Buy, sell, hold: how M&A activity in marketing industry is shaping up in 2020
Covid-19’s impact on mergers and acquisition (M&A) activity in the first quarter will be minor compared to what’s to come in the next few months. But, with economic upheaval will come opportunity for buyers and sellers alike as the year progresses.
Entering 2020, the M&A market was already facing a slowdown. After years of a “bull market”, where acquisition targets had been fiercely contended and prices consequently pushed, there was a “subtle softening” of global activity at the end of Q4 2019 according to Jonathan Davis, a partner at Jegi Clarity – the M&A advisory that in last year alone managed transactions including digital agency Dept’s sale to The Carlyle Group, Livingbridge’s equity injection to Brainlabs and Accenture’s purchase of Hjaltelin Stahl.
“There was a concern among some investors, more than strategic buyers, that we were coming to the end of a bull market and entering a recession. We did see a subtle softening of what the banks were prepared to lend and what investors were willing to invest," says Davis. "But no one anticipated the end of that bull run being triggered by this.”
In the UK, Brexit negotiations had already stunted the market, but the year “started briskly” for SI Partners – an M&A firm based in London, New York and Singapore – immediately after the general election, with a particular interest from private equity buyers, consultancies, holding groups like Publicis and WPP, and mid-market and independent firms like You & Mr Jones and Dept.
“There was a huge upswing in activity in January and February,” says the group’s European partner Tristan Rice. “We were expecting 2020 to be a bumpy year but it was all looking positive and then things dropped off a cliff from middle of March.”
According to research from Dealogic, the first quarter of 2020 recorded $690.1bn in M&A deal volume and $5.7bn in revenue, a decrease of 35.5% and 16.3% year-on-year respectively, and the lowest Q1 volume since 2013. Americas-targeted M&A volume saw the deepest year-on-year decline of 50.2%.
Greg Paull, principal at consultancy R3, said his firm brokered 102 acquisitions through the first quarter in 2019 and has seen less than 30 in 2020. Clarity’s Davis estimates that as many as 80% of the transactions it was overseeing have been paused or cancelled altogether since March. Rice said of the 10 deals it was managing in March, four have been put on hold as sellers opted to focus on getting through the current situation rather than an acquisition strategy.
“From what I have heard from lawyers in the marketing world, those transactions that were in the legal process in the middle of March have stopped,” he adds. “Two lawyers told me they’ve had all transactions paused or pulled. Those in the final furlong of legal contracts and due diligence have been paused or stopped.”
But it seems the worst is yet to come and all M&A experts The Drum spoke to admitted that while Q1 has been affected, they are braced for a tougher Q2.
The reasons for the slowdown are two-fold. Firstly, there’s the simple challenge of pushing forward with M&A discussions over Zoom calls. During these delicate negotiations, the importance of face-to-face contact can’t be underestimated as buyers and sellers alike suss each other out. This can be managed to some extent and when lockdown restrictions do lift, getting back to business as usual will be quick. But by far the more challenging problem is the long-term economic uncertainty that all businesses are now facing.
On the sell-side, shareholders looking to raise capital or sell have been questioning if it’s the right time to go to market and explore a sale option when the numbers will be unstable in 2020. Conversely, on the demand-side, buyers have found themselves with less access to finance as banks lockdown on any major lending, which has had a sudden impact on pricing and the ability for certain acquirers to be in the market.
Pockets of activity
Despite the dismal assessment of the first quarter of the year, there have been small pockets of activity that are beginning to swell in regions that haven’t been as hard hit by the virus. Julie Langley, partner at Results International, says her firm has seen deal volume slow compared to last year, but that it hasn’t come to a standstill. Indeed, Huntsworth announced last week that it had completed a $524m deal to be taken private by a US private equity firm, while Accenture announced in early April that it would buy a 400-person agency called Yesler.
Davis says Clarity too is beginning discussions with a social media influencer agency on the west coast of America, while in Sweden, where social distancing rules are more relaxed, it is helping an acquirer progress on a deal. “Australia is a bit like Sweden, so things are easing up there. I can see that while everyone is looking around to see the long-term impact, just the practicalities of being able to get out and meet people will start to open up M&A [in some regions].”
