A tale of three quarters – the resurgence of ad-tech
Ad-tech is still a sector with all to play for, writes Results International’s Mark Williams as he analyses the latest mergers and acquisitions activity
Q3 has continued to be exciting for ad-tech from an M&A perspective. Signs of improvement have been long awaited in a market that’s been put on the defensive by ad blocking and hampered by concerns relating to ad fraud, privacy, transparency and more.
Volumes of ad-tech M&A have grown over the course of the year and jumped by 44% between the second and third quarters.
Notably, we’ve also seen the first IPOs for four quarters in the shape of The Trade Desk and Gridsum, both of which are trading well. The Trade Desk, particularly being a poster child for new age ad-tech proving that both scale and successful profitability are achievable.
Furthermore, we saw late stage IPO candidates including Teads, Zeta Interactive and Kaltura secure sizeable funding. Firms in early stage Series A & B markets also received investment -Vertebrae (VR ad-tech) and Beeswax (customisable DSP) each raised funds in excess of $10m.
The ad-tech landscape seems radically improved since the end of last year and what a difference nine months makes. But what’s changed?
In essence, very little. The controversies of recent months remind us that there are still flaws to address, but the advertising paradigm, and for the time being the ad-funded online model, remains pretty secure.
Advertising is a $600bn global industry and digital advertising continues to grow at double digits – in particular, programmatic is growing at 30-40% year-on-year.
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What is perhaps changing is the sheer breadth of businesses coming to recognise the value in ad-tech. Over the past 18 months 215 companies in the space have been acquired by 186 separate buyers, all of whom have a strategic reason for investing.
If we delve further into who those buyers were, we see that around half the deals were completed by pureplay ad-tech or marketing services groups.
Consolidation is key here, and these deals are often relatively small for a couple of reasons: they are either by smaller players merging to create the combined scale required to compete with the larger global groups; or by larger vendors, including Appnexus or Criteo for example, buying their innovation through the acquisitions of innovative start-ups, new technology, talented teams and additional channel capability.
Around 11% of deals were completed by marketing services businesses – either large holding companies or independent agencies. Previously, the primary motivation for the holdcos has been to licence rather than acquire the tech.
However, recent deals such as Denstu’s acquisition of Accordant, suggest this approach may be changing as the networks see the value of owning the platforms and making them core functionality propositions within their trading desks.
Ad-tech is proving key in helping businesses within the TMT (Technology, Media, Telecommunications) ecosystem to survive digital disruption in the wake of changing patterns of audience consumption.
While it’s fair to suggest that some traditional publishers and broadcasters have found the move to digital challenging over the past decade, they are now waking up to the value of their audience and using their considerable resources to invest in the sector.
Buying into ad-tech allows them to take greater control of monetisation and create new revenue streams that offer more innovative (and of course digital) solutions to their advertisers.
The telcos are often touted as being big buyers in the sector and, indeed, Q3 began with the largest ad-tech deal on record in the shape of Verizon’s successful $4.8bn bid for Yahoo.
However, it may come as a surprise to learn only 3% of deals have been completed by this market segment. While deal volume is low, value is (unsurprisingly) very high – deals that are being done by telcos are highly strategic and generally for the largest independent companies in the sector.
These are shrewd moves as the potential pay-offs could potentially be huge as mobile and location-based advertising become more embedded.
The trend for Asian acquirers investing in Western ad-tech businesses that we noted in our previous quarterly review continues.
M&A activity from the Asian market has now grown by 30% for the year to date. Not only are Eastern based strategics acquiring in the sector but now Chinese Private Equity firms, for example Orient Hontai Capital made an exciting $1.4bn investment to acquire a majority stake in Applovin.
What is abundantly clear is ad-tech is still a sector with all to play for. The re-opening of the IPO market is good news for all and will likely result in improved market liquidity for sellers and buyers.
This, coupled with emerging buyer groups, notably those with deep pockets from the East, suggests the ad-tech M&A figures will look significantly more positive at the end of this year.