Global-advertising exchange Rubicon Project (NYSE:RUBI) and digital-advertising specialist Telaria (NYSE:TLRA) announced on Thursday that they had reached a definitive agreement to band together, forming the world's largest independent sell-side advertising platform. The combined company will possess the "scale, capabilities, and solutions unmatched by the competition," according to the press release.

The combined company will provide programmatic advertising buyers and sellers with a single platform and access to every format and channel -- including the substantial growth resulting from the rapid adoption of connected TVs. 

Investors hailed the deal, driving Telaria stock up more than 11% for the day, while Rubicon Project shares jumped nearly 7%.

Man watches stock ticker numbers and graphs.

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The fine print

The plan was unanimously approved by the boards of directors of both companies and is expected to close in the first half of 2020, though the name of the new entity has not yet been decided. The transaction will consist of a stock-for-stock merger that will exchange 1.082 shares of Rubicon Project stock for every share of Telaria. At the conclusion of the deal, Telaria stockholders are expected to own approximately 47.1% and Rubicon Project shareholders are expected to own approximately 52.9% of the fully diluted shares of the combined company. 

Rubicon Project CEO Michael Barrett will be the CEO of the newly formed company while Telaria CEO Mark Zagorski will assume the role of president and chief operating officer. Rubicon Project CFO David Day will be the finance chief of the new enterprise.

The combined entity will offer a single platform for transacting connected TV (CTV), desktop display, video, audio, and mobile advertising inventory across all geographies and advertising auction types.

Improved financial position

One of the benefits of the merger will be the stronger financial profile of the combined company, which will boast a diversified revenue stream, stronger adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and a rock-solid balance sheet with $150 million in cash and no debt.

The additional cost synergies that result from the combination will amount to approximately $15 million to $20 million annually and provide the company with substantial operating leverage that will boost its net income margins.

Important strategic benefits

The combination of Telaria's leading CTV technology and premium partnerships and Rubicon Projects scale in programmatic ads will create a titan in the world of digital advertising. This will enable "publishers to monetize across all auction types and formats" while offering a "transparent alternative" supporting an "open internet."

One of the biggest benefits of the merger will be to position the company to capture the explosive growth of CTV, which is "the fastest growing digital medium" because an increasing amount of viewing on CTV is ad-supported. In the very near future, nearly all CTV advertising is expected to be transacted programmatically, which uses algorithms and high-speed computers to match ad inventory with available slots for the ads.

A connected TV showing viewing options and apps.

Image source: Getty Images.

A massive opportunity

If you have any doubts about the massive opportunity afforded by CTV, consider the following. Roku (NASDAQ:ROKU), known for its pioneering streaming devices, is also the No. 1 licensed CTV operating system in North America, with its platform installed on 1 in 3 smart TVs sold in the U.S. The boom in CTV has served Roku well, driving the company to 53% year-over-year revenue growth during the first nine months of 2019. At the same time, its streaming hours soared 63% in Q3, while active accounts grew 43%, compared to the prior-year quarter.

On the buy-side of the advertising equation, The Trade Desk (NASDAQ:TTD) has taken the world by storm. For the first nine months of 2019, revenue grew by 54% year over year, while adjusted net income grew by 44%. At the heart of these gains was tremendous growth in CTV advertising, which grew 145% year over year in the third quarter after 250% growth and 300% growth in the second and first quarters, respectively.

For its part, Telaria reported that revenue grew 23% year over year, but the contribution from CTV soared, up 115%, and grew to 45% of the company's total revenue. 

A match made in heaven

Programmatic advertising -- the fastest-growing segment of digital ads-- is expected to account for 65% of digital ad spending by the end of this year, growing 19% to $84 billion -- four times faster than the overall ad industry. CTV ad spending is increasing even faster and is expected to grow from about $7 billion in 2019 to more than $14 billion by 2023, according to eMarketer. 

The high-growth company formed by Telaria and Rubicon sits at the intersection of two powerful advertising trends. By joining forces, the enterprise will have the scale and resources to create a market leader in a fast-growing industry -- even if we don't yet know its name.