Tired in 2022: Growth at all costs.
Wired in 2023: Realistic ad tech valuations.
“We were in a 12-year bull run with very low interest rates for such a long time that the push towards growth [as the primary valuation driver] had gotten a little out of hand,” said Conor McKenna, a director at LUMA Partners. Last week, LUMA released its full-year market report analyzing the state of digital media and marketing in 2022.
During the height of the pandemic, company valuations across the ad tech and martech sectors went cuckoo bonkers (technical term). Newly public ad tech companies had more cash on hand to finance consolidation – there were seven transactions valued at more than $1 billion during the first quarter of 2021 – and the market hadn’t yet soured on SPACs.
It didn’t last, though.
If M&A activity in 2021 could be represented by the shape of a hockey stick – a surge in deals that shot up and to the right – deal activity last year could be represented by the sound of a sad trombone.
“Interest rates spiked, and there were all of those other exogenous factors, too,” McKenna said, pointing to economic and geopolitical uncertainty. “After the strength of 2021, it’s not surprising that scaled dealmaking was down, especially during the second half of last year.”
Back to reality
But a return to Earth for ad tech and martech valuations is a good thing.
Rational valuations should help spur more M&A this year, as businesses are valued based on their sustainability and profit margins rather than purely on growth, McKenna said.
“When valuations were high, you had this disconnect between buyers and sellers,” he said. “Now that valuations are more in line with historical norms, we’ll start to see more alignment between buyers and sellers.”
So, what’s gonna get bought?
Connected TV, commerce media and performance marketing are all areas ripe for growth and consolidation, according to LUMA.
And although regulatory scrutiny and privacy changes will dampen certain spirits, some acquirers will view uncertainty as an opportunity for consolidation, McKenna said.
“Privacy challenges are having a huge effect on some of the largest walled garden platforms, which have historically always sucked up all the ad spend,” he said. “So uncertainty may actually create more opportunity for the independent ecosystem, which can lead to M&A.”
Glass half empty vs. glass half full
Still, we’re about to head into a recession. (Right?)
And not everyone takes such a rosy view of what’s to come for the ad ecosystem in 2023.
Although Magna, GroupM and Zenith are forecasting growth in ad spend this year, independent equity research firm Arete Research predicts an 8% decline in overall ad spend and a 5% drop in digital ad spending.
There are also multiple categories of ad demand that were big in 2021 and 2022 but will simply not exist this year, argues Arete Research.
You won’t see most crypto brands going big in 2023, for example, and a lot of experimental budgets will be on hold for fear of an economic downturn. Signal loss, as a result of Apple’s ATT, is also palpable in the ad ecosystem, leading to fewer conversions and lower ROAS.
Some pieces of the pie may be shrinking, perhaps inevitably, but McKenna doesn’t expect a doomsday.
“Some categories might go away, but experimental budgets will be reallocated to channels where marketers have more data and the ability to see performance and do attribution,” he said. “And, in a way, I’d say it’s actually helpful for the broader digital ecosystem to move away from advertising around things like Web3 and crypto right now.”
