Private equity grabs a bigger slice of the marcoms M&A pie

01 May 2018  |  Julie Langley 
Private equity grabs a bigger slice of the marcoms M&A pie

Results International's Julie Langley shares a first quarter analysis on marcoms merger and acquisition activity

Rumours around Sir Martin Sorrell’s retirement from WPP have been circulating for years, and yet when it finally happened in April it still left the ad industry reeling.

His departure came against a backdrop of WPP’s lowest quarterly M&A volume for some years. The network completed just three deals in Q1, as compared to 30 deals in 2017 as a whole. Yet there are undoubtedly still acquisitions underway and it seems likely WPP will continue to invest. However, as it focuses on internal restructuring and the Sorrell succession, it’s unlikely that the pace of its acquisition strategy will carry on into 2018 at the same level as in recent years.

The global networks have mostly seen their revenue growth slow, and it’s as yet unclear quite how this, and the exit of Sorrell, will impact global marcoms M&A deal volumes. However, with WPP looking inward, it seems likely there will be increased opportunities for some of the other players to step up their acquisition strategies.

Other networks are continuing to invest. Dentsu was the most active buyer in Q1 with seven deals, and Publicis has also announced a war chest of €300-500m per year to invest in areas such as digital transformation and data.

A surge in private equity

Many independents demonstrated a strong performance in the first quarter of 2018. This stems from their flexibility, which enables them to respond quickly to changing market conditions. However, what was particularly notable during that period was a spike in interest in marcoms from private equity firms.

While PE investment grew steadily throughout 2017, private equity-backed deals doubled from around one tenth of the market (11%) in Q4 last year to almost a quarter (22%) of all deals completed in Q1 2018.

This growth can only be viewed as a sign of growing confidence in digital marketing services. We’re also now seeing previous investments delivering successful exits and returns - which will no doubt drive continued interest in the industry from private equity.

For example, PE-backed exits in Q1 included the acquisition of full-service digital agency LiquidHub from Chrys Capital by Capgemini for $500 million. In addition, out-of-home media solutions company Ocean Outdoor was bought from Searchlight Capital by LSE-listed investment vehicle Ocelot Partners (which renamed as Ocean Outdoors Limited following the acquisition) for $274m. Ocean Outdoor was initially backed by LDC before Searchlight acquired a majority stake in 2014.

It’s also not just PE whose involvement in marcoms is growing. We’ve seen new consultancy groups following Accenture and Deloitte’s lead and entering the market every quarter. Capgemini’s second major acquisition in the space (LiquidHub), coming shortly after buying Lyons Consulting Group last September, is a clear statement of intent.

Overall, the acquirer landscape has become massively diverse. As well as PE and the consultancies, Q1 saw buyers ranging from Salesforce and Informa to Endeavor all investing in the sector.

Geographies and sub-sectors

Digital and digital transformation remain key areas for buyers. Full-service digital agencies were once again the most active marcoms subsector in Q1 2018, accounting for 15% of total deals. However, there’s a strong appetite for suitably scaled businesses across the market services spectrum.

This is reflected in the continuing interest in targets ranging from tech-led agencies, with capabilities in Adobe and Salesforce, through to more traditional areas such as offline media-buying, OOH and events.

The geographic spread of M&A also remains highly positive, with cross-border deals accounting for 26% of all activity in the first quarter of this year. The prospect of Brexit also doesn’t seem to be putting acquirers off targets in the UK, where transaction volumes remain static quarter on quarter.

Conversely, deals in Western Europe dipped slightly, down from 25% of overall volume in Q4 2017 to 19% of activity in Q1 2018. But this is just a blip, as there is still considerable demand for strong targets in key markets like Germany, the Nordics and France.

Global deal volumes remained fairly constant overall in Q1, down fractionally from 193 in Q4 2017 to 187, and this reflects a buoyant market. And with the spike in interest from the PE sector and other external buyers, we can expect marcoms M&A to continue to go from strength to strength in 2018. Sir Martin Sorrell may have bowed out, but the sector marches on.

Julie Langley is a partner at Results International

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