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Merger and acquisition prospects for advertising marketing services and interactive firms
2009 Market Survey 2009 Market Survey Merger and Acquisition Prospects for MARKETING SERVICES AND INTERNET M ARKETING FIRMS I N DECEMBER 2008, AdMedia Partners, Inc. conducted its fifteenth annual survey of senior executives at leading advertising, marketing services and interactive marketing services firms on prospects for industry mergers and acquisitions in the year ahead. The survey was done amid a growing awareness that economic conditions in 2009 would be as difficult as any year in memory. Respondents were unanimous that a recession is under way, with one-third expecting it to continue throughout 2009 and another 13% anticipating an even longer slowdown. Nonetheless, respondents were outspoken that the current downturn would inevitably create unique opportunities for buyers and sellers, especially those companies with innovative business models in emerging marketing and media. Respondents expect overall advertising spending in 2009 to decline by five percent, impacting both independent agencies and large holding companies. Many newer agencies, especially online firms, are finding themselves at a critical juncture as the validity of their business model, strength of their management team and overall financial wherewithal are being severely tested, most for the first time. Notwithstanding these challenges, respondents expect five percent growth in interactive advertising spending as well as five percent growth in their own businesses. Even with a troubled economy, 60% of respondents expect to take M&A-related steps in 2009, only a modest decline from last year when 67% anticipated doing so. This outlook appears to reflect both consolidation opportunities for smaller agencies with cutting-edge business models or strategic client relationships and game-changing opportunities for larger agencies to merge in order to gain critical mass and reshape the agency landscape. Volatile financial markets will continue to affect the universe of buyers. One-third of respondents expect M&A by strategic buyers to be up in 2009, versus more than two-thirds in last year’s survey. Publicly held marketing communications companies have seen their valuations cut nearly in half over the past six months, hindering their ability to be aggressive in the M&A marketplace. Similarly, only 14% of respondents predict industry M&A by financial buyers will grow in 2009, in contrast to 41% last year. The majority of financial buyers have been sidelined by frozen credit markets; however, a number of private equity players are sitting on large cash reserves, positioning themselves to act on attractive deals, albeit using less debt and more of their own equity. Easing off the record valuations reached in 2007 and 2008, respondents expect valuations to soften in 2009: 5x EBIT for advertising agencies (the one group with consistent multiples over the last several years), 5x EBIT for marketing services firms (versus 6–6.5x last year) and 6–7x EBIT for digital marketing agencies and digital marketing technology companies (versus 7–8x last year). So while the year ahead may not be remembered for record-breaking M&A volume or lofty valuations, nimble buyers – both strategic and financial – are sure to find suitable investment opportunities that will help them weather the downturn and be positioned for strong growth once the economy picks up – with a new, more accountable marketing mix model likely emerging. Likewise, sellers with a desirable mix of digital and traditional services and attractive financial results will potentially find opportunities to align with financial and strategic partners who can provide resources for accelerated growth in the years beyond 2009. In the following pages are the results of our 2009 Merger and Acquisition Prospects for Marketing Services and Internet Marketing Firms survey. MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 2 Weaker 78% Same 16% Stronger 6% EXPECTATIONS FOR THE ECONOMY ■ Three-quarters of respondents expect the economy in 2009 to be weaker than 2008. ■ Respondents were nearly unanimous (98%) that a recession is currently under way. More than one-third expect the recession to last throughout 2009, while 13% believe it will last into 2010 or beyond. Expectations for the Economy in 2009 versus 2008 Respondents’ Views on Expected Length of Recession 1% 11% 23% 38% 13% 13% 0% 5% 10% 15% 20% 25% 30% 35% 40% 1 Quarter 2 Quarters 3 Quarters 4 Quarters More Than 4 Quarters Don't Know MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 