In Asia, which is beginning to emerge from the coronavirus chaos, Rice reveals SI Partners is seeing much less of an impact. “There were a couple of deals that got paused by four to six weeks, but actually we barely have seen a dent in business out there – across Greater China, South East Asia and Australia, all mandates have continued, albeit slower than before if they were involved with Europe or US buyers. We expect them to come out the other side much faster.”
There is, therefore, a mixed bag of predictions for what activity will look like for the remainder of the year. Results International’s Langley reveals that of the buyers she’s spoken to, the feedback is that they will be looking to deploy capital in the second half for acquisitions. “I think we will see deal volumes start to pick up in Q3,” she adds, positively.
Overall, Davis says he anticipates volumes for the year will be down 50% across the board in this sector. “Maybe even more,” he laments. “Q4 will be when deal flow comes back in a meaningful way, but I don’t expect it to return to pre-Covid levels until mid-way through 2021 when businesses can prove that Covid-19 is behind them and a stronger year is in front of them. That’s when good businesses and shareholders will start to take a look at going out to market.”
But there will be other reasons that businesses will trade before that. In the short term – June, July, August – deal volume may come back when government support for businesses is taken away. “I imagine we’ll see a few very good businesses have liquidity issues that will see strategic or private equity investors come in to take a stake in a slow recovery but potentially high return acquisition,” Davis adds.
The buyers and sellers likely to emerge
While the level of activity we can expect is uncertain, many of the advisory firm experts agree that the buyers and sellers that emerge will look every different to previous years. According to data from Hampleton Partners, Accenture was the most prolific buyer in last 30 months, followed by Dentsu. But that looks set to change as holding companies focus on mitigating the risk they are exposed to by the coronavirus downturn, rather than M&A activity. Instead, those most likely to be in the market to acquire or invest will be businesses that have a much broader service offering that extends beyond marketing.
Even the consultancies with deep pockets and less exposure to a downturn in client ad spend – like Accenture – will likely focus on the integration of what they’ve bought in lieu of bringing any new agencies into the mix.
Langley says the buyers emerging quickly and strongly will be the private equity backed marketing services businesses – such as the Stagwell Group, which is backed by USPE, Dept, which was recently bought by a private equity firm, and Kantar, which has been backed by Bain Capital.
“Those are the buyers that we will see leading the deal activity in the second half as private equity has a lot of capital to deploy – they are sitting on ’dry powder’ as they call it. I would expect they would be looking to bolster those businesses.”
Davis cites groups like Tinuiti, Hero Digital and S4 Capital-owned Mediamonks as buyers likely to be “opportunistic” in the current market. “They have a clear strategy to build around creativity, tech and media, and now would be a good time to do it,” he adds.
S4 Capital founder Sir Martin Sorrell told The Drum in an interview last week that he is already eyeballing smaller acquisitions of firms with data and analytics capabilities in what he expects will be a “bloodbath” market.
Private equity firms leading the charge are also out for a bargain, says Rice. “There’s pricing pressure when there’s not a sense of as much money in the market. So private equity will see this as an opportunity to dilute multiples across the market. There has been an enormous amount of multiple inflation [in the past] and what we’ll see if them trying to rebalance their portfolios from what they’ve overpaid for in the past couple of years.
“We’ll see price pressure from strategic and private equity looking for better deals and testing whether entrepreneurs’ expectations shift by what has happened. We will see a rationalisation.”
So what’s likely to be an appealing target? Covid-19 has exposed how much traditional companies have to change in order to adapt to customers in a non-physical world, and this will have a chain reaction on the companies in the eye line of buyers.
Agencies and platforms specialising in digital transformation and consumer experience will be the first to benefit over the mid and long-term. “We’ve seen a huge amount of interest in that space [from buyers],” says Davis.
Social media and influencer agencies that have held up during Covid will also be in demand as client spend further drifts into that space. As will other specialist agencies that help with implementation for key platforms such as Magento and Sitecore. Acquisition targets will also be made of those businesses that have flexible models, such as agencies with remote working, or which have built a service around the scaling up or down of freelancers.
Langly sums up the most appealing marcomms prospects as those that “help the CMO do more with less“.
“Any agencies that help clients measure and track spend and put it to the best use will be in demand. In the same vein as doing more with less, dynamic content creation will be interesting. There’s a lot of channels marketers need to put their content through and any services that help them do that will be in demand. I see independent media buying coming out of this strongly – we’ll see CMOs want to do buying that’s more agile, real-time and transparent, and those firms can respond to that.”
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