EU internet M&A activity is hotting up

Carl White, CEO of ValueClick Europe, on the recent increase in mergers and acquisitions activity in the EU internet space.

Recently we’ve had ITV selling Friends Reunited to DC Thomson (£25 million); Digital Window to Axel Springer to Publigroupe (undisclosed); Adlink media to Hi-Media (£25.4m). Is this a sign that the market is at last returning to some form of stability?

Roll back to a couple of years ago and the market was characterised by some very steep valuations: Latitude to Vitruvian Partners (rumoured £55-60m); i-level/ilG Digital to ECI (£45m); Search Works to TradeDoubler (£56m).

Feast was followed by famine as the number of deals fell off a cliff due to – in varying degrees – lack of available debt, falling (and unpredictable) revenues and shifting valuations (with some business owners still holding on to pre-2007 valuations). Consolidation always looked likely with companies showing strong balance sheets likely to reap the reward.

However, unlike the housing market, there has until recently been little evidence of business owners moving to sell, perhaps because they were battling to keep their heads above water and protect their existing business. PwC last week reported that 352 advertising companies have gone into insolvency since 2007, with a 50% increase over the past year, suggesting that many of the business owners lost that battle. But the report also says that Q2 2009 showed the rate of insolvency falling by 22% from Q1. There is a feeling that the storm has abated, and revenues and profits are starting to be a little more predictable.

More cynical commentators have commented that this stage will be characterised by companies coming to market because they have messed up their cash flow and risk losing it all – or as in the case of Friends Reunited owners ITV – because they have bigger problems to sort out such as the dramatic drop of TV ad revenue and the lack of a clear broadcast/production strategy. However, the sale of Razorfish to Publicis might well be an early example of the next stage of transactions – the strategic fit of the Razorfish business within Microsoft was always questionable when the latter acquired aQuantive but, arguably, they have waited for signs of a market recovery before selling the creative services business. There was no cash crunch for Microsoft.

There’s bound to be further consolidation over the next 18 months. The media agency space seems to be under significant pressure and there are also still considerable benefits of scale in the growth areas such as performance marketing.

The next stage of the M&A recovery will be evident when more of the bigger and in some cases less distressed companies start to agree to buy or merge. The questions that should be being raised are: How are some of the highly valued (VC invested) companies going to come to market? Is there a big deal out there that will be seen as clear and conclusive evidence of the market returning? Or will the continued battle to preserve and grow revenues keep business owners with their hands more than full? Could the Time Warner/AOL demerger trigger the floodgates?

For sure, this is the end of the hiatus, and it will be interesting to see businesses readjusting valuations to realistic figures before they make their moves. Watch this space.

Do you agree with Carl? Send us your opinion – news@mediatel.co.uk