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MERGERS AND ACQUISITIONS PROSPECTS FOR MARKETING SERVICES, MEDIA AND RELATED TECHNOLOGY FIRMS nd 22 ANNUAL MARKET SURVEY 2016 Table of Contents Executive Summary 3 Detailed Findings 4 Methodology 18 About AdMedia Partners 20 Executive Summary In late 2015, AdMedia Partners, Inc. conducted its 22nd annual survey of senior executives at leading marketing services, media and related technology companies for their take on industry mergers and acquisitions prospects in 2016. Respondents continue to have a generally positive outlook for M&A in these sectors, particularly for digital, analytics and social media businesses. As was the case last year, about two-thirds of respondents expect to seek acquisition targets in 2016. Interestingly, sellers’ intent to transact increased significantly to 54% versus 40% last year. This 14% increase in intent to sell corresponds inversely to a 14% decrease in intent to seek investment, down from 35% last year to 21%. Key findings include: 2015: A Busy Year for M&A - Over two-thirds (68%) of respondents were approached by a buyer in 2015, up from 63% in 2014. - Likewise, there was an uptick in respondents who actually received an offer, from 23% last year to 29% this year. - Interestingly, the percentage of respondents involved in actual closed transactions was in line with last year. - The trend thus seems to be greater activity in buyers looking for deals, but this does not necessarily translate into more closings. One possible explanation is that there are more and more buyers in the marketing services and media space, but a more fixed number of sellers. 2016: Positive Outlook for M&A - The vast majority (81%) of respondents believe that M&A by strategic buyers will increase in 2016; for financial buyers this number is only 44%, down from 55% last year and 49% the year before that. - Similarly, there was a marked increase in the percentage of respondents who say they will seek a sale of their company in 2016: 54% versus just 40% a year ago. - For the first time in well over a decade, the percentage of respondents who would advise buyers to act now and the percentage that would advise sellers to act now is identical at 79%. This likely reflects a belief that buyers should act while rates remain low and sellers should take advantage of strong current valuations. Growth Expectations - 74% of respondents expect that digital will represent 40% or more of their business in two years, up from 46% currently. Mobile is expected to grow too, with 35% of respondents expecting that the portion of their revenue from mobile will be over 40% the next two years, up from 14% currently. - Over half of respondents expect growth of more than 40% for social (55%), custom content/native ads (55%), programmatic (57%), mobile (65%), and video (53%). - 84% of respondents expect the more mature sectors of both search and display to grow at less than 15%. Opinions on Valuations - Similar to last year, the areas in which respondents were most interested expanding or acquiring were in analytics, digital, social and custom content/native advertising sectors. Generally, these areas tend to command valuation expectations at the highest levels. 2016 Market Survey | www.admediapartners.com % Interest Weighted Average Multiple Ad Tech Analytics Mobile Marketing Digital Agencies Social Marketing Custom Content/Native Advertising CRM/Database Marketing Healthcare Marketing Design/User Experience Integrated Ad Agencies Marketing/Strategic Consulting Market Research Experiential Marketing 33% 51% 36% 51% 46% 46% 38% 28% 29% 21% 37% 25% 22% 8.5 8.0 8.0 7.5 7.5 7.5 7.5 7.5 7.0 7.0 6.5 6.5 6.5 Shopper Marketing 15% 6.5 Sector - Three sectors enjoyed an increase in the percentage of - - - respondents that were interested: ad tech, up from 29% last year to 33%, market research, up from 18% last year to 25% and custom content/native advertising, up from 44% last year to 46%. The largest declines in the percentage of interest by respondents were for mobile (-14%), analytics (-13%), CRM/database marketing (-8%) and shopper marketing (-9%) —a somewhat surprising trend given that in our experience, these remain sought after services, and tend to command strong multiples. One possible explanation is that there are a relatively small number of independent quality companies in these sectors, which can drive up valuations and may give