“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Jay MacDonald, CEO and managing partner at Digital Capital Advisors.
Everyone take a deep breath – and exhale.
Entrepreneurs, investors and board members are now synthesizing the potential ramifications of the global coronavirus pandemic to M&A markets this year. The consequences are critical to companies that are either in market or thinking of going to market this year.
My overall observation – which is subject to change depending on how long this situation lasts – is that if COVID-19 is gone or well contained by May 15, profitable companies will be fine, and those that aren’t had better start spending a lot of time talking to their investors.
So let’s take a look at how the pandemic is impacting M&A presently:
Large-cap buyers will undoubtedly slow the pace of their new M&A activities for the near term. Many major public buyers have seen their share prices annihilated over the past several weeks, and with depressed share prices come depressed corporate C-suites. When that happens, the focus invariably turns inward toward making sure their employees are safe and understanding how this affects their current customers.
The good news for sellers is that, unlike pullbacks driven by weak fundamentals, which are a harbinger of recessionary times, most of these companies have been reporting record or near-record earnings for quite a while now, and their balance sheets remain strong, allowing them to become acquisitive again more quickly. Some companies may even develop a newfound desire to acquire companies that are more economically inelastic and resistant to periods of market stress.
Publicly traded ad tech companies remain a mixed bag. Players such as Criteo and Rubicon Project were already facing stock price issues limiting M&A, with COVID-19 only compounding problems. Successes such as The Trade Desk have yet to fully embrace and execute an M&A strategy, a pattern that will now continue for an extended period sans an opportunistic purchase. On the other hand, media buyers will remain active, continuing to look toward content, distribution and new revenue generation, with rich balance sheets on hand.
SaaS-based business models
Nothing is more attractive to an acquirer in good times and bad than a company that has predictable reoccurring revenue. This is much more valuable to an acquirer in bad times because they do not have the same challenges as advertising-dependent models, namely budget cuts.
Most SaaS businesses are on annualized contracts, with a large number boasting two- or three-year contracts. It’s not to say that all ad-based businesses will have it tough in the M&A markets during and after the pandemic. They’ll just need to be profitable and/or have a “need to have,” not a “nice to have,” value proposition as they fight to keep and grow revenue when some sector ad budgets will decline or temporarily freeze.
The SaaS preference is equally true for ad tech and media. For ad tech, SaaS-monetized advanced data-driven targeting will remain prominent and a key piece as advertisers think harder about maximizing the ROI of advertising dollars and effectively targeting consumers across mediums. For media, subscription revenue generation remains king. The war for limited consumer dollars continues with content remaining central in attracting and retaining users.
Patience is not a virtue, it is a necessity.
There is a saying in M&A that “time is not a friend to deals,” meaning that the longer a transaction takes, the higher the probability that it could collapse. But in our present economic and social environment, acquirers – like the rest of us – are migrating their employees toward remote work, aren’t traveling, which makes due diligence more challenging, and are distracted and looking inward.
The good news is that in 2020 we all have access to tools not available during prior market scares, including virtual data rooms and video conferencing services (Zoom, GoToMeeting, Skype). Most people have some level of experience working and communicating remotely and – here you go, ad-based businesses – all understand the value of being digital.
Private equity will look for sector roll-ups and tuck-in acquisitions. Private equity investors and buyers are always opportunistic, and given the current environment, they will be looking for areas that are undervalued to either add to their current portfolio companies or to find a sector that has one clear winner to grab as a platform company and roll up the rest.
This is always easier said than done but think online gambling, measurement and research, to name a few.
Ad tech remains ripe for private equity involvement with scaled profitable companies and underperforming public companies as prime targets. Combining a few large assets will help to more effectively compete against walled gardens and provide margin uplift. Media will see less private equity activity due to a hesitance to be involved in media businesses that are heavily reliant on advertising, with subscription-driven businesses being the potential outlier.
It’s good to be private
Medium and large privately held companies will become aggressive acquirers after the pandemic for two reasons. First, privately held companies don’t have the very real pressure to restore their damaged share prices as a main focus. Second, with the Federal Reserve slashing interest rates to zero (that’s right, 0%), they literally can’t afford not to be.
Prior to the pandemic, most companies enjoyed strong years as the US economy continued its 10-year-plus growth pattern. And included in their strong years were plans for both organic and inorganic growth opportunities. Once the pandemic is contained and the potential acquiring companies can correctly assess the damage done to their own balance sheets, they will again get acquisitive.
Expect private-to-private transactions in ad tech and media. Profitable private ad tech businesses will leverage their balance sheets and low interest rates to make opportunistic and additive acquisitions. Media will continue to look to acquisition for access to content and distribution.
Winners and beneficiaries: Pharmaceutical, medical equipment, biotech, online gaming, online video, streaming services, home fitness, online productivity, online delivery, ed tech/elearning, online communication tools and workforce management tools.
Losers and hardest-hit sectors: Energy, tourism and travel (especially the cruise industry), luxury goods, manufacturing, sports betting, finance, discretionary spending, in-person entertainment, retail and retail tech.