Why New York's Hottest Startup, Valued at $1.2 Billion, Just Sold A Huge Chunk Of Itself For A Tiny Sum

Robert Libetti/ Business InsiderAppNexus CEO Brian O'KelleyWPP, the world's largest ad agency holding company, announced it invested $25 million in the adtech company AppNexus.

The deal is somewhat complicated, but in a nutshell WPP has acquired a huge stake in the hottest tech startup in New York - worth $1.2 billion - for what appears to be a huge bargain.

It also helps WPP maintain a potent threat against Facebook and Google, who increasingly dominate online advertising.

The new funding will increase WPP's stake in AppNexus from roughly 1% up to nearly 15%. According to CrunchBase, AppNexus has raised a total of $225.5 million in funding from investors to date. The deal comes after AppNexus took in an investment round of up to $100 million last month, which placed the company's valuation at $1.2 billion.

In addition, AppNexus has acquired from WPP its Xaxis For Publishers (XFP) unit, a product that serves ads for website publishers selling ad space, for an undisclosed sum. Business Insider has been told that the non-cash value of the XFP deal was about $150 million.

So, on paper, WPP appears to be making a profit on a deal in which it has gained a greater stake in AppNexus: WPP has received a net value from AppNexus of $125 million ($150 million on the sale of XFP minus $25 million in cash from WPP) and gained 15% of AppNexus in exchange. Here's another way to look at it: WPP's $25 million in cash is actually only 11% of the $225 million invested in AppNexus, not the 15% its stake currently represents. And AppNexus doesn't need the cash anyway, following that $100 million injection a month ago.

So why would AppNexus CEO Brian O'Kelley agree to such generous terms from WPP?

Business Insider has been told that the deal comes with the implicit understanding that WPP will continue to funnel its clients' ad money through AppNexus and its new XFP unit. (Think about it: If WPP spent less money through AppNexus, it would reduce the value of the stake it just bought.)

WPP has a track record of cutting deals like this: The company used to own a stake in the social media marketing platform Buddy Media, on which it made a profit when Buddy was sold to Salesforce. Buddy was the preferred partner for WPP's clients and, by amazing coincidence, Salesforce offered "volume-based incentives" to its larger ad clients.

In other words, while O'Kelley appears to be letting a huge chunk of AppNexus go at a discount, he's gaining a ton of new revenue in the future.

"We're delighted to deepen our partnership with AppNexus, which has proven itself as a clear leader in ad tech and a company with the scale and ingenuity to continue to transform our industry," WPP CEO Martin Sorrell said in a press release.

The deal also helps both companies in their war against Facebook and Google. WPP needs to be able to go to Google and Facebook as one of the biggest ad spenders on the planet and say, "we need you to give us special treatment or we will go elsewhere." AppNexus, as one of the largest ad servers on the planet, is now the default "elsewhere."

AppNexus has long been rumored to be planning an IPO in the very near future. O'Kelley recently told Business Insider that the company is also profitable, saying its net revenues were over $100 million.

The deal is expected to close by the end of this year.