buyers pause. Expected multiples by sector were close to where they were in last year’s survey, which is most likely a reflection of the finding that respondents believe that this is a good time for both buyers and sellers to transact. Please note that the multiples above are averages that reflect expectations. There are factors in any specific situation that can move actual deal multiples significantly up or down, such as company size, growth rate, client list, revenue concentration, profit margins and the presence or absence of differentiating skills or proprietary technology. Changing Landscape - When asked about drivers of M&A, respondents commented - on ad blocking and user experience. While on the surface these appear to be wholly unrelated trends, there is a point of view that ad blocking has arisen as a result of obtrusive ads that deliver little value to consumers, whereas there is also currently a marketplace trend towards improving user/customer experience and delivering marketing messages and content that are highly relevant to the target audience. Analytics, programmatic, social and new media remain disruptive industry issues—offering opportunities to deliver higher returns for clients and a higher quality experience for consumers, while also posing a threat to the traditional agency model from technology companies and new media providers who are offering innovative ways to interact with consumers. 3 Detailed Findings M&A Activities in 2015 Q. In the past year, which of the following M&A-related activities has your company been involved in? - Over two-thirds (68%) of respondents Fig. 1 - 2015 vs. 2014 M&A Activities were approached by a buyer, up from 63% in 2014. - More than half (53%) were approached by a strategic buyer, a slight increase over 2014 when 49% of respondents reported this activity. 53% Approached by a strategic buyer 49% 41% Approached by a financial investor 38% - Four in ten (41%) were approached by a financial investor, a slight increase over 2014. 29% Made one or more acquisition(s) 35% - Less than one-third (29%) of respondents made one or more acquisitions, a significant decrease over the 35% reported last year. - There was a notable increase in companies that received an offer. Three in ten (29%) respondents reported receiving an offer in 2015 compared to 23% in 2014. - Acquisitions by a strategic buyer (12%) were in line with the 11% reported in 2014. Respondents who were acquired by or received funding from a financial investor remained at 7%, consistent with 2014. 29% Received an offer 23% 12% Acquired by a strategic buyer 11% 7% Acquired or received funding from a financial investor Involved in a merger 7% 3% 11% 2015 2014 - In 2015, 3% of respondents were involved in a merger, a sharp decrease over the 11% reported last year. - It is interesting to note that despite an uptick in approaches by strategic buyers and financial investors in 2015, the percentage of respondents that were involved in actual closed transactions was flat. Note: numbers exclude mentions of “None” 2016 Market Survey | www.admediapartners.com 5 M&A Expectations for 2016 Q. For those who have M&A expectations for 2016, which of the following M&A-related activities do you expect your company to pursue? - Respondents continue to be optimistic, with nearly two-thirds (63%) expecting to seek an acquisition target in 2016. This is consistent with the 62% reported in 2015. Fig. 2 - 2016 vs. 2015 M&A Expectations 63% Seek an acquisition target 62% - The attitudes of sellers have changed markedly. Overall, 54% anticipate that they will explore a sale of their company in 2016, up from 40% in 2015. - Two in ten (21%) plan to seek investment funding in 2016—a sizable decrease over the 35% in 2015. - Sellers appear to be more eager than they were last year, while buyer interest remains the same. Due to the recent volume and valuation of deals in the market, it appears more sellers are interested in completing a transaction in the year ahead. 