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DOOH Growth Strategies: Horizontal and Vertical Integration

Author: Bill Gerba on 2010-09-16 13:46:31

While chatting with Crisie Charan-Thomas from the Strategy Institute, I asked her which topics she expects to be the most popular at their upcoming Digital Signage Investor Conference. The event always draws a mix of starry-eyed startups, owners of existing networks, institutional investors and a smörgåsbord of consultants and service people looking for new ways to grow. But it seems like the focus of this year's event will have to be split between how to thrive in our market, and how to to simply survive. Of course, the two needn't be mutually exclusive. For example, strategic mergers and acquisitions can (and should) benefit both acquirer and acquire-e. The trick for many firms is simply knowing which kind of strategy to pursue, and timing it for maximum effect.

Horizontal growth strategies

Whether we look at troubled firms selling off their assets or healthy companies getting acquired, most of the deals we've seen (by number) in the digital signage industry have been horizontal in nature. In these cases, materially similar businesses band together to do more of what they were already doing, just more efficiently (or with more scale). For example, any time one DOOH network buys another, it's a horizontal acquisition. Of course, in our sad little industry the acquisition is more likely to be a purchase of assets from a defunct entity, rather than a merging of two healthy firms, but the point is the same. The overall success of the new entity is predicated on (a) operating the combined networks less expensively than if they were separate, thus increasing operating margins, and/or (b) reaching a new level of scale that will allow the company to achieve business objectives that would otherwise have been impossible.

The siren call of scale

Every time I talk to an institutional investor on the phone -- every time -- I can actually hear them get giddy as they talk about the revenue potential of a fully-scaled digital signage network. And admittedly, if someone could figure out how to build or buy a really, really big network AND get an audit process in place AND get the accredited information in front of the major media planners AND develop an optimal content model for digital signage AND convince/coerce advertisers to adhere to that model AND manage to run the whole thing economically... then yes, they could probably make a lot of money. However, experience has shown us that many of these steps are difficult if not outright impossible, and the most successful DOOH networks on a dollars-per-screen basis continue to be fairly small and very tightly focused.

Thinking vertically

A potentially more challenging growth option to pursue (if you're looking to get sold) is vertical integration, where your portion of a project is combined with another to either increase sales volume (by getting your widget included in more deals) or sales profitability (by consolidating margins that would previously have been spread among multiple firms working on the same deal). For example, when AV-giant AMX bought Inspired Signage back in 2007, they were no doubt thinking vertically, since their existing sales and fulfillment channels were already handling many of the other tasks associated with outfitting new digital signage projects. Likewise, when CBS bought SignStorey that same year, they figured they could increase their profits by owning the medium that they and others were already trying to sell and place ads on.

Weighing the options

Big businesses are sitting on hundreds of billions of dollars that could be put to use buying and merging smaller firms, either to create scale or become vertically complete. But their big challenge is deciding where the deals are: do they want to buy the assets of companies that are otherwise unsalvageable, or do they prefer to spend more on healthier firms with more synergistic potential? From the seller's side, timing is everything, and selling a business isn't an overnight endeavor. That's why I'm hoping that some of the experts at the Strategy Institute conference will spend a little time talking about when to think about growth options, and where so many of the companies in our industry are currently going wrong.

So, in summary: two health care digital signage networks merging together for scale and efficiency = horizontal growth. Those networks getting bought up by the pharmaceutical media planning agency already selling advertising on them = vertical. Getting acquired in the middle of an obvious growth curve = good. Selling off the assets of your defunct company because you waited too long to start looking for a viable growth option = bad. Writing a few paragraphs to highlight some of these potentially very complex deals = easy. Actually getting a deal done at the right time = hard.

Have you noticed any horizontal or vertical integration strategies that made a lot of sense? What about deals that made no sense at all? Leave a comment and let us know.

Nonsense FTC disclaimer: I don't work for the Strategy Institute and they're not paying me for this post, but I will be attending the Digital Signage Investor Conference at the Strategy Institute's invitation.

