Analysis: Private equity firms hungry for digital, media and marketing M&A deals in 2021

Private equity firms are predicted to have "a very strong appetite" for merger and acquisitions (M&A) deals in the technology, digital, media, and marketing sectors, according to sector-specialist M&A advisory firm Ciesco’s latest report on M&A outlook in 2021. This comes as no surprise since the private equity sector reportedly has over US$1.7 trillion of cash, the report added. Overall in 2020, private equity represented 37% of all deal activity in the technology, digital, media, and marketing sectors. Some notable M&A deals include Platinum Equity's buyout of earned media software provider Cision, and Clayton, Dubilier & rice buying specialty services firm Huntsworth.

This figure in 2020 is higher than 13% in 2017 and 22% in 2018, which the report said showcases the attractiveness to financial backers of technology-driven business models in the digital world. Although it formed slightly more than a third of all deal activity, the number of private equity deals in the sectors still dipped by 29% compared to 2019, with the total value estimated to be US$17 billion compared with US$57 billion in 2019.

Due to the lower deal count last year, the report predicts that most firms are keen to deploy their investment funds in 2021, which will result in competitive bids and higher valuations.

Investors will also compete for the limited quality acquisition opportunities and in recent times, the private equity route has become an attractive exit or partial exit opportunity for business owners.

The most popular sub-sectors for private equity investment last year were digital media, martech, data analytics, and digital agencies, together representing 55% of inward investment across over 200 deals. The business models in these sub-sectors comprise activities such as systems for data collection, data management, analysis including predictive analysis, adtech platforms, and online media market places.

Traditional holding networks to have strong appetite for M&A in 2021

Meanwhile, global holding networks are expected to have “a strong appetite” for M&A this year to strengthen their capabilities in specific services, disciplines, and regions. This comes after global holding networks such as Publicis Groupe, dentsu, and Omnicom Group spent majority of last year restructuring their operations and divest legacy under-performing assets.

Areas such as data, tech, eCommerce, and CRM-enabled capabilities are predicted to receive strong interest from the global networks, with focus on China, US, UK, and Germany.

According to the report, Amsterdam is also among their priorities as a regional hub, especially considering Brexit. 

M&A activity among global network companies was expected to pick up in 2020 after a sluggish 2019, but this changed when agencies shifted emphasis on restructuring, consolidation, and senior management changes as a result of the COVID-19 pandemic. Only a total of 15 acquisitions were completed in 2020, a 42% dip versus 2019.

Dentsu had six transactions conducted via Merkle, Voyage Group, and Cmer TV across the US and Japan. Meanwhile, WPP made four acquisitions across New Zealand, the US and UK, and even merged AKQA with Grey and Geometry with VMLY&R last year. At the same time, Havas made two acquisitions, respectively in the UK and Australia , while Publicis, IPG, and Omnicom each recorded a single acquisition. According to the report, this is also a drastic dip from 2016 when 95 deals were completed by the six major holding networks – dentsu, WPP, Publicis, IPG, and Omnicom – representing 8% of all activity that year.

The acquisition strategy and direction of the six networks has changed over the past four years, noted the report, which added that digital, data, and technology play a major part of their focus and needs as they continue to futureproof the business.

Consultancies are certainly giving the major holding networks a run for their money as they are no longer the first or natural choice for the would-be seller in the market within the overall buyer landscape, the report added.

In 2021, the six global network companies are expected to emphasise the value of creativity and leverage their media capabilities. Agencies that merge digital, tech, and design capabilities to deliver connected experiences will also benefit from digital transformation, which is predicted in the report to “accelerate at super speed” this year. At the same time, consultancies will also benefit from digital transformation, and they are expected to continue building on their data, digital, and delivery capabilities, and make further advances in building a name for themselves in managing global campaigns.

The acceleration of digital transformation is a result of 2020 bringing to light rigid business models and their inability to adapt to the changing environment. Companies that demonstrated resilience throughout the past year were those that were digital and tech-savvy. Hence, the report advises business leaders to drive business transformation across all sectors of their organisation – marketing, customer service, sales, and supply chain procurement.

At the same time, the report also touched on mid-market buyers, a "new breed of marketing services firms" that go beyond traditional media strategies to offer expertise on technology best practices, in-house team design and technical implementation, advanced measurement, and privacy. Hakuhodo and S4 Capital were named in this list, with the former being the most active acquirer. Last year, Hakuhodo had five majority and one minority acquisition including martech firm Adglobal360 and Taiwanese agency Growww Media Co. Meanwhile, S4 Capital completed five acquisitions in 2020, including digital marketing firm Circus Marketing, data and analytics consultant Digodat. It also raised an additional US$100 million to explore larger deals.

Significant decline in deal volume for marketing and digital sectors

On a whole, 2020 witnessed “a significant decline” in deal volume for M&A in the technology, digital, media, and marketing sectors. Compared with 2019, M&A transactions dipped 19% to 1,091, well below the average 1,241 deals per annum recorded over the last five-year period, according to the report. This was largely a result of the pandemic’s impact on buyer confidence and general lack of visibility in trading. This was also compounded by the need to adjust to the new normal and significant changes in consumer behaviour.

That said, digital media, traditional media, and martech remained the most active sectors for M&A last year, with 234, 180, and 143 deals respectively. This combined to form 51% of 2020 deal activity. According to the report, digital media showed no change in activity from 2019 whereas traditional media and martech experienced activity declines of 13% and 8% respectively from 2019.

Likewise, agency services and digital agency sectors followed with 112 and 114 deals announced. CRM was the only sector that had a year-on-year increase, up 30% from 2019. On the other hand, strategy suffered the steepest decline with only 32 deals announced, 57% less than in 2019. The report added that consultancies have also taken a hit globally due to delays or cancellations in client projects.

Asia Pacific, Latin America and the Middle East had growth in deal activity, while activity remained flat in the Eastern European region. On the other hand, Western European countries experienced a small year-on-year dip of 8% in activity. The US and UK, however, remained the most active M&A markets last year, with 503 and 143 deals respectively. Combined with France, Germany, Canada, and Netherlands, these six countries represent 76% of the global deal flow.

Meanwhile, consultancies also witnessed a 30% dip in M&A activity last year, due to the uncertainty caused by the global economic slowdown. Despite this, the report ranked Accenture as the most active consultancy and buyer in the space with 12 acquisitions. Its strength lies in its long-term relationship building and the innovative nature of service offering. Among the list of companies it acquired last year were CX consultancy Mainiro, tech consultancy Icon Integration, and digital marketing services firm iTrigger.

Capgemini was ranked second with three acquisitions – social impact agency Purpose, data science firm Advectas, and cloud-based independent consultancy firm WhiteSkyLabs. EY, on the other hand, only had one acquisition – digital customer experience agency Doberman.

Other trends for 2021

1. ECommerce: ECommerce is expected to thrive and drive future retail this year, putting further pressure on brick-and-mortar brands. The report predicts further increase in purchasing online via different devices as more brands also shift their focus towards D2C. Companies involved throughout the eCommerce chain will prosper and specialist eCommerce creative, content, and media agencies with capabilities particularly in delivering Amazon and Amazon Marketplace programmes, will see further revenue increase for existing clients and new businses opportunities.

2. Programmatic: More brands are expected to embrace programmatic opportunities with technology enhancements in 2021, with many more developing in-house capabilities. The efficiencies of programmatic buying and the increased capability to apply data in targeting specific audience segments will grow further this year, along with the benefits it brings for brands. According to the report, programmatic buying and measurement will become more effective this year. The collaboration of the sell and buy sides will be able to thoroughly evaluate supply and demand to create greater optimisation requirements.

3. Reinvention for companies: Business leaders will seek to better futureproof their business this year, with technology and data expected to be at the forefront of the evolution. The smart use of data will also help in making informed decisions across the company, from sales and marketing to product innovation and supply chain management. Brands will want to get closer to their customers and creative use of technology will be another key enabler.

4. Becoming an all-round ethical business: This year, more brands are predicted to further change or enhance their approach to be a better all-round ethical business. According to the report, they will also embrace purpose, social, and environmental sustainability. Agencies that successfully demonstrate they operate off a purposeful platform will benefit, and acquisition activity within this communication sector is also expected, the report said. This comes as 2020 was the year brands began reacting and realigning with consumers on issues such as social, environmental, and ethical responsibility.

Photo courtesy: 123RF