54% Explore a sale of the company 40% 21% Seek investment/growth funding 2016 35% 2015 Note: numbers exclude mentions of “None” 2016 Market Survey | www.admediapartners.com 6 Areas of Expansion Interest Q. Is your company considering expanding or acquiring any of the following businesses? - The most sought after areas of interest for expansion or acquisition remained consistent with prior years: analytics (51%), digital (51%) and social (46%). - The largest increases in interest were for market research (+7%), ad tech (+4%) and custom content/native advertising (+2%). - However, compared to the 2015 survey, there has been a significant decrease in interest in other high growth areas. Interest in analytics dropped sharply from the prior year (64% versus 51%) and CRM interest dropped from 46% to 38%. - Interest in mobile marketing had the most significant drop, from 50% last year to 36% for 2016. - This seems to be at odds with the result in the previous question indicating no fall off in interest in making acquisitions. Perhaps this may reflect an increased focus by buyers on acquiring for growth in general in addition to acquisition for expanding specific capabilities. - One possible explanation for the drop in interest in certain high growth sectors could be a relatively small number of quality companies with critical mass available in the market, which would drive up valuations and may give some buyers pause; likewise, organic growth in these esoteric sectors is challenging. Fig. 3 - 2016 Areas of Expansion Interest Analytics 51% Digital agencies 51% Social marketing 46% Custom content/native advertising 46% CRM/database marketing 38% Marketing/strategic consulting 37% Mobile marketing 36% Ad tech 33% Design/user experience 29% Healthcare marketing 28% Market research 25% Experiential marketing 22% Integrated advertising agencies 21% Shopper marketing 15% Note: numbers exclude mentions of “Don’t know” 2016 Market Survey | www.admediapartners.com 7 M&A Expectations for 2016 – Strategic vs. Financial Buyers Q. Compared to 2015, do you think M&A in your industry—driven by either strategic or financial buyers—will be up, flat or down in 2016? - The vast majority (81%) expect that M&A by strategic buyers will be up in 2016. This figure is consistent with our 2015 survey, when 81% of respondents held this belief. - Less than half (44%) of respondents anticipate an upward shift in M&A by financial buyers. This is a sharp decrease from the response reported in 2015 (55%). Fig. 4 - M&A Expectations for Strategic or Financial Buyers 81% Up 44% 17% Flat Down 43% 2% 13% Strategic Buyers “There will be more and more consolidation as larger shops seek to acquire nichebased content marketing firms to gain expertise in new areas of content marketing.” “Agencies will add martech to integrate media into creative practices.” “Similar to 2015 levels.” Financial Buyers “Strategic buyers will more and more often come from outside the industry—consultants and other businesses will morph to get a piece of the explosive communications business.” “Programmatic platforms will be the lead in acquiring companies.” “There will be further expansion of agencies to control the margin erosion in media, due to adoption of technology. The marriage of tech services & creative is now happening in a brand new evolution.” “Agencies will support existing digital services with improved analytics.” “The drive will be to continue to pursue broader service offerings. Buyers will be looking to purchase firms in areas where they do not have a capability. Sellers will be looking to develop a more integrated offering to become more attractive to buyers.” Note: numbers exclude mentions of “Don’t know” 2016 Market Survey | www.admediapartners.com 8 Disruptive Industry Trends Q. What trends and technologies are most disruptive to your industry? - The newest emerging trend in this year’s survey is ad blocking, which was mentioned by a significant number of respondents as an industry threat. - In addition, tailoring user experience to best serve the customer arose as an evolving trend focus of marketers. - Significant trends similar to last year include: Analytics was mentioned more than any other single factor as a disruptive industry issue. This result demonstrates the increasing importance of data-driven marketing. Programmatic continues to be a key topic among marketers. Social and new media are also perceived as competitive threats to traditional agencies. “Two disruptive trends are the growing power of non-traditional players in communications, such as Deloitte Digital, and the influence of platforms compared to agencies.” “Firms that provide a robust analytics service platform and solid insights based on the data, combined with strategic and executional ability, will lead the way.” - Behavior of new media players like Facebook and Google continues to drive traffic and shape the way consumers access content. “Providing quality creative and cutting edge UX services will be key.” “Competitive practices of Google and Facebook.” 