Comments (7)

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2010-09-16John Moezzi writes:
3M's acquisition of Mercury Online Solutions and Clarity's acquisition of CoolSign were always suspect in my eyes. However, CoolSign may have added value to Clarity's ability to get a pretty good deal from Planar. Planar ended up on short end of the stick on that one and CoolSign and founder reunited once again. Not sure why Planar sold gaming rights only for CoolSign to Bally Technologies either. Planar seems to = bad deals.
2010-09-16Bill Gerba writes:
Agreed, John. And I have to admit I intentionally left off conglomerate-ish deals like 3M/Mercury and Thomson/PRN because the whole notion of conglomerates confuses me. Likewise, hedge funds and private capital companies that buy companies for their ongoing cashflows are hard to get a read on too (e.g. GGC/Symon)
2010-09-16adrian cotterill writes:
Deals that made no sense? Wow, how much space have you got for an answer?

- PlayNetworks buying Channel M
- 3M buying Mercury (especially since 3M did nothing with it)
- Barco buying dZine (this one is yet to play out but we firmly believe thatit makes little sense for ant large display manufacturer to own a software business)
- Navori buying BroadSign (oh wait that hasn't happened yet)

and oh so many more!

On the flip side however we have seen and perhaps we should celebrate more deals that have made sense and are working. Amscreen wouldn't be the Amscreen we all love and hate in the UK for example without the acquisition for example of ComtechM2M

Most of the work we are doing at the moment in the M&A space is with interactive vendors. Expect to see several announcements of money being spent in this sector by many.
2010-09-16Jason Goldberg writes:
This is going back a ways, but the first "horizontal" acquisition I remember in the space seemed particularly ill advised to me. There used to be a decent shrink-wrapped software application called "Fred Systems" founded by John Kirkpatrick that was bought by Mercury Online. At the time Fred's only channel were VARs that integrated the product for clients, but Mercury Online was an integrator that competed directly with Fred's customers. So Mercury didn't use Fred's IP, and instantly lost all it's customers (mostly to Scala back then). I remember being surprised to see a deal with such an obvious channel conflict.

I struggle to think of an acquisition that made a ton of sense, but NetKey to NCR seems like an example of a "vertical" acquisition that made some sense to NCR, given NCR's desire to be a turn-key player in the retail and self-service spaces.
2010-09-17Bill Gerba writes:
Ah, NetKey/NCR is a great example of a vertical acquisition. And while they probably would have pitted their own acquisition of WebPavement (was that an asset sale?) as vertical, I'd probably categorize it as a horizontal move, since it was essentially an IP purchase by a company making a similar-ish product.
2010-09-17John Moezzi writes:
I would characterize Netkey's acquisition of Webpavement as vertical I suppose because each platform was well rooted with somewhat similar yet different competencies - self-service kiosks in the case of Netkey and digital signage in the case of Webpavement. The combined technolgy was perhaps more attractive to a much larger player's desire to be a turn-key player
2010-09-23Bryan Crotaz writes:
Interesting that you mention our acquisition by AMX (my father and I owned Inspiration Matters prior to acquisition). Our thinking as the "small fry" (a 13 man team at the time) was that we were doing pretty well in the UK sales-wise with 6 good resellers, but the overheads of running a development and consultancy team meant that we were stuck around break-even. I can't comment on AMX's reasons for the acquisition for confidentiality reasons, but their intentions were well thought out. The jump to going worldwide through AMX's 2000 dealers was perfect for us as the acquirees - we could take a working product with a good customer base and immediately sell it in all English-speaking regions, and later in foreign language regions after documentation and UI translation.

There was (and still is!) a fantastic fit with AMX's other products - control, IPTV, VGA extenders, and our first work after acquisition was to enable control of Inspired Signage from AMX controllers, and integration with the AMX AV ecosystem. This enabled clients to get a "one stop shop" - everything but the screens, including content generation if there is no agency involved can be purchased from AMX. This fact alone sealed several of our deals as clients had had bad experiences in the past when trying to get software from multiple manufacturers to work together.

I left AMX in March 2010 and now work freelance to help end users understand what they are buying, and interestingly with M&A teams to look at the integration process when buying companies in this market, having experienced it myself and learnt some tough lessons.

I think there are some very interesting opportunities out there for a VC or similar to build a portfolio of signage technologies (playout, IPTV, signal transmission, reporting, monitoring and measurement) that could then be integrated to make the user experience a little easier. I'm looking forward to seeing this happen, and perhaps being involved in those deals. It's an exciting time right now!

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