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