2016 Market Survey | www.admediapartners.com “Human-centric innovation, creativity and IP are being valued more so than in recent years.” “Mismanagement/over-acceleration of social media is moving into being a problem…when there is too much information, each piece— no matter how targeted—is of less importance.” “New programs streamlining content distribution, plus advances in technologies like virtual reality, will probably change the landscape.” 9 Digital Landscape Q. Currently, what percentage of your business is digital? What percentage of your business do you anticipate will be digital in two years? - Today, over half (54%) of respondents’ Fig. 5 – Digital Portion of Business businesses were less than 40% digital while a quarter (24%) are over 80%. - When asked about expectations for their businesses two years from now, only a quarter (26%) anticipate their digital business will be less than 40% digital. In fact, a third (31%) predict their digital businesses will be over 80%. 22% 0-20% 10% 32% 20-40% 16% 9% 40-60% 31% 13% 60-80% 12% 24% 80-100% 31% Today In Two Years Note: numbers exclude mentions of “Don’t know” 2016 Market Survey | www.admediapartners.com 10 Mobile Landscape Q. Currently, what percentage of your business is mobile? What percentage of your business do you anticipate will be mobile in two years? - Today, nearly two thirds (63%) of Fig. 6 – Mobile Portion of Business respondents’ businesses were less than 20% mobile while 14% are over 40% mobile. 63% - In contrast, when asked about expectations for their businesses two years from now, only 24% expect less than 20% of their business will be mobile, while over a third (35%) predict over 40% in two years. 0-20% 24% 23% 20-40% 41% - The results point to a change in the marketing environment, as the focus shifts from desktop to mobile. 11% 40-60% 20% 3% Greater than 60% 15% Today In Two Years Note: numbers exclude mentions of “Don’t know” 2016 Market Survey | www.admediapartners.com 11 Advice to Prospective Buyers and Sellers Q. Given the M&A environment that you foresee for 2016, would you advise prospective buyers to act now or wait? Would you advise prospective sellers to act now or wait? - A significant majority (79%) of respondents would advise buyers to act now. - In addition, a significant majority (79%) of respondents would advise sellers to act now, the highest response rate in at least 15 years. - For the first time since at least 2002, the differential between advising buyers and sellers to act now has disappeared—a strong sign that the market may be poised for activity with eager buyers and sellers. Fig. 7 - Advice to Prospective Buyers & Sellers – Act Now 92% 88% 87% 85% 84% 79% 83% 82% 80% 79% 79% 77% 74% 70% 68% 65% 64% 60% 58% 57% 50% 52% 51% 34% 51% 32% 31% 27% 23% 20% 2002 2003 2004 2005 2006 2007 2008 Buyers 2016 Market Survey | www.admediapartners.com 2009 2010 2011 2012 2013 2014 2015 2016 Sellers 12 Reasoning Behind Advice to Prospective Buyers and Sellers Q. Why would you give such advice to prospective buyers and sellers? - The dominant explanation (40%) given by those offering advice to prospective buyers and sellers is that the timing is right—strategic and financial market interests are currently aligned for favorable conditions. This explanation was up sharply over the 30% of responses in this category one year ago. Fig. 8 - Advice to Buyers and Sellers Current timing is right 40% Low interest rate environment 16% Market will improve 14% Uncertainty of market, economy, election 14% - Respondents also noted the availability of abundant inexpensive financing in their advice. Depends on specfic goal/needs Market will decline “With many brands facing serious business/marketing challenges, this is the time for agencies to add depth to their capabilities.” “The pace of change is great, so companies in a strong enough position to sell should do so—the future is more uncertain than ever.” 9% 7% “Low borrowing costs support higher valuations right now. Higher interest rates over the next 12-24 months will dampen valuations and provide opportunities for buyers at sellers' expenses.” “Strike while the iron is hot.” “Business in 2015 has been relatively frothy.” “Large agencies (i.e. prospective buyers) will continue to struggle to adapt to the new media marketplace and the associated business/service models required, so there is urgency to acquire the right capabilities and talent. Prospective sellers should entertain offers, but continued channel disruption is only going to increase demand for advanced acquisition targets.” 