Moving in on martech: marketing giants on the acquisition trail
Tuesday June 13, 2023
Bilal Hasan explores how digital innovation is shaping investment activity in the marcomm space.
The marketing sector has been through a transformative ten years, as a new wave of digital-first martech agencies have, to some extent, stolen the thunder of the traditional marketing giants.
Digital’s share of media consumption has increased from around 10 per cent in 2012 to more than 60 per cent in 2022, turbocharged by increased mobile phone usage and the proliferation of streaming services.
At the same time, the cost of digital marketing campaigns has become far lower than those designed for traditional media channels, presenting the opportunity to improve margins and broaden brands’ offering.
Holding companies – known as holdcos – recognise this, and are driving an uptick in investment activity, snapping up SMEs with complementary offerings that are focused on monetising data and insights. We saw this with the sale of Goat, one of the world’s leading influencer marketing agencies, to multinational communications holdco, WPP. Goat has grown at an impressive rate since our FRP Corporate Finance team advised the business on its growth capital investment by Inflexion two years prior, with huge demand for its specialist data-driven influencer marketing services.
Our team has led on a number of similar recent martech transactions, including advising Digital Sports Mgmt, an agency at the forefront of e-sports and gaming marketing – including non-fungible tokens (NFTs) – on its merger with YMU Sports, a global talent management agency. Other notable transactions include advising on the sale of Lifecycle Marketing, owner of parenting network Emma’s Diary, to Everyday Health, part of Ziff Davis, a US based digital media and internet group; and the merger of ConversionWorks, an award-winning digital analytics, biddable media and data science consultancy, with MightyHive, part of S4 Capital.
The data driving decision-making
Investing in marketing is no longer seen as a nice-to-have by business leaders. In the last few years, many have recognised that attracting the attention of relevant audiences and raising the profile of their organisation is critical to growth.
As a result, M&A activity has remained strong. By 2022, transaction volumes in the sector had returned to the levels seen before the COVID-19 pandemic. The mix of transactions has changed slightly, however, with greater investor appetite for digital and social assets. Added to this, a number of digital-first agencies have now established themselves and are focusing on monetising data and insight across the marketing funnel.
In the next two years, demand for strategic acquisitions will remain strong, both from holdcos and private equity-backed, new-era agencies. For traditional marketeers, they must either acquire complementary offerings, or invest in building their own from scratch, to keep up with the competition.
Building new proprietary offerings takes time, is often expensive and the outcome is uncertain, so many will prefer to invest in established expertise.
For others, it offers an opportunity for arbitrage with a relatively short payback period. For private equity investors, an additional upside is the benefit that backing a martech agency may bring to its other portfolio companies.
Impact on valuations
The big question will be how this increased interest will impact valuations.
The right assets will certainly continue to attract a decent price, but data is key. We will see more diligent scrutiny of potential acquisition targets, especially around conversion metrics. Any business leader who is ultimately considering an exit should be working to ensure that they have detailed performance data to hand.
Brands implement marketing strategies for two reasons – to maximise sales and to increase brand awareness or reputation. For the former, it’s important that a business leader looking to exit can illustrate that their associated costs of customer acquisition is lower than their competitors. It will be the most important KPI that buyers, both strategic and private equity, are interested in.
For those focusing on the latter, the most interesting metrics will be those surrounding the reach of their marketing activity. Either way, agencies need to start putting data at the heart of their decision making.
Brands are also increasingly looking to work with marketeers that have a direct relationship with the consumer. This enables marketeers to personalise their offering, which is likely to improve conversion metrics, rather than deploying a one-size-fits-all campaign.
The next 18 months will be pivotal for the industry, and investment will be characterised by three main industry trends.
Firstly, there will be an increase in social’s share of the overall marketing spend, with in-app purchases becoming more popular as consumers gain confidence over both the security and quality of offering, such as a brand’s returns policy. Successful adoption and integration of AI by marketeers, no matter what their preferred platform, will also become increasingly relevant.
Secondly, there will be an increase in contribution by micro influencers versus that of celebrity influencers. Micro influencers typically have a follower count between the 10,000 to 100,000 mark, compared to the larger audiences of macro influencers and celebrities. By their very nature, they have a more targeted audience offering a better return on investment opportunity for brands.
And finally, online experiential marketing spend by brands will significantly increase, with e-sports and gaming campaigns becoming particularly popular. This is especially true in the light of the proliferation of women’s sport, the Olympics in Paris 2024 and the Men’s FIFA World Cup in the US, Mexico and Canada in 2026.
Such trends will prompt a surge of demand from investors for martech businesses that provide specialist expertise in these areas, backed up by data. If I had one message for business leaders in the sector, it is that agencies need to start putting data at the heart of their decision making.
This, in turn, should automatically lead to an improvement in quality of earnings and valuations. Those companies that can deliver cost-effective marketing solutions will likely see an influx of investment interest.
The increase in competition from holdcos, plus the new breed of digital first agencies, will drive M&A activity in the martech space. Despite the macro headwinds companies that can demonstrate that they deliver differentiated cost-effective marketing solutions will continue to prosper and attract a premium.Bilal Hasan Corporate Finance