Author: Nati Cucalon-Robles

M&A activity in digital marketing services is accelerating, as we anticipated in July, read full article here. Over the past two quarters, deal volume exceeded the quarterly average of 300 transactions over the last 7 years.

Notable deals, such as ECI’s acquisition of Croud, advised by JEGI CLARITY, highlight this trend. Looking ahead, we expect 2024 M&A levels to align with 2023, following the record-breaking momentum of 2021 and 2022.

M&A Activity in Digital Marketing Services since 2010:

*Source: Pitchbook Financial Database

While global M&A saw a decline in 2023-2024, valuations for high-quality digital assets remained resilient. The median EBITDA multiple since 2023 has remained around 13x, aligning with the long-term median of 13.4x, reflecting strong investor confidence in well-positioned, scaled assets.

EV/LTM EBITDA for Select Transactions since 2010:

PRIVATE EQUITY (PE) HAS AN ACTIVE ROLE IN DRIVING SECTOR CONSOLIDATION

PE represented 32% of YTD M&A activity in digital marketing services, with notable transactions like ECI’s investment in Croud, as mentioned earlier, Bridgepoint’s investment in SAMY and Alaris Equity Partners’ investment in Shipyard – all advised by JEGI CLARITY, demonstrating PE’s active role in driving consolidation. Key attractions for investors include the market’s impressive growth prospects – with the market projected to increase from £4.3bn in 2023 to £14bn by 2032 (CAGR of 14%), and the buy-and-build opportunity presented by the fragmented landscape.

DIGITAL MARKETING GROWTH FUELED BY NEW CHANNELS AND INCREASING DATA COMPLEXITY

The growth expected for digital marketing services will be driven by CMOs’ increasing emphasis on data-driven strategies and the shift toward digital engagement across a rapidly evolving landscape. Emerging channels such as CTV, Retail Media, and Social Commerce introduce added complexity, making agency expertise invaluable as brands navigate targeting and personalization. Privacy regulations are further constraining data visibility, increasing brands’ dependence on agencies to leverage advanced targeting solutions effectively. Growth in paid media and programmatic is expected to remain strong, with hyper-growth expected in these new channels.

INVESTORS ARE GROWING COMFORTABLE WITH GENERATIVE AI (GenAI)

Investors are increasingly comfortable with GenAI’s impact on the agency model, seeing parallels with the evolution of digital and programmatic advertising, which added complexity to media buying and increased reliance on agency expertise. As with the rise of programmatic, AI enhances agencies’ roles in defining data-driven audience groups and personalizing campaigns. By leveraging AI to optimize media spend across channels, agencies are positioned as crucial partners in navigating a more intricate advertising landscape, using advanced tools to deliver highly tailored, effective omnichannel strategies.

SCALE AND EXPOSURE TO TIER 1 MARKETS ARE KEY VALUE DRIVERS IN DIGITAL MARKETING SERVICES M&A

Valuations in digital marketing services are influenced by several key factors:

• Differentiated Proposition: Agencies with scalable, Tech and AI-driven, or specialized services command higher valuations.
• Scale: Our data suggests that size matters when it comes to valuation, with larger assets, EBITDA over £12.5m, trading at a median multiple of 16.5x, while smaller assets, EBITDA between £4m and £7.5m, trade at a median of 10.8x.
• U.S. Revenue Exposure: Higher U.S. revenue draws N. American PE interest (directionally >25% of revenues), creating competitive tension, in turn driving valuations.
• Strong Financial KPIs: attractive revenue growth, healthy margins, and strong client retention are critical for driving valuation multiples.
• Evidence of integration in Buy-and-Build: For companies following a buy-and-build strategy, effective and successful integration of acquisitions is a key value driver.

EBITDA range vs EBITDA multiple for Select Transactions:

CONCLUSION

M&A GROWTH EXPECTED TO BE DRIVEN BY ECONOMIC RECOVERY, PE EXIT AND DEMAND FOR SPECIALIST SKILLS

Looking ahead, we expect M&A activity in digital marketing to increase as economic conditions improve. Private Equity funds will likely continue deploying capital and exits will accelerate considering current hold periods. On the trade side, large agencies, driven by client demand, are likely to continue acquiring digital capabilities that are difficult to build internally.

Over the next 18 months, several PE-backed digital marketing groups across Europe and the US, held for over four years, are likely to come to market, including the likes of Labelium, Jakala, IDHL, Adswerve, Plus Company, and Tinuiti. Additionally, we foresee some consolidation among large PE-backed platforms across Europe, as agencies look to broaden geographic reach and potentially achieve the scale required for public listings.

We are anticipating a significant rebound in M&A activity for the Marketing Services sector as we enter the back half of 2024. Supported by our recent Digital Services market studies in Europe and North America, where we interviewed executive leaders at global independent digital services companies, as well as recent signs of broad recovery in global M&A activity.

Transaction activity in Q2 2024 shows an 11% increase from Q1. In Q2 2024, 424 transactions were completed globally, up from 383 in Q1 2024. This rise is particularly significant as Q1 marked the eighth consecutive quarter of decline from a peak of 617 transactions in Q1 2022.