2016 Market Survey | www.admediapartners.com “Interest rates are low, and there is optimism afoot.” “It is a good climate for both buyers and sellers with abundant, inexpensive capital.” 13 Growth Expectations for 2016 Q. What revenue growth rate do you anticipate in 2015 for your own businesses? - The median expected growth rate for respondents’ own businesses (18%) is consistent with 2015 results – relatively bullish compared with the last several years. Fig. 9 - 2016 Business Growth Expectations Less than 5% 5% - A quarter (25%) of respondents are very bullish and believe their business will grow at least 20% in 2016. 5 - 10% 29% 10 - 15% 20% 15 - 20% 21% 20 - 25% 10% 25 - 30% 1% Over 30% 14% Fig. 10 - Overall Median Business Growth Expectations 20% 18% 18% 15% 13% 13% 13% 13% 2011 2012 2013 2014 10% 5% Note: numbers exclude mentions of “Don’t Know” 2016 Market Survey | www.admediapartners.com 2007 2008 2009 2010 2015 2016 14 Advertising Growth Expectations for 2015 Q. What growth rate do you anticipate in 2016 for overall advertising spending? - Sentiment has been steady regarding Fig. 11 - 2016 Advertising Growth Expectations respondents’ expectations for overall ad spending. The median expected growth rate for ad spending in 2016 is 3%, a consistent result over the last few years. - Almost half (47%) of respondents expect Less than 2% 15% overall ad spending to grow 2 to 4% in 2016; this finding is consistent with 2015 expectations. 2 - 4% 47% 4 - 6% 6 - 8% 16% 6% 8 - 10% 8% Over 10% 8% Fig. 12 - Overall Median Advertising Growth Expectations 5% 5% 3% 3% 3% 3% 3% 3% 3% -5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: numbers exclude mentions of “Don’t Know” 2016 Market Survey | www.admediapartners.com 15 Advertising Growth Expectations – by Category Q. What growth rate do you anticipate in 2016 for social, custom content/native advertising, programmatic, mobile, video, search and online display ad spending and buying? - Respondents expect growth rates above 15% for social (55%), custom content (55%), programmatic (57%), mobile (65%) and video (53%). - Most respondents predict growth of less than 15% for the more mature categories of search (84%) and display (84%). Fig. 13 - Expected Growth Rates 0 - 10% 15% 10 - 15% 30% SOCIAL 15 - 20% 27% 20 - 25% 17% 55% of Respondents 25 - 30% Over 30% Fig. 14 - Expected Growth Rates 6% 5% 0 - 10% 16% 10 - 15% CUSTOM CONTENT/ NATIVE ADVERTISING 29% 15 - 20% 24% 20 - 25% 18% 55% of Respondents 25 - 30% Over 30% Fig. 15 - Expected Growth Rates 8% 5% 0 - 10% 17% 10 - 15% 26% 15 - 20% 26% PROGRAMMATIC 20 - 25% 14% 57% of Respondents 25 - 30% Over 30% 10% 7% Note: numbers exclude mentions of “Don’t Know” 2016 Market Survey | www.admediapartners.com 16 Advertising Growth Expectations – by Category, Continued Q. What growth rate do you anticipate in 2016 for social, custom content/native advertising, programmatic, mobile, video, search and online display ad spending and buying? Fig. 16 - Expected Growth Rates 0 - 10% 8% 10 - 15% MOBILE MARKETING 27% 15 - 20% 20% 20 - 25% 17% 65% of Respondents 25 - 30% Fig. 17 - Expected Growth Rates 13% Over 30% 15% 0 - 10% 15% 10 - 15% 32% VIDEO 15 - 20% 19% 20 - 25% 18% 53% of Respondents Fig. 18 - Expected Growth Rates 25 - 30% 8% Over 30% 8% 0 - 10% 44% 10 - 15% SEARCH ADVERTISING 40% 15 - 20% 8% 20 - 25% 3% 25 - 30% 3% 16% of Respondents Over 30% Fig. 19 - Expected Growth Rates ONLINE DISPLAY 2% 54% 0 - 10% 10 - 15% 30% 15 - 20% 11% 20 - 25% 2% 16% of Respondents 25 - 30% Over 30% 0% 3% Note: numbers exclude mentions of “Don’t Know” 2016 Market Survey | www.admediapartners.com 17 Methodology METHODOLOGY Background & Methodology - In Q4 2015, AdMedia Partners conducted its 22nd annual survey on the outlook for M&A for marketing services, media and related technology firms in the coming year. Over 6,000 domestic and international executives in advertising, marketing services, digital marketing, marketing technology, media technology, media or digital media were invited to take part in a 5-minute online survey. - Respondents were asked to describe the nature of their