JMI Equity Takes Stake In Online Ad Network

Target: Undertone Networks

Price: $40 million

Sponsor: JMI Equity

Financial Adviser: Seller: Jordan Edmiston Group Inc.

Legal Adviser: Sponsor: Goodwin Procter LLP; Seller: Gunderson Dettmer Stough Villeneuve Franklin & Hachigan, LLP

JMI Equity has committed $40 million in growth equity to Undertone Networks, a manager of online advertising campaigns, after courting the company’s founder for a year.

Undertone Networks, based in New York, helps clients such as American Express, General Mills, Neiman Marcus and Toyota place ads on Web sites of The New York Times, The Wall Street Journal and Fox News. Bradford Woloson, general partner at JMI Equity, said the company appears well positioned to take advantage of the booming market for Web-based advertising, which he pegged at $20 billion in 2007.

Undertone Networks fielded unsolicited inquiries from about 40 or 50 strategic and financial suitors, including JMI Equity, before it started thinking seriously last summer about bringing in a partner, said Michael Cassidy, the CEO who founded the company out of his bedroom in 2001. The company, while building out its product offerings and hiring more people, was under attack from rivals that suddenly grew more powerful with investments from deep-pocketed strategics, such as Yahoo’s $300 million acquisition of Blue Lithium in July.

“We felt comfortable we could keep riding on our current path,” Cassidy said. “On the flip side, [we thought], what if we could get there in a year instead of two years, or in two years instead of three?” The Jordan Edminston Group Inc. began an auction in July that included both buyout firms and strategic acquirers. But Cassidy did not want to lose managerial control in a buyout because he felt that the industry was just hitting its stride.

JMI Equity, which specializes in investing in growing software businesses and business services, displayed the most thorough knowledge of Undertone Networks’s business, Cassidy said. “They understood the smaller details other people didn’t really get in conversations.”

Officals at JMI Equity and Undertone Networks characterized the firm’s investment as significant, but would not say if it acquired a minority or majority interest. Growth equity investments are usually minority stakes.

JMI Equity expects its investment to help the company hire more senior level management and expand geographically. The company, which employs more than 75 people, is currently active in New York and Los Angeles, and wants to spread out to other major cities such as Chicago, Denver and San Francisco, Woloson said. —B.V.