Marcoms and ad tech merger activity: 2015 round-up

Last year’s ad tech mergers and acquisitions trends suggest that the market is unlikely to slow down in 2016, writes Results International’s Julie Langley.

2015 was an interesting year for adtech. It was a tough environment for public companies – our index of listed adtech stocks fell by over 37 per cent over the course of the year. Our martech index also dropped but by just one percent, and this was compared to an overall rise of nearly six percent for the Nasdaq.

The IPO market was effectively closed, yet the M&A market remained strong. The annual figures we recently released reveal that whilst M&A deal volume in the sector was down, this was by just eight percent year-on-year. There were still over 400 adtech and martech M&A deals completed globally in 2015.

Understanding this growing disconnect between the state of the public markets and the continued buoyancy of the M&A market requires a little digging into the numbers. Advertising platforms, effectively technology designed to optimise the buying and selling of digital inventory, showed a 24 per cent drop overall on 2014.

Conversely, deals involving marketing automation, software that optimises and automates data-driven customer-engagement across all channels, rose by 93 per cent on the previous year.

2015 was probably the year when the clear distinction between adtech and martech – and in particular their business models – started to crystallise.

Most of the listed adtech companies which have suffered in the public markets have a transactional revenue model, based on a percentage of media spend or other form of performance-based revenue. Businesses which have done well in 2015, such as HubSpot, New Relic and Shopify, tend to be martech companies with a subscription-based Software-as-a-Service (SaaS) revenue model.

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This suggests an interesting development in the public markets; it would appear investors have started to make a very clear distinction between adtech and martech, based in large part on their contrasting revenue models. However, this is happening at the same time that vendors across both sectors are actively looking to converge.

The distinction that ad tech and martech makes between paid and earned media is starting to look ever more artificial.

There is now growing interest in the potential benefits to brands of implementing a single platform to manage both advertising and marketing budgets and processes in an integrated fashion. This idea of closing the loop between the named data provisioned by the martech world and the anonymised data offered by adtech is gaining traction. Privacy challenges abound but the benefits would be clear.

The battle to become the de facto software platform for the entire marketing function well and truly gained momentum in 2015. Most departments within an enterprise, whether that’s finance, HR or procurement, tend to have a function-wide software platform, whether that’s Oracle, Workday or SAP. However, the marketing function continues to be served by a wide range of point solutions, across paid and earned media.

The players vying to become the platform of choice for marketing fall broadly into four categories: (i) the large enterprise software players, such as SAP, Salesforce and Oracle; (ii) the leading adtech vendors, such as Criteo, Appnexus and MediaMath; (iii) the well funded next generation or pure-play martech companies, such as Marketo, Sprinklr and Percolate; and (iv) the large online groups such as Facebook, Twitter and LinkedIn.

Each has an individual take on the sector and offers particular advantages. Oracle, Salesforce and SAP come from the CRM angle and are moving increasingly into other areas of the marketing function.

To date, Oracle has probably made the greatest in-roads into adtech through its acquisitions of Maxymiser, BlueKai and Datalogix. The USP of adtech vendors such as Criteo and MediaMath is expertise around managing advertising spend.

Although they don’t have the experience of an Oracle in managing enterprise-wide software platforms, they are highly proficient in managing paid channels, still the lion’s share of most marketing budgets.

Let’s not forget other entrants into the space, traditional media groups, telcos and the data groups – for example, last year saw the acquisition of Unruly by News UK and AOL by Verizon. Sky’s recent investment in DataXu, the programmatic ad platform, suggests this trend will continue into 2016.

It seems unlikely these players will develop entire marketing software suites, but will continue to drive deal activity in 2016, albeit more likely in adtech than martech.

The fundamental structural shift in the market towards more integrated adtech and martech offerings lay behind much of the M&A activity in 2015. Convergence is not without risks – the revenue models and cultural DNA of enterprise software and advertising technology businesses are very different – but doing nothing is equally not an option for many of the large players.

For this reason, and despite (or perhaps because of) what’s happening in the public markets, we are likely to see more rather than less M&A activity in the sector in 2016.

Julie Langley, partner, Results International.