3 EXPECTATIONS FOR ADVERTISING SPENDING AND GROWTH ■ In contrast to the past three years, when a 5% growth rate was projected for overall ad spending, respondents now expect a median decline of 5%. ■ Down even more significantly are expectations for interactive spending and growth rates for their own businesses – respondents anticipate just 5% median growth for both interactive and their own businesses, a sharp contrast to a year ago when 20% median growth rates were predicted for both. ■ Respondents are most optimistic about outlays for database/CRM and word-of-mouth marketing, with approximately one-half anticipating increased spending in 2009. ■ Respondents are most pessimistic about general advertising and media buying/planning, with approximately three- quarters or more predicting decreased spending. ■ For all other offline marketing activities, most respondents anticipate spending will be either flat or down. Growth Expectations for Advertising Spending and for Respondents’ Own Businesses Anticipated Spending in Offline Marketing Sectors in 2009 EXPECTATIONS FOR OFFLINE MARKETING SPENDING “A recession does not hurt everyone in the industry. Agencies of all sizes that focus on online will do well. Small, boutique specialty agencies will thrive – not just survive, but thrive. Only the large, traditional agencies will struggle, especially those who continue to not make online a core competency.” 2009 2008 2007 2006 Growth in overall advertising spending (5%) 5% 5% 5% Growth in interactive advertising spending 5% 20% 15% 18% Growth in their own business 5% 20% 15% 20% Up Flat Down Word-of-Mouth Marketing 52% 23% 25% Database Marketing/CRM 48% 32% 19% Direct Marketing 30% 30% 40% Marketing/Strategic Consulting 30% 27% 42% Promotional Marketing 30% 31% 39% Public Relations/Investor Relations 24% 32% 44% Experiential/Event Marketing 24% 24% 51% Market Research 16% 38% 46% Design/Branding 10% 30% 60% Media Buying/Planning 2% 26% 72% General Advertising 1% 12% 87% MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 4 EXPECTATIONS FOR ONLINE MARKETING SPENDING ■ Respondents are optimistic about 2009 spending in most online marketing business categories, particularly word-of- mouth/social media, search, mobile marketing, and behavioral/contextual marketing. ■ Respondents were most pessimistic about display advertising. One respondent wrote, “banner ads will become pure commodity.” REASONS FOR ENTERING NEW SECTORS ■ Eighty-two percent of respondents reported entering at least one new sector in the past year, versus 86% a year ago. ■ Client demand for online capabilities emerged as this year’s key driver, giving lower priority to the expanding definition of marketing services, which had been the most significant factor for the prior two years. Driving this may be the maturing of interactive marketing services and the belief that interactive is now a standard component of the marketing mix. ■ As new media services mature, margins face greater pressure, especially in the current environment. This might explain why opportunities for higher margins in new sectors have also become less important. Anticipated Spending in Online Marketing Sectors in 2009 Up Flat Down Word-of-Mouth/Social Media Marketing 77% 12% 11% Search Marketing 76% 18% 7% Mobile Marketing 75% 14% 11% Behavioral/Contextual Marketing 70% 22% 7% Lead Generation 63% 29% 9% CRM/Analytics 60% 31% 9% Video Advertising 60% 24% 16% Email Marketing 58% 31% 11% Online Gaming/In-Game Advertising 51% 30% 18% Online Media Buying/Planning 47% 40% 13% Affiliate Marketing 46% 35% 19% Web Development 39% 38% 23% Market Research 27% 50% 23% Display Advertising 26% 29% 45% What Is Driving Moves into New Sectors 2009 2008 2007 2006 Client demand for online capabilities 47% 49% 56% 47% Need for new sources of revenue 40% 40% 54% 64% Expanding definition of marketing services 38% 68% 68% 62% Client request 36% 49% 44% 33% Opportunities for higher margins in new sectors 23% 37% 29% 44% Other 7% 5% 6% 13% MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 5 EXPANSION IN OFFLINE BUSINESSES ■ Asked about expansion plans for 2009, a majority of respondents (57%) checked one or more offline marketing business areas in which they are thinking of entering or expanding. A year ago 76% of respondents had such plans. ■ In recent years marketing/strategic consulting has consistently ranked first in this respect. Possible explanations for this might be the higher margins this work can generate as well as its potential as a front-end feeder for other services. ■ Interest in the expansion of database marketing/CRM is likely prompted by marketers’ constantly increasing demand for campaigns that deliver measurable ROI. Considering Entering/Expanding Presence in Offline Businesses EXPANSION IN ONLINE BUSINESSES ■ Seventy-five percent of respondents checked one or more online marketing areas into which they may enter or expand. A year ago 80% of respondents planned to enter or expand in an online business. ■ Mobile marketing generated by far the greatest interest, much more than a year ago. This is probably due to the popularity of the iPhone and similar devices that have created a wave of new mobile applications. Considering Entering/Expanding Presence in Online Businesses 2009 2008 2007 2006 Marketing/Strategic Consulting 43% 47% 39% 57% Database Marketing/CRM 32% 29% 33% 41% Experiential/Event Marketing 30% 29% 19% n/a Design/Branding 22% 33% 18% 24% Direct Marketing 21% 18% 31% 35% Market Research 19% 26% n/a n/a Public Relations/Investor Relations 19% 28% 24% 39% Media Buying/Planning 17% 15% 14% 25% Word-of-Mouth Marketing 17% 31% 33% n/a Promotional Marketing 16% 19% n/a n/a General Advertising 6% 10% 16% 15% 2009 2008 Mobile Marketing 57% 38% Search Marketing 42% 40% Word-of-Mouth/Social Media Marketing 38% 36% CRM/Analytics 34% 40% Web Development 34% 51% Email Marketing 32% n/a Online Media Buying/Planning 31% 30% Behavioral/Contextual Targeting 30% 37% Video Advertising 26% 38% Display Advertising 26% 25% Lead Generation 21% 25% Market Research 19% 25% Online Gaming/In-Game Advertising 16% 7% Affiliate Marketing 14% 18% MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 6 M&A EXPECTATIONS ■ Despite the discouraging economic climate, 60% of respondents expect to take one or more M&A-related steps in 2009, a modest decline from last year when 67% anticipated doing so. Activities Respondents Expect to be Involved in During 2009 “This is the time for consolidation. The problem is - where is the financing?” “Consolidation – larger groups might be able to absorb smaller agencies or talent within struggling smaller agencies.” “Selective acquisitions. Looking for larger ‘game changers’ as opposed to smaller boutique shops.” 2009 2008 2007 2006 Be approached by a prospective buyer 56% 57% 51% 60% Approach a prospective acquisition 52% 55% 58% 64% Seek investment funding (i.e. not sell control) 31% 20% n/a n/a Seek an acquisition 30% 35% 38% 38% Find a merger partner 27% 20% 23% 25% Be involved in M&A transaction outside the U.S. 25% 28% 25% n/a Seek a valuation of our firm in case of sale 16% 28% 19% 28% Be acquired 13% 19% 17% 19% Make an initial public offering 1% 1% 0% 0% STRATEGIC VERSUS FINANCIAL BUYERS ■ After three years of record activity, most respondents expect advertising, marketing services and online advertising M&A to decline or, at most, remain flat in 2009. ■ One-third of respondents predict strategic buyers will still be active in the M&A area, a drop of more than 50% from last year. ■ The role to be played by financial buyers is also expected to decline. Two-thirds of respondents predict industry M&A by financial buyers to be down. “Big strategics running out of capital to fund aggressive M&A. Multiples coming down quickly. M&A will become more defensive (holding clients, industries), less offensive (new offerings).” “I think M&A activity will slow drastically as the big holding companies focus on operational issues and maximizing their cash positions. Slow, uncertain debt cycles will make operating for cash (and not stretching out with purchases requiring new debt) more important than in years past.” “I believe that agency holding companies will continue to acquire technology companies that will enable them to deliver efficiencies to their clients. They will likely be able to snap up great technologies at fire-sale prices.” Expectations for Industry M&A 2009 2008 2007 Up 31% 70% 75% Flat 27% 26% 24% Down 42% 4% 1% By Strategic Buyers 2009 2008 2007 Up 14% 41% 55% Flat 21% 32% 32% Down 65% 27% 13% By Financial Buyers MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 7 ■ The median multiple of operating profits respondents consider reasonable for valuing advertising agencies has remained steady for the fourth year in a row, while multiples for marketing services, digital marketing agencies and digital marketing technology companies have declined somewhat. Multiple of Pretax Operating Profits (EBIT) Respondents Consider Reasonable (median ranges) 2008 2007 2006 2005 Advertising Agencies 5x 5x 5x 5–6x Marketing Services (including Sales, Promo, PR, etc.) 6–6.5x 6–6.5x 6x 5–7x Digital Marketing Agencies 8x 8x 7x 5–7x Digital Marketing Technology Companies 7–8x n/a n/a n/a 2009 5x 5x 6–7x 6–7x VALUATION