag well.

There don’t seem to be any other companies in the list of big-name big-money acquirers of Adobe’s ilk, however. Kenshoo must’ve been kicking themselves after EF split!

So, who will acquire Kenshoo?

Here are my top guesses.

  1. Top choice: IBM, for $400mil. Yes, after all the thesis-building, I still think in the hands of right acquirer, Kenshoo can command a premium price. It’s just not a company the Kenshoo executives will get excited about. IBM’s system integrators could really push Kenshoo with gusto, to great effect!
  2. eBay, for $200mil. With X.commerce, eBay is doubling down on eCommerce. Demand generation is a big part of the eCommerce funnel, and online marketing is an important building block. Expect them to buy marketing companies at the high-end and the low-end. Kenshoo can fill part of the promise on the high-end.
  3. SAS Institute, for $100mil. SAS has been making strategic acquisitions in the marketing world, understanding astutely that these days high-end marketing is just low-end business intelligence.
  4. No-go: Google or Microsoft, unless it’s a pure-tech acquisition for ~$100mil.

So, do you agree? Disagree? Let me know!

UPDATE: edited comment on Efficient Frontier to note that the ‘luck’ part of the comment is about the price paid for it, not about their business itself.

Amit

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3 thoughts on “5 reasons Kenshoo won’t be sold anywhere close to $400mil

  1. Pingback: Kenshoo is about to get acquired by IBM for $300 million | @akumar overflow

  2. Hi Amit,

    You’re wrong on at least a few points:

    1. You seem to have mis-read the article. The article says Kenshoo’s in talks at a valuation of NIS 300-400M (Israeli Shekels), *which equals* US$78M, not that they want US$300-400M which Google values them at US$78M.

    2. There are about, oh, five people on the planet that know more about the SEM tech landscape than me, and I can tell you with utter certainty that a) they are a tech company; and b) they are the best of the self-service SEM platforms. Your firm should be expected to be >50% engineers because you’re a tiny startup, but as you gain customer traction, invest in growth, etc, you’ll have more non-engineers. That’s normal, and there’s no Golden Ratio of engineers to total employees.

    3. Efficient Frontier did not get lucky, and implying that they did shows ignorance on your part. EF spent 9 years building itself into by far and away the #1 cross-channel marketing optimization company (your term), including hyper-growth phases, excessive client digestion problems, product rebuilds to address evolving client needs, significant global expansion and finally strategic acquisitions & product builds to round out cross-channel solution set. Going from a math geek with some ideas in his head to the world’s largest x-channel mktg opti firm by revenues does not happen by luck, but rather by hard work, passion and strategic and tactical proficiency.

    4. Your description of Adobe is a bit off. The Omniture business unit within Adobe & into which EF will be placed, has actually only ever built one great product – SiteCatalyst. All the others were acquired (Offermatica, Visual Sciences, Touch Clarity, Instadia, Mercado and Demdex). Omniture’s skill was acquiring, integrating & selling multiple products to the same customer, not product development. People have to stop thinking about the old Adobe; Adobe spent $1.8B (and now $400M on EF) to try and transform itself more into what Omniture/EF are and less what Adobe was.

    5. Kenshoo doesn’t have to go significantly downstream to win. When AdAge reported on leaked data showing Google’s revenues by customer, it became clear to the world that 83% of their revs come from 26% of their customers. The tail matters, but the head is 4x bigger and will continue to be so. Search traffic is energy, and the head babies will box out the weaker tail babies, so to speak, unless firms like you actually build something disruptive. I do think you have an interesting business oppty – in fact, I’d love to get together to talk about it – but I actually think the real oppty is further down the tail than even you are currently thinking.

    • Chris, thanks for stopping by. With your background as VP at Efficient Frontier, then Omniture, then Dapper and then at Yahoo!, you are uniquely qualified to comment on this post :-). I’ll respond as best I can.

      1. The original article did talk about the $300-$400mil ask and the $78mil Google response, but has been edited since. In fact, as of my comment right now, the title still says (copy-pasting): Kenshoo in talks for $300-400M sale

      2. You are right – and that’s my point. Even the best ad tech company is mostly non-engineers. They should embrace that, but not act as if they’re somehow different. This is not common across all verticals – for example, the deepest tech company in Travel, ITA Software, has 66% of their employees in R&D: http://www.linkedin.com/company/ita-software/statistics

      3. I didn’t mean EF got lucky, just that a $400mil for a company like EF was lucky – since there aren’t that many acquirers like Adobe for that particular proficiency. I’ll edit the post to reflect that.

      4. Every company is hostage to its vision – for good or for bad. Adobe is all about tools – whether it’s build/partner/buy, that’s what they want to do. As I’ve said before, products are merely manifestations of company visions (http://b.akumar.me/2011/09/25/facebook-timeline-vs-google-vision-product-manifestation/) – and this acquisition is no different. Adobe is acquiring a product team to build tools to help other companies succeed in optimizing their spend.

      5. While Google gets 83% from 26%, for Facebook, it’s exactly the opposite – their self-serve platform makes them more money from the long-tail then from the head (sorry, no public links for this one). For Twitter, when it launches, it’ll be even more so.

      Chris, just because SEM for the long tail has been a joke so far (witness the implosion of Webvisible) doesn’t mean it’ll continue to be. However, as you hint, the real opportunity is on all other channels, not SEM – which is why Lexity is focussed on Retargeting, Facebook, Shopping Engines and Display (used judiciously) as much as SEM.

      One last thing – I don’t know how I can go more affordable than $20/month :-) – we’re sufficiently long tail!

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