Prepare for the Mother of All M&A Booms

Terence Kawaja

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 Terence Kawaja, CEO, LUMA Partners.

CAVEAT: LUMA Partners is a leading M&A advisor to the ad tech sector. Hammer >>> Nail.

The intersection of media, marketing and technology has always been a complex and dynamic place. M&A deal activity has been persistent as the sector became digitally addressable with the application of data and software.

We are now at an inflection point. We predict that the next 18 months will see the greatest surge in M&A transactions the sector has ever seen.

There are eight factors that support my thesis:

  • Economic recovery. Goldman Sachs is projecting United States’ GDP will grow 8% in 2021 as we come out of the COVID pandemic. That’s China-sized growth! Advertising is expected to track GDP growth. Digital advertising will increase a whopping 26% from a massive base of $150 billion – that’s nearly $40 billion of new dollars into the sector this year alone – to $190 billion, according to eMarketer projections. TAM [total addressable market] like that will attract buyers. 
  • Digital acceleration. The COVID pandemic accelerated several sub-sectors of the digital economy: Gaming, streaming and ecommerce. These inflections have both primary and secondary effects that drive growth and transactions as companies vie to get better positioned in these high growth sub sectors. 
  • Changing floorplates. All of this growth is happening at a time when both regulation and technology data policies are shifting the foundation of audience-targeted marketing. New legislation from several jurisdictions is changing the rules. Signal deprecation from Google (cookie) and Apple (IDFA) is forcing a re-architecture of identity in the open web. As a result, companies are acquiring capabilities to adapt. 
  • Triopoly headwinds. With multi-governmental action on both the antitrust and privacy fronts, the dominant big tech firms have never felt more pressure. While specific remedies like break-ups are hard to predict, the scrutiny has driven industry sentiment to reduce platform dependency. Independent alternatives have accrued the benefits of this change in sentiment, which in turn creates a deeper bench of potential acquirers and more deal activity. 
  • Private equity appetite. The past few years have seen the private equity community drive consolidation in the ad tech sector. Major investments from Vista Equity (Mediaocean, IAS, TripleLift), Blackstone (Vungle, Liftoff), KKR (AppLovin), Providence Equity (DoubleVerify), Francisco Partners (Operative), and GTCR (Simplifi) have happened, with more sponsors in the wings. And they’re paying strategic prices for quality targets, as evidenced by Vista’s $1.4 billion valuation for TripleLift. Look for more new entrant and portfolio buying as the sector grows and consolidates. 
  • Corporate restructuring. Several large corporates in telco and media invested in ad tech through the years with a particular thesis that hasn’t panned out. Blame changing data privacy rules and gyrating market valuations for the activity. A prime example is the recent announcement that Verizon is divesting the Yahoo/AOL business to Apollo for $5 billion. We predict more of these deals as corporations rationalize these ad tech assets at a time when their valuation multiples are seeing new highs.
  • Buyer currency. The robust equity valuations in the stock market make acquisitions less dilutive or more accretive. Bull markets tend to reward acts of commission and lately acquirors have been rewarded with positive announcement day equity appreciations, several in excess of the purchase price. In other words, the deals pay for themselves. Additionally, buoyed stock prices breed confidence and encourage more buying.
  • Public company competition. Historically, the ad tech sector was under-represented in the public markets. Prior to 2017, there was only one public ad tech company that sported a market cap of more than $1 billion. Today, there are a dozen public Ad Tech companies and an equal number are contemplating a public offering in 2021.

This means that before the end of the year, we could have two dozen publicly-traded companies – all with valuations in excess of $1 billion – in the sector. If they trade at current multiples that average more than 20 times revenues, that implies that investors have high expectations for growth. While some of this growth will be achieved by organic means (see points one to four above), companies will invariably have to resort to inorganic growth (code for M&A) to satiate these growth expectations and differentiate from their competitors. That means the strategic buyer pool for ad tech businesses just got a lot bigger.

For a sector that was out of favor with investors for many years, this trend is a welcome development. Get ready for the deluge!


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