*Source: Pitchbook Financial Database

Within the Marketing Services sector specifically, our recent engagements and pitches indicate robust activity for Q4 2024, with the potential to return to recent peak volumes in the first half of 2025. This optimism is shared by many in the industry, reflecting a broader sentiment of recovery.

Factors driving this positive trend include the following:

• Decline in inflation and interest rates: Declining inflation and the anticipation of interest rate reductions are primary influences, which in turn are easing debt markets and facilitating transaction activity.
• Recovery of marketing budgets: Marketing budgets are bouncing back faster and being deployed more rapidly, improving visibility, and leading to the majority of agency CEOs interviewed anticipating stronger performance in the second half of 2024.
• Backlog of companies seeking an exit: Several Private Equity-backed Digital Services platforms are eyeing an exit after delays of up to 24 months, with many waiting for three to four quarters of robust growth as a trigger to launch a process.
• Olympics and U.S. Presidential Election:  Notable spending attached to the Summer Olympics and anticipated windfall of political budgets will create additional momentum.
• Operational efficiencies beginning to be felt with AI:  The adaptation of AI as an efficiency tool across disparate operational functions from Enterprise to SMB businesses are beginning to be realized.

As we navigate this dynamic landscape, the groundwork is being laid for sustained recovery in Global Marketing Services M&A activity, reflecting renewed business confidence and economic stability.  

If you would like to speak to us about this topic or the broader market, please contact us.

 

Director, Patricia Vicente, recently attended the Mergermarket Private Equity and M&A Forum in Madrid, Spain. An annual event that gathers stakeholders across the Iberian M&A and Private Equity market to hear industry leaders participate in interactive panel discussions, and network with others in the dealmaking community. Here are her key reflections from the event:

General Market Conditions

Although 2023 was a challenging year, the Spanish economy has shown some resilience, attracting substantial international interest including in the Tech space.  However, many transactions took longer to close and were harder to execute, due to increased due diligence requirements and the introduction of more complex earnouts to bridge valuation gaps.

Private equity activity was impacted by general market conditions.  Yet, there were some significant transactions that took place including JEGI CLARITY advising on the Bridgepoint investment in Samy Alliance, that accelerated the company’s growth as a social-first integrated digital marketing company.

As those at the event concluded, there has been a positive shift in sentiment recently, with the Technology, Media and Telecommunications (TMT) market buoyant in the first half of the year. Internet, Software and IT services ranked as the second most active sector based on the number of transactions in the first month of this year. 

There is optimism after the European Central Bank (ECB) reduced interest rates, from 4% to 3.75%, fostering a positive market outlook.  Combined with transactions such as Cinven’s sale of agritech company Planasa to Germany’s EW Group, with a reported valuation of around EUR 900m, there are clear signals of market momentum.

Source: Mergermarket

Healthy Pipelines

Key plenaries and stakeholders agreed that transaction pipelines appear robust, with the expectations that the valuation gap will narrow. Despite last year’s challenges, high quality assets that traded last year held their value well.

Future activity will require innovation

Attendees acknowledged that future activity would require innovation and flexibility from buyers, with bidders utilizing alternative finance tools and seeking ways to cover liability where the seller is not willing to assume it. Debt is also making a comeback, including more diverse funding sources and creative solutions. There was also optimism about a resurgence in initial public offering (IPOs).

If you would like to speak to us about the Iberian or EMEA markets, please contact Patricia Vicente directly.

 

While the digital services industry faced challenges in 2023, there are signs for recovery and growth in 2024, with a focus on building integrated capabilities, leveraging AI, and driving scale via M&A.

JEGI CLARITY and CIL have conducted a comprehensive survey of leading independent businesses in the European digital services market to understand their outlook for 2024 and what opportunities they see for the year ahead.

The survey focused on three areas:

• Market conditions: how demand for services has changed in 2023 and likely areas for growth in 2024.
• Industry trends: how margin dynamics have impacted group structures and which trends are having the greatest impact.
• M&A outlook: which areas are going to be the focus for investment and what
  is the outlook for M&A.

If you would like an in depth discussion on this topic please contact us. 

Recent breakthroughs, such as the advent of Generative AI tools herald a new era set to rival the impact that personal computers, the internet, and smartphones had on our lives.

This wave of innovation has the potential to propel industries forward at a pace, promising to revolutionize the way businesses operate. Tasks, once mundane, are being automated, insights are generated with greater precision, and decision-making is reaching new heights of sophistication. At the same time, AI is opening up fresh avenues of growth, sparking product and service innovations, redefining value propositions and driving operational efficiencies.

One fundamental theme, something that has been consistent across all of our research, remains the importance of the human touch. As the story unfolds, AI’s true power lies in its ability to complement and enhance human capabilities, accelerating progress and efficiency, and delivering higher quality end products and experiences. Firms are actively harnessing AI and related capabilities fueling a surge in M&A activity, as they strive to gain an edge in an increasingly digital economy.

Our report is designed to identify key themes arising from AI developments and their subsequent impact on businesses and M&A
across the following sectors:

We look forward to continuing the conversation as the story unfolds. In the meantime, if you have any queries or would like to have an in depth discussion on this topic or the broader market contact us.