Most media industry observers expect to see a another strong year in M&A for the Ad Tech sector. For example, a survey [PDF] of 231 top media/tech executives released last week from media investment bank Jordan, Edmiston Group, Inc. and Econsultancy shows an upward trend in organizations planning an acquisition in the next 12 months, with increases across every revenue category.
The sharpest increase on a percentage basis can be seen in those entities with $10 to $50 million of revenue, where nearly 50% more companies are planning an acquisition in 2013, as compared to 2012. The focal areas for acquisitions are online media & technology and data & analytics, with mobile media & technology as a growing area of importance. To get a sharper perspective on digital advertising M&A activity, we turned to Blackstone Group Managing Director Ken Allen for thoughts on deal outlook for social media, mobile, data, acqui-hires and “marketing automation.”
KEN ALLEN: 2012 was a banner year for Ad Tech M&A. Across the sectors we track most closely, including E-commerce, Digital Content, Digital Advertising, and Interactive Marketing Services, M&A volume increased over 50% this year and has doubled relative to 2010 levels. The strength we are witnessing is reflective of the underlying growth dynamics across these sectors and the need for acquirers to invest in the critical themes currently transforming the Digital Marketing landscape.
The strength we see in the M&A market in Digital Marketing is particularly notable given the softness in the broader global economy and the fact that 2012 was a down year in M&A, broadly speaking. Even with all of the headwinds around Europe, the Fiscal Cliff, the Facebook IPO debacle, and growth stagnation here in the U.S., there remains a healthy appetite for M&A investment in the Digital sector.
What specific trends were driving the higher activity in Ad Tech deals in 2012?
In 2012 there was obviously a huge frenzy around social, with the Salesforce/Buddy Media, Oracle/Vitrue and Google/Wildfire deals. Each of these deals is emblematic of the fact that social is now viewed by marketers as a medium on which they need to be successful. I think it is interesting that pundits have been picking apart Facebook’s advertising model and effectiveness since its IPO, yet during this time players like Salesforce.com were willing to spend nearly $700m on Buddy to fortify its “Marketing Cloud” as it relates to social. A move like that is a pretty good testament to the fact that social is a key long-term growth pillar in the industry.
The other mega-trends I am seeing are around mobile, online video, and big data/analytics, although these trends are tending to drive deals in the private capital markets more so than in the M&A markets. These trends are very early at present and I expect them to gain increased attention among strategic acquirers in 2013/14. Lastly, the trend towards stack convergence continues, both relating to the traditional Ad Tech buyers and, more recently, between traditional horizontal software providers and the Digital Marketing vertical.
It’s been several months since the social deals you outline were done. Can we get a sense of how the respective integrations have been working out? In other words, have those deals lived up to their hype?
Frankly, it’s too early to tell. Certainly, the prices paid were reflective of big expectations. With that said, I can see tremendous potential with each deal given the footprint of the acquirers and their ability to sell these new offerings through their existing channels. Social is inherently synergistic with the data stack as well; if the acquirers can integrate these offering successfully, the combined Social CRM suite has the potential to be very powerful for marketers. But it is still early days and will be many months before we see the true impact of these transactions on the acquirers.
What categories do you see as ripe for real trends and where do see potential for mere hype?
I continue to see hype building around anything that touches mobile or big data / analytics. There is a tremendous amount of private capital being invested into these sectors at present and valuations, in some cases, have been bid up to level that are not justified by underlying fundamentals.
It is possible to have hype around a “real trend,” however, and I think that is the case here. There will, undeniably, be huge growth for many years in these segments and there will be many other exits like Instagram, Yammer, etc. For those VCs that are able to pick the winners successfully, paying a ‘hype-like’ valuation today may be ok given the future payoff. On the M&A side, I can tell you that nearly every potential buyer we speak with is looking to supplement its offering around mobile, analytics, social, and cloud.
What’s your take on the value of acqui-hires, or talent hires?
It can be a very viable way of growing a company. The marketplace for talent is certainly one of the most important battlegrounds in technology. Talent is a scarce resource, particularly in markets like Ad Tech. In such markets, the most talented individuals oftentimes will go to the most attractive emerging opportunities, foregoing positions at larger, more established firms. When that’s the case, those larger companies can, and should, turn to M&A to fill gaps in the talent pool. It’s not the cheapest way to do it and you would certainly rather fill those voids organically if you could. But for the highest-value skill sets, an acquisition may be the only way to assemble the team you need to be successful. The challenge, from a buyer’s perspective, is structuring a deal in the right way with the right long-term incentives, so as to make sure the talent you just bought doesn’t walk out the door the day you acquire it.
From the human side of Ad Tech, I wanted to get your thoughts on “marketing automation” as an increasingly important M&A category, as programmatic media buying continues to rise. How do you define MA — and what sort of acquirers/investors will likely be looking to such providers of that technology?
Marketing Automation is becoming an increasingly important capability in the Digital Marketing stack. I think of MA software as acting as a middleware layer between the CRM system and the ‘actions’ taken by that system. In a multi-channel world, MA software is required to manage and optimize, in a programmatic way, campaign execution through these channels. Many offerings today are also embedding sophisticated analytics as part of the MA suite, to enable optimization not only within a given campaign, but in a cross-channel way.
As I commented last month in AdExchanger, the Eloqua deal made a lot of sense for Oracle, in my view, given how strategic and foundational MA is. I expect to see other software players bolster their offerings by acquiring in this area and think this could be one of the major M&A themes we see in 2013.
What are your expectations for Ad Tech M&A this year? More of the same?
I think you will see continued strength in the M&A market as it relates to Digital Marketing, broadly defined. This will really just be a continuation of a trend we have seen for the past several years in the sector, despite continued global economic uncertainty. I don’t want to say that Ad Tech is sheltered from macro headwinds; no sector is totally immune; but I do think the underlying trends within digital marketing in many respects can buck an overall trend of economic stagnation.
There are a number of reasons I think the strong trend in Digital Marketing M&A will continue. On the buy side, acquirers are looking for growth, which can be very difficult to do organically, particularly for large firms. Innovation is also at a premium and many acquirers can best fuel innovation by acquiring it. We discussed the talent war and the need in certain instances to acquire key personnel. There are natural synergies with having a converged Ad Tech stack, leading to a natural tendency toward integrated solutions combined under a single umbrella.
I would also say that there are an increasing number of bidders for Ad Tech assets, ranging from software companies, technology platforms, publishers, agencies, content and e-commerce players. The increasing breadth in the buyer universe is fueling increased competition for deals and driving valuations higher in strategic sectors, providing a positive environment for prospective exits.
Each of these factors is a precursor for a healthy deal environment in the coming year. The wild card is fear and uncertainty, which is a factor that tends to impede deal making. But as it relates to Digital Marketing M&A in 2013, I expect the former to outweigh the latter.
