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Advertising and marketing M&A stalls as pandemic disrupts deal-making

Mergers and acquisitions in the marketing world have mostly lagged due to the COVID-19 pandemic. First quarter activity dipped to the lowest volume since 2013, with deal-makers predicting a slower-than-usual Q2, then a rebound in the second half of 2020 as the crisis subsides. However, deals around ad tech and location data could accelerate. There’s also the potential for landscape-altering deals if investors capitalize on what could be bargain prices for assets of important-but-struggling players like ad holding companies.

Still, the pandemic has slammed the industry in several ways that make deal-making more challenging, especially as volatility in stock and debt markets slashes valuations of businesses and limits financing for deals. Forecasting revenue and earnings is trickier now that many advertisers continue to cut spending as they cope with significant disruptions in every aspect of their operations. Their spending on media, creative services, technology and data provides the financial lifeblood for thousands of companies in the advertising and marketing industry.

“We’re seeing a lot of investors — whether they’re strategic or corporate venture arms, family offices, venture capital/private equity firms — take a very cautious approach right now,” Ned Sherman, a partner in the digital and technology practice of Manatt, Phelps & Phillips, told Marketing Dive. “They’re reluctant to make big moves until they better understand the timeline and the real economic impact that the circumstances are going to have.”

The first quarter’s deal picture was somewhat murky, given that the marketing and advertising services industry encompasses companies including ad-tech startups and specialized data firms. However, the pandemic has jolted deal-making for all industries this year, falling 35.5% to $690.1 billion in Q1 from a year earlier, per global data compiled by Dealogic. Acquisitions of U.S. companies totaled $276.5 billion, making up most of the 50.2% plunge in deals for the broader Americas region.

“In a market that has essentially changed overnight, the unexpected uncertainty has given buyers pause and forced sellers to re-evaluate their expectations.”

Terrence Kavanaugh

Technology Holdings Worldwide, managing director

The weakness likely will continue into the current quarter with widespread lockdowns still in effect. It remains to be seen how long those restrictions will last and whether business activity will stabilize enough to restore growth.

“Overall, I expect M&A to tail off a bit in Q2 before rebounding in the second half of the year,” Terrence Kavanaugh, managing director of Technology Holdings Worldwide, told Marketing Dive. “In some cases, deals will be restructured or even repriced, which will cause some delay.”

‘Baptism of fire’

The pandemic’s economic fallout likely will effect the motivations of strategic buyers and private equity firms in different ways. Deal targets may be less expensive than they were just a few weeks ago, but those valuations reflect greater uncertainties about their revenue and earnings potential as the global economy slides into a potentially steep recession. Opinions vary on the shape of the eventual recovery, adding to the short-term challenges of completing deals.

“In a market that has essentially changed overnight, the unexpected uncertainty has given buyers pause and forced sellers to re-evaluate their expectations,” Kavanaugh said. “Once the current situation stabilizes and companies have better visibility on the impact to their sales and operations, we expect M&A activity to pick back up.”

The turmoil has accelerated longer-term trends for major ad holding companies that face a growing rivalry from startups focused on digital and data-driven marketing as well as major consultancies like Accenture. Some of the biggest deals of the past few years have included acquisitions of data platforms that support personalized advertising and marketing.

“Traditional media holding companies have been discounted by the stock market more significantly right now than some of their newer, more technology-oriented competitors,” Kavanaugh said. “Perhaps eventually they will replace their traditional channels entirely.”

Among strategic buyers, ad holding companies have become much more focused on internal operations rather than looking outward for deals. WPP, Omnicom, Publicis, Interpublic and Dentsu in the past few weeks have announced cost-cutting measures that range from canceled dividends and pay cuts to worker furloughs and headcount reductions. Havas has been comparably quiet, with CEO Yannick Bolloré last month sending a memo to employees that touted its ability to weather the crisis.

“2020 is going to be a complete reset on M&A. The holding groups are going to face too many internal liquidity issues to rely on external funding or investment,” Greg Paull, principal at consulting firm R3 Worldwide, told Marketing Dive. “All of the main holding groups’ first quarter calls were mostly doom and gloom. They are clearly going to be preoccupied with their own challenges over the coming months.”

“For independent agencies, it’s going to be an important baptism of fire for them to weather the storm.”

Greg Paull

R3 Worldwide, co-founder and principal

The challenges that ad holding companies face right now could make them an acquisition target, especially from private equity firms that have waded into the advertising and marketing services industry, like Bain Capital with its 60% purchase of market research giant Kantar from WPP for $3.1 billion last year. Private equity firms have a key advantage over strategic buyers with a vast war chest of cash they’re ready to put to work — especially with valuations so distressed. The firms started the year with a record $1.45 trillion in unspent capital, per financial data provider Preqin cited by CNBC.

They also faced difficulties in finding good values as asset valuations marched upward, with the S&P 500 Stock Index hitting a record high by Feb. 19. The dramatic reversal into a bear market in the ensuing weeks — which especially pummeled the stocks of ad holding companies — may spur private equity firms’ interest.

“I wouldn’t be surprised to see private equity taking a close look at the Big 6,” R3’s Paull said of the world’s biggest ad holding companies. “They are at historically weak levels from a market cap point of view and could represent bargain-basement prices.”

Weathering the storm

Leading into 2020, deal activity showed signs of weakening. The value of M&A transactions among advertising and marketing companies last year fell 15% to $27.7 billion amid a pullback in buyouts of ad-tech firms, according to an R3 study. Major ad holding companies slashed the number of M&A deals by more than half while their dollar value rose 8% to $6.53 billion.

Among ad-tech companies, the pandemic may add extra motivation to find buyers or merge, potentially accelerating the consolidation trend that’s picked up in recent years. The programmatic advertising market was ripe for a shakeout, especially as privacy restrictions like the European Union’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) imposed limitations on data-sharing activities that underpin digital ad targeting. Meanwhile, the location data services industry is similarly consolidating around a smaller group of companies, with PlaceIQ buying FreckleIOT and Foursquare merging with Factual this month.

Smaller agencies that hang on through the crisis will likely see a strong rebound in their values once the pandemic subsides.

“For independent agencies, it’s going to be an important baptism of fire for them to weather the storm,” Paull said. “If they can, it should only exponentially increase their value when M&A returns to 2019 levels.”

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