MULTIPLES M&A EXPECTATIONS BY REGION ■ Consistent with the past two years, respondents think North America holds the greatest potential for industry M&A activity. Region Respondents Think Holds Most Growth M&A Potential 2009 United States/Canada 45% China 29% Asia (excluding China & India) 8% Latin America 7% India 6% Europe (excluding U.K.) 4% Middle East 3% United Kingdom 0% 4.0x 4.5x 5.0x 5.5x 6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 2005 2006 2007 2008 2009 Advertising Agencies Marketing Services (including Sales, Promo, PR, etc.) Digital Marketing Agencies Digital Marketing Technology Companies MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 8 ACT NOW OR WAIT? ■ Despite the pessimism about 2009 economic conditions, a majority of respondents (64%) still advise buyers to act now. There has been a dramatic reversal, however, in advice to sellers: a year ago 60% of respondents indicated it was a good time to sell, while today 73% suggest owners should hold off. ■ Historically, advice to sellers has had greater variability than advice to buyers, with “act now” to sellers aligning with the economic cycle. Given the M&A Climate, Sellers Should: 86% 14% 20% 80% 23% 77% 34% 66% 31% 69% 50% 50% 52% 48% 60% 40% 27% 73% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 Wait Act Now Given the M&A Climate, Buyers Should: 75% 25% 79% 21% 77% 23% 80% 20% 87% 13% 84% 16% 85% 15% 68% 32% 64% 36% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 Wait Act Now MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 9 ■ The current economic turmoil presents a wide range of M&A opportunities according to many respondents. “Still there is likely to be activity with potential for strong, well-funded players to acquire additional capabilities at more reasonable valuations.” “Depressed valuations may lead to more consolidation among online specialist agencies.” “Only the best smaller companies will survive and there will be many opportunities to find good smaller companies that don’t have the business model or momentum to survive as a standalone but are great tuck-ins.” “There are a good number of agencies that are having financial difficulties, but at their core are good platforms.” “Those with strong balance sheets and/or are well capitalized can pick up companies at good values.” “Consolidation of all the little advertising tools and gadgets that will never be real standalone companies — at reasonable valuations.” M&A OPPORTUNITIES “If you are a buyer and have cash or access to cash, then try to acquire shops that meet your criteria for a successful acquisition. Sellers are on edge about their future and likely to accept a reasonable offer. In 4–5 years, buyers will be glad they stayed aggressive at this time.” “If a buyer and seller can reach an agreeable price now, why wait? If prices are depressed sellers won’t sell and buyers won’t find bargains from companies that are doing well. If money is available to do a deal now – the Newcom will be better poised when we come out of the recession.” “Unless sellers need liquidity in the next 24–36 months, they should ride out the storm, operate their businesses and wait for valuations to improve. If they are at all technology based and need capital, they might consider partial sales to fund expansion. Firms will spend on technology that enhances capabilities and creates a differentiator or cost advantage.” “For buyers, don’t wait for the market to drop more. Get the investment and integration done during the down market so you are ready to take share in the up market cycle. For sellers, don’t wait for certainty as it may not come. Sell now to the right strategics.” “Strategic buyers may have unique opportunities to grow top-of-the-line in spite of this market. Organic growth for many will be limited, but incremental revenue and profit can be exploited with these strategic acquisitions. For sellers that present one of these opportunities, especially to a technology buyer, I think the timing is good.” “Buyers ought to get some really good deals if they are willing to look at future value instead of current earnings.” ACT NOW OR WAIT? MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey | www.admediapartners.com 10 Expect to Be Buyers 39% Expect to Be Sellers 41% Expect to Be Buyers & Sellers 20% PROFILE OF RESPONDENTS ■ The survey drew responses from executives across the globe who operate in a variety of advertising, marketing services and internet marketing sectors. Nature of Respondents’ Companies Marketing Services Firm 60% Online Marketing Firm 47% Ad Agency 27% Holding Company 7% Private Equity Investors 3% Respondents’ Firms’ Annual Revenues Under $5 million 35% $6–15 million 28% $16–75 million 23% $76–150 million 6% Over $150 million 8% ■ The great majority of respondents’ organizations are private, with only 14% publicly held. If their companies are involved in transactions in 2009, 39% would expect to be buyers, 41% sellers and 20% possibly both — virtually the same position as a year ago. METHODOLOGY OF THE SURVEY ■ This report is based on a uniform, 35-item web-based survey of more than 3,700 domestic and international advertising, marketing services or Internet marketing executives and private equity investors. Responses were analyzed using a standard online survey tool. All percentages were rounded up or down to the nearest whole number. Respondents’ Anticipated Roles in Transactions [...].. .Prospects for MARKETING SERVICES AND INTERNET MARKETING FIRMS SELECT ADMEDIA MARKETING SERVICES & INTERACTIVE TRANSACTIONS 11 2009 Market Survey | www.admediapartners.com ABOUT ADMEDIA PARTNERS, INC ADMEDIA PARTNERS is an independent M&A financial advisory firm serving digital and traditional media, marketing and information businesses Founded in 1990 by former advertising, media and financial... INDUSTRIES INCLUDING: ■ Marketing Services and Communications: Advertising, Media Buying and Planning, Marketing Research, Direct Marketing, Entertainment Marketing, Public Relations, Corporate Communications, Government Affairs, Consulting and Sales Promotion ■ Interactive and New Media: Online Advertising and Measurement, Search Engine Marketing, Online Market Research, Performance Marketing and Lead Generation,... and financial executives, the firm focuses on mergers and acquisitions, divestitures, valuations and strategy consulting AdMedia has provided transactional services and strategic and financial advice to the world’s leading media and advertising companies The firm’s industry knowledge and strong transactional skills provide the best outcomes for both buyers and sellers — the strategic value that AdMedia... Omnicom ■ Barefoot, a premier creative and interactive advertising agency, in its sale to Omnicom’s BBDO Worldwide ■ Manhattan Research, a premier healthcare market research and advisory services firm, in its sale to Decision Resources, a world leader in healthcare market research publications, advisory services and consulting ■ Spunlogic, an interactive marketing and technology agency, in its sale to... leading digital healthcare marketing communications company, in its sale to Meredith Corporation, one of America’s premier media and marketing companies ■ i33 Communications, a digital design, development and marketing firm, in its sale to 360i ■ McKinney, a digital and offline communications agency, in its repurchase from Havas ■ Centro, the leading solution provider for planning and executing national... Research, Performance Marketing and Lead Generation, Affiliate and Ad Networks, Mobile Marketing, Content and Applications, Web Development, Web 2.0 and Interactive TV ■ Media: Consumer Magazines, New Media Content, User-Generated Content, Online Communities, Business-toBusiness Publishing, Directories, Newspapers, Newsletters, Information Publishing and Tradeshows NOTABLE TRANSACTIONS ADMEDIA PARTNERS CLOSED... independent interactive marketing agencies, in its sale to Rosetta, a portfolio company of Lindsay Goldberg ■ Mr Youth, a leading word-of-mouth and social interactive marketing agency, in its sale to Mustang Group LLC, a Boston-based private equity firm ■ Range Online Media, a search engine marketing agency, in its sale to iProspect, a subsidiary of Aegis Group plc ■ The Kern Organization, a leading direct marketing. .. repurchase from Havas ■ Centro, the leading solution provider for planning and executing national buys of online local media, in its acquisition of Real Cities from The McClatchy Company ■ Juli B, an online luxury and lifestyle brand that emails local content on 14 cities in the U.S and Europe to over 700,000 subscribers, in its sale to Modern Luxury Magazines, a portfolio company of Clarity Partners . results of our 2009 Merger and Acquisition Prospects for Marketing Services and Internet Marketing Firms survey. MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2009 Market Survey. survey of senior executives at leading advertising, marketing services and interactive marketing services firms on prospects for industry mergers and acquisitions in the year ahead. The survey. 2009 Advertising Agencies Marketing Services (including Sales, Promo, PR, etc.) Digital Marketing Agencies Digital Marketing Technology Companies MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects