Scaled ad tech M&A was up 150% in the third quarter, driven in part by private equity … so, hurrah?
(For reference, scaled ad tech deal volume was down 60% quarter over quarter in Q2.)
“I wouldn’t read too much into this, actually,” said Conor McKenna, a director at LUMA Partners, which released its Q3 market report in early October.
The rise in M&A during the previous quarter is partially the result of a backlog from the first half of this year. Because there wasn’t a fresh calamity during Q3, some companies with deals in the pipeline decided the situation was stable enough to finally pull the trigger.
The war in Ukraine, general geopolitical instability, recessionary fears and rising inflation – none of those uncertainties have gone away.
What’s changed is that investors and dealmakers are “getting used to it” by now, McKenna said.
“After two quarters of dealing with these exogenous factors, people are getting comfortable enough to say, ‘Okay, I know what we’re dealing with now, I understand what’s happening,’” he said. “The situation isn’t really going to change, so we saw some companies go after certain opportunities in Q3 rather than continuing to wait.”
Taking stock
We might also start to see some public ad tech companies get taken private in quarters to come based on how market conditions are trending.
Although tech stocks are down overall, ad tech stock values are beginning to trend closer to their SaaS-y (as in martech) cousins. Martech stocks have historically traded at higher multiples than other tech stocks because SaaS is associated with more stable, recurring revenue.
But now, programmatic platforms are maturing and getting valued closer to SaaS businesses, McKenna said.
Ad tech valuations are also stabilizing after what were arguably unjustifiably high valuations over the past couple of years when more than 20 ad tech and martech companies went public.
“When we hit November of this year, and every subsequent quarter after that, we’ll be in more stable times, at least in terms of where these valuations are,” McKenna said. “And then I think we’ll start to see more consolidation among public companies.”
The pie
Looking at the tea leaves and predicting an uptick in consolidation is perhaps an unsurprising point of view for an investment banker. It’s also a little sanguine considering the economic climate.
But even if there’s a downturn that causes advertisers to pull back their spend, McKenna said, he predicts ad tech and martech companies won’t fall off a cliff.
“There’s always the possibility that externalities negatively impact the sector, and there are a lot of challenges coming in the short term,” he said. “But there are also longer-term trends that accrue towards advertising technology and marketing technology.”
For example, although ad spend will decrease during a recession, “people will also need to see performance and they’ll want to know exactly what’s happening with their ad spend,” McKenna said.
“Even if the overall pie shrinks,” he said, “specific parts of the pie can still continue to grow.”
