With the final data on Q4 still to arrive, confirmed deal volumes in the marcomms sector for the first three quarters of the year are down on 2016. Overall there were 216 marcomms deals in Q3, on a par with the 219 seen in each of the previous two quarters. This amounted to 654 in the first nine months of 2017, down from 785 in the same period last year.
However, a downturn in volume doesn’t equate to a lack of intriguing activity, vibrancy or great opportunities for buyers and sellers alike. For one, marcomms agencies in Western Europe (outside the UK) are becoming increasingly attractive to global buyers. A quarter (25%) of all industry M&A deals in Q1-Q3 this year involved targets in the region, compared to only 19% over the same period in 2016.
These included WPP acquiring thjnk, an independent creative agency in Germany specialising in advertising, design and corporate publishing; AKQA (WPP) buying Danish digital agency Dis/Play; and Accenture acquiring a majority shareholding in SinnerSchrader in Germany and proposed acquisition of Altima in France.
This increased focus on the main continental markets of Germany, the Nordics and France may reflect buyers looking to de-risk with Brexit on the horizon, but it’s also a trend that’s been building for some time now. It is more likely to reinforce the fact that large advertisers are increasingly demanding a global service from their agencies.
UK activity was down slightly in the first three quarters of the year (from 15% of the total in 2016 to 13%). However, as we entered Q4, we saw several large digital deals announced in the UK reflecting the continued attractiveness of the UK to overseas buyers. These included The Stagwell Group acquiring Forward3D and Cognizant acquiring Zone.
The leading acquirers of recent years have also been very active in 2017. WPP was the most prolific marcomms buyer in the first and third quarters, with Dentsu taking the lead in Q2. They are the top two acquirers so far this year by a considerable margin, although Accenture comes third overall with nine deals. These included the acquisitions in Q3 of US-based mobile application design and development business Intrepid and e-commerce solutions provider Media Hive, and highlight that the networks are not having things all their own way. The latter might continue to dominate by deal volume, but the management consultancies are making strategically important transactions deep into the heart of adland: good examples include deals such as Accenture buying The Monkeys and Wire Stone, and Deloitte buying Acne.
Turning to the question of what types of businesses are being bought, full-service digital continues to dominate and integrated agencies follow. However, events and experiential agencies were the third-most popular acquisition targets in Q1-3 after seeing 35 deals in the first half of the year, more than double the number (14) over the same period in 2016.
This growth is in line with the increasing efforts by brands to offer exceptional customer experiences as they try to target younger consumers and drag people away from their phones and tablets. The drive to replicate some of the online experience in an offline environment will probably continue to drive deal activity in 2018.
2017 has also seen a material change in the interest levels of private equity (PE) investors in the sector. Private equity houses over the period Q1-Q3 2017 accounted for 12% of all marcomms deals, higher than the 8% seen over the same period last year. Notably, 24 of those PE deals were cross-border (accounting for 32% of total PE deals), a significant growth on the 16 cross-border PE deals (26% of the total) completed in Q1-Q3 2016.
PE buyers have, directly or through portfolio companies, acquired 72 marketing services companies globally in Q1-Q3 2017, up from 61 in the same period last year. Direct investment by private equity into the sector includes Advent International’s acquisition of Williams Lea Tag; Bain Capital acquiring a majority stake in Daymon Worldwide; The Stagwell Group’s acquisition of Forward3D and LDC’s backing of Fishawack.
In addition, PE-backed strategic acquirers continue to bolster their investment in the sector, and add to the private equity funding which is coming into marketing services. These include companies such as Ansira, Advantage Solutions, Red Ventures, Chime and Cision.
Of course, PE houses typically invest with a view to exiting with strong returns within three to five years, and investment will only continue if they see a successful path to liquidity. This year we’ve seen a number of successful exits for PE-backed marketing services companies such as Oxyma, which has been acquired by Merkle and Zone, which was acquired by Cognizant. These will only serve to drive continued investment in the space.
Private equity has plenty of funds to deploy and is increasingly looking at marketing related services as an attractive investment opportunity. That being the case, it would be unsurprising to see even more private equity interest in marcomms over 2018. Nor would we rule out PE investors looking closely at some of the holdcos.
For the year ahead, we expect deal activity to continue to be driven by the networks, the management consultancies, emerging PE-backed strategic acquirers and PE directly. Buyers are of course looking for scale and growth, but the sectors that are likely to see most interest are digital transformation, customer experience, experiential, and transparent and data-driven media-buying. We also expect a lot of activity around technology and services which enable brands to have better access to data, more confidence in that data and therefore better attribution of their marketing spend. Equally, anything which helps take the online customer experience into the store and other offline environments is going to be attractive.
In summary, what has become clear overall is that while volumes may be down in Q1-Q3 2017, the number and types of buyers and investors in the sector are increasingly rapidly, and there is still a lot of interest in the best marketing services companies. But the most attractive companies are going to be those which are challenging the status quo, and taking advantage of the way technology and new business models are disrupting the industry.
Julie Langley is a partner at Results International