Analysis: Q3 adtech and martech M&A activity
Julie Langley looks at how Brexit and continued globalisation concerns are impacting mergers and acquisitions trends in the adtech and martech markets
The latest set of M&A metrics for the marcoms sector would finally seem to offer proof that the prospect of Brexit has had some impact on the pace and nature of transactions in Western Europe.
At the time, Martin Sorrell observed that WPP would put greater emphasis on growth in Western continental Europe and it appears that they are not the only ones. Market trends suggest buyers are hedging their bets.
A quarter of the total deals completed between Q1-Q3 were in continental Western Europe, up from 18 per cent over the same period in 2016. Indeed, the region is bucking an overall global trend of falling deal volumes, which have dropped by around 16.5% year-on-year for Q1-Q3.
Paris and Berlin have been actively marketing themselves as digital hubs and this now appears to be paying off. Agencies across Western Europe are becoming increasingly attractive to global buyers.
The evidence would suggest that an imminent Brexit is now prompting some international buyers to pay closer attention to high-quality targets in markets such as Germany, France and the Nordics as a way of de-risking and expanding their footprint on the Continent through acquisition.
This increased interest in Western Europe is not however entirely, or maybe even primarily, due to Brexit. M&A activity in those regions has been growing for the past three years as advertisers have increasingly put pressure on their agencies to build the capability to serve them on a global basis.
In contrast to Western Continental Europe, deals volumes in the UK were down in Q1-Q3 compared to the same period last year. However, they were flat compared to the same period in 2015 so it is too early to know if this is a longer-term trend.
It could well be a short-term phenomenon reflecting the fact that in the uncertainty in the run-up to, and immediate aftermath of, the Brexit referendum, founders put M&A on hold. Given the typical nine month period to get a deal done, this would thus impact deal volumes in 2017.
[advert position=”left”]
The UK remains attractive and a core market for the sector. Acquisitions of UK-headquartered companies accounted for 13% of all marcoms M&A activity over the Q1-Q3 period, greater than any other single geography except the US.
Global deal volume was also down, from 785 deals in Q1-Q3 2016 to 654 in Q1-Q3 2017. The largest driver of this drop was the US. Acquisitions of US targets fell from 325 in Q1-Q3 2016 to 267 in the same period in 2017.
Recent results announcements from the major holding companies have indicated that most of them are facing considerable headwinds in the US. This may explain the fall off in deal volumes, as acquirers look to deploy their acquisition dollars in faster growing markets.
The holding companies WPP and Dentsu remain the most acquisitive buyers as they seek to shore up their service offer against threats from new entrants to the sector. Accenture was the third most acquisitive buyer in the space for Q1-Q3 and it’s also worth noting Deloitte Digital has made acquisitions each quarter this year – in Q3 Accenture bought Wire Stone and The Monkeys, and Deloitte acquired Acne.
An analyst at investment bank Natixis caused a stir recently when he posited that one of the consultancies could credibly acquire a major holdco like WPP given falling share prices. While a shake-up of the sector may still be coming, we think a wholesale land grab is unlikely.
The consultancies might like to pick up the large digital arms of the holding companies but would not want assets such as the media buying or market research, nor would they find the operating model of the holdcos (multiple independent, and often competing, operating companies) attractive. The recently announced acquisition of Zone by Cognizant is much more typical of the types of digital assets they are interested in, and deals they will continue to do.
While the largest subsector for Q3 was, once again, full-service digital, which saw 29 deals in total, there was a sharp quarterly increase in M&A for shopper marketing agencies (11 deals in Q3, as compared to four in Q2) and also a resurgence in deals involving social media agencies. The number of deals in the latter stood at eight in Q3, up from three in Q2 and the highest volume seen since Q1 2016.
M&A involving advertising and creative agencies also grew, from five to 13% quarter-on-quarter. An increase in deal activity focused around this segment Is not surprising. We are seeing a greater emphasis by the networks on creative, and particularly on being able to bring creative and media together in a more dynamic fashion.
Private equity (PE) is also on the ascendency, accounting for 12% of all marcoms deals for Q1-Q3 this year and up from 8% during the same period in 2016. The number of cross-border deals completed by PE buyers in the first three quarters accounts for 32% of the total, a growth of six percent on the previous year.
This suggests a growing confidence in the marcoms sector on the part of the PE houses, which have previously been wary of businesses focused on project-based work. Private equity has significant funds to deploy and while eyes are locked on the management consultancies, it seems much more likely that one or more of the PE investors could be looking at one of the holding companies as a potential acquisition target.
However we look at it, the market is going through a transitional period, both in terms of which geographies are most attractive and where the buyers are coming from. The Zone acquisition demonstrates that the pool of new acquirers in the space is expanding not shrinking.
Marcoms is a space that thrives on change; we can’t yet know who will come to dominate the sector even within the next decade. But one thing’s for sure – increased competition will drive investment and M&A will continue to thrive.
Julie Langley is a partner at Results International