businesses and were classified into one of three groups. Below is a summary of the makeup of the respondents. Nature of Business % of Total Businesses involved solely in Services 29% Businesses involved in Content and related work 45% Other businesses related to Marketing or Media Technology 26% Total 100% - Respondents were asked to choose a range which described their company's annual revenue. Below is a summary of the makeup of the responses. Annual Revenue % of Total $50 Million or less 79% $51 - $500 Million 13% Over $500 Million 4% Don’t know/refused 4% Total 100% Analytical Summary - Throughout this report, results are reported in the aggregate. - Data from all respondents was analyzed regardless of whether they completed the survey in its entirety. - Participants were asked several open-ended questions to aid in understanding the "whys" behind the numbers. Where possible, responses to these questions have been coded and tabulated. - Where historical data is available and the comparison worthy, comparisons between years have been made. - All percentages were rounded up or down to the nearest whole number. As such, percentages may not add to 100%. 2016 Market Survey | www.admediapartners.com 19 About AdMedia Partners METHODOLOGY About AdMedia Partners, Inc. AdMedia Partners is a leading M&A advisor that provides middle-market mergers and acquisition advisory services to marketing, media and related technology businesses. Founded in 1990 and located in New York City, the firm has completed over 230 transactions worth over $11 billion. AdMedia was founded by former advertising, media and financial executives who recognized the market need for an M&A advisory firm focused specifically on the rapidly changing marketing and media industries. AdMedia has provided transactional services and strategic and financial advice to the world's leading advertising and media companies. The firm's industry knowledge and strong transactional skills provide the best outcomes for both sellers and buyers—the strategic value that AdMedia Partners brings to every assignment. AdMedia's group of managing directors is among the most experienced financial advisors in the marketing services, media and related technology industries. Their diverse backgrounds as former operating and financial executives and entrepreneurs provide unique insights into both the strategic and operating issues that surface during mergers, acquisitions and divestitures. Clients benefit from the managing directors' keen and unique perspectives into the current themes and trends within the sectors that AdMedia covers. Most importantly, the managing directors speak the same language and have shared backgrounds with the clients they serve. The combination of AdMedia's industry expertise and financial advisory experience provides clients with a unique offering of industryfocused deal strategy and strong transactional experience. Unlike other financial advisory firms that provide more junior staff as the day-to-day contact, AdMedia assigns two managing directors to every assignment with a lead MD as the main point of contact. A team of experienced professionals supports the managing directors, allowing them to dedicate 100% of their time to working on behalf of clients. Marketing & Business Services - Advertising BPO Brand Identity/Design Consulting Corporate Communications CRM/Loyalty Direct/Database Marketing Entertainment Marketing Experiential Marketing Government Affairs Healthcare Marketing Market Research Media Buying & Planning Promotional/Shopper Marketing Digital Marketing & Technology - 2016 Market Survey | www.admediapartners.com Advertising Technology Interactive TV Mobile Marketing, Content & Applications Online Advertising & Measurement Online Market Research Performance Marketing & Lead Generation Programmatic Buying Search Marketing Social Media Marketing UX/User Experience Design Web & Application Development Media & Digital Media - Affiliate & Ad Networks B2B Publishing Consumer Magazines Content Agencies Information Publishing Online Communities Online Media User-Generated Content 21 Select AdMedia Partners, Inc. Transactions 2016 Market Survey | www.admediapartners.com 22 Select AdMedia Partners, Inc. Transactions, Continued 2016 Market Survey | www.admediapartners.com 23 Contact AdMedia Partners, Inc. Three Park Avenue, 31st Floor New York, NY 10016 212-759-1870 [email protected] www.admediapartners.com