By Seb Joseph • August 6, 2024 •
Ivy Liu
Dealmaking in media and advertising is still moving, but calling it a full-blown resurgence is like calling a warm-up jog a marathon.
A deal here, a deal there since the year’s start show promise, but this isn’t exactly a signal that the tide has turned. Even the recent uptick in term sheets over the past two months feels more like a teaser than a true comeback for mergers and acquisitions in the space.
And yes, there have been a few.
Outbrain acquired Teads. Publicis swooped in for Influential. Informa snagged Cannes owner Ascential. Hyve Group made a move for the Possible conference. MiQ nabbed Pathlabs. And that was just last month. June was no slouch of a month, either. Seedtag acquired Beachfront Media. Madhive did the same for Frequence, as did Verve for June Group. Equativ and Sharethrough announced a merger.
All this action in just two months.
But here’s the kicker: Many of these deals have been simmering for a while, so they’re not exactly crystal-clear indicators of the current state of play. They are, however, a hint of things to come. That’s because nothing happens in a vacuum when it comes to M&A and the sign of the tide turning is often seen in the subtle shifts before the big waves crash.
Those shifts began at the turn of the year when investment banks were hired to get companies in shape to sell. But deals didn’t flood in. There were still too many reasons to stay on the sidelines, from blinkered clarity on upcoming interest rate cuts to the looming U.S. presidential election. Yet, the capital remains poised, ready to be deployed at the right time.
When this happens, the U.S. will lead the charge over Europe. In fact, it’s already happening in some markets. Look at the U.K., where dealmaking trails the U.S. by a third, according to Charles Ping, managing director at Winterberry Group. Most of the action involves U.S. owners bankrolling their U.K. companies’ acquisition of smaller businesses in Europe or the U.S., he continued. What’s not happening is U.K. businesses coming to market. They don’t think it’s the right time.
But rest assured, that moment is coming soon — both for them and everyone else.
Investment firm First Party Capital has three or four companies currently engaged in a sales process, and one or two of those will likely close by the end of the year.
Meanwhile, U.K. agency group Common Interest is eyeing three deals in the coming year, while SAMY Alliance, a social-first agency, is on the hunt for a U.S. acquisition to bolster its expanding business.
While none of these deals will be the show-stoppers of the M&A wave to come — those are still down the road — they signal the trends to watch: public companies hungry for growth, private equity investors with cash to burn, and private firms shoring up their services and profits in preparation for their own exits.
“Buyers are on the lookout for deals to get done, while sellers are starting to come to the market because looking forward the macro-economic indicators look more favorable,” said William Ritchie, founder and managing director of U.K.-based M&A advisors WY Partners. “Clearly, there’s more happening now, but i wouldn’t say its a full-on recovery or even a return to the levels of the last boom by any stretch.”
For starters, valuations are going to be less inflated — a dip that has played out over the last two years or so.
Between 2021 and 2022, there was a significant 64% dip in overall deal value, based on data from investment bank Luma. This downturn continued the following year, widely regarded as one of the worst.
That trend has started to recover since the beginning of the year, with 19 to 20 scaled deals per quarter and a 44% year-over-year increase in the first half. It suggests that deal values are likely trending upward again, though probably not yet reaching the inflated levels seen in 2021.
Chalk this return to more realistic valuations up to a mix of factors: higher interest rates, a focus on profitability rather than just growth, and some tough lessons learned from the previous period.
“Value investing comes in and out of fashion, but it always prevails,” said Tom Triscari, an advisor to investment firm Landmark Ventures. “That means over the long run investors gravitate toward companies that generate returns on capital greater than the cost of capital.”
It’s why the $1 billion price tag Outbrain paid for Teads is so telling — for those reading between the lines. It shows that companies are regaining confidence in strategic acquisitions but are now taking a more measured approach to valuations and deal structures compared to the 2021 frenzy.
Triscari crunched the numbers and came up with a thesis as to why the deal was done at that price: He predicted Teads will hit a fiscal-year 2023 return on invested capital (ROIC) of 29%, despite taking a hit on revenue growth, with traffic acquisition costs (TAC) excluded. On the flip side, Outbrain’s ROIC sat at a dismal –2.5%, showing its financial health was challenged with negative revenue growth for the past two years.
By combining Teads’ profitable prowess with Outbrain’s break-even operation and boosting net revenue ex-TAC per employee to $300,000, a 15% cut in fixed costs (about $50 million) can turn the tide. This plan could turn the merged entity into a robust business with stellar 36% ROIC — a remarkable feat in the ad tech world, or any industry for that matter.
“If that is not instructive for M&A moving forward then what is?” asked Triscari. “Take a profitable private company unable or unwilling to go public into a lagging or fatigued public company and everyone is happy.”
Put simply, dealmaking is like a traffic signal stuck on yellow, with decisions on hold until conditions change. The smart money is on the light turning green in the final quarter of the year or early 2025.
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