Author: Nati Cucalon-Robles

Overview

JEGI CLARITY has been a prominent player in the Marketing, Content and Digital Services sectors for over three decades. During this time, we have witnessed significant changes in the industry, none more so than what we are experiencing in the Global Customer Experience market today.

As our report indicates there are powerful tailwinds driving structural demand in the digital services ecosystem as companies and brands redefine and enhance their online propositions. The market is now estimated to be worth over $100 billion in the US and UK alone and showing strong growth despite broader market conditions. 

As a consequence, there has been a sharpened focus from the Private Equity community over recent years attracted by the high single-digit, low double-digit money multiple returns that  their peers have achieved. As the wider M&A market starts to warm up, we anticipate several PE-backed platforms will be in play over the next 12 to 24 months driving further investment into and consolidation of a highly fragmented industry.

Larger strategic players, such as Accenture Song, Wipro, and WPP, are also actively looking to add to their capabilities by consciously building integrated offerings on a global scale.

Whether you are a corporate looking to ramp up investment or a Private Equity firm seeking to participate in this market opportunity, we would be delighted to share our comprehensive report and provide you with a more detailed account of the sector. Contact us at globaldigitalmarket@jegiclarity-emea.com.

Author: San Datta, Partner, EMEA

The last week has seen both Qualtrics and Momentive, both large and global publicly-listed CX businesses in the research, insights and analytics sector, receive buyout offers from Silver Lake and Symphony Technology Group, respectively, to go private. Following on the heels of Advent International’s acquisition of NielsenIQ in 2021 and subsequent merger with GfK in 2022, and Bain Capital’s acquisition of Kantar back in December 2019 this firmly places many of the largest players in the sector in the hands of financial sponsors.

At one level, these two latest deals look opportunistic. Headline revenue multiples of 7.5x for Qualtrics (EV of $12.5Bn) and 3x for Momentive (EV of $1.5Bn) compare very favorably with the 14x revenue which Thomas Bravo paid for Medallia in a $6.4Bn transaction announced 2 years ago in a much more favorable SaaS valuation market. And even though both were at a significant premium to their share price just before acquisition (73% for Qualtrics and 46% for Momentive), the offers are at a material discount to where both businesses were trading just twelve months ago (as well as a material discount to Zendesk’s failed $4.1Bn acquisition of Momentive a year ago) and even further from their share price peaks.

To be fair, although underlying revenue growth at both businesses remains strong at 12-15% on a three year forward basis, both businesses have not been immune to the broader woes afflicting the tech sector. Both businesses have restructured and reduced their workforces by 5-10% through Q4 2022 and Q1 2023; both are facing higher customer acquisition costs; and both are seeing a near-term slow-down in revenue growth across several customer or solution segments.

With that in mind, why is this sector potentially at the vanguard of a technology and software M&A bounce-back? 

The answer is the market opportunity. However you define the market and its sub-segments, be it customer experience, experience management, consumer insights or simply ResTech, it is a huge and growing market. Customer and experience management alone is an addressable market of over $60Bn. The broader research, insights and analytics market is estimated at over $125Bn, and some of these markets are growing annually at double-digit percentage growth rates. Why? Simply put, there is a real and growing need for corporates and brands to have a rich, comprehensive and real-time understanding of what their consumers are thinking, how they’re behaving and how best to engage with them. Whether that is to drive sales, launch new products or enhance customer loyalty which are just some of the solutions offered by players in this space.

Even more interestingly, this market is being increasingly viewed as a key “tip-of-the-spear” entry point to unlock share of wallet for the broader digital marketing and transformation sectors. Ultimately, understanding consumer behavior and needs is critical to developing best-in-class front-end digital marketing services, whether that’s designing brand strategy, creative concepts, user experience or the customer journey. This broader market is over $500Bn and as private equity owners think about the eventual exit opportunities, there is a whole world of players such as Accenture, Cognizant or IBM for whom this capability is becoming an increasingly important part of their broader service offerings.

From an investment perspective, if you’re looking for exposure to this sector, there are a number of private platforms available like Qualtrics and Momentive, the parent company of Survey Monkey, with large enterprise clients such as Uber, P&G, Coca-Cola and Pfizer. The playing field is highly fragmented with many smaller tech vendors seeking to scale at an enterprise level with strong product offerings which are ripe for consolidation. There are also many mid-tier ResTech platforms like Suzy, Quantilope, Prodege and Zappi which are backed by private equity sponsors who will ultimately sell or combine in the coming years. This provides a large and real investment opportunity across this space which can accelerate the organic growth, embed client relationships, unlock new revenue streams, open new client opportunities, and deepen their competitive moat.

Will it all be smooth sailing for these companies? Almost certainly not. Many of the larger tech vendors are well placed to build out product offerings in this sector, leveraging existing customer relationships and data capabilities. Similarly, businesses with deep tech and advanced AI/ ML capabilities may disrupt on their front-end data aggregation and analytic capability. And there’s a real possibility that clients start to demand more and more of an advisory layer on top of these solutions, which may limit their ability to scale as quickly and could eat into their higher software margins.

However, from where we sit today, with the capital that the firms like Silver Lake bring to the party, they’ve got everything to play for, and we see the market as one of real opportunity in the year ahead. 

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As The Metaverse adoption continues apace, there will be an unprecedented wall of expertise required to service demand

Author: Jonathan Davis, Partner, EMEA

For all the recent publicity, “The Metaverse” remains a relatively opaque concept. Perhaps the simplest way to think about it is as the potential cyberspace functionality provided by Web 3.0 (the name that signifies the third generation of the Internet).

Based upon principles of decentralization, open protocols, greater user interaction and enhanced levels of certified digital ownership, Web 3.0 leans heavily into technologies such as Blockchain (digitally distributed, decentralized data ledgers), smart contracts and digital financial instruments (such as crypto-currencies and NFTs).

These foundational technologies offer end-users greater rights and participation in financial transactions, more interactive retail, gaming and entertainment experiences, and social media platforms that blend virtual and physical environments in a more intuitive and seamless way. The ecosystem that is the nexus of these experiences is increasingly referred to as “The Metaverse”. 

Though still nascent, far from cohesive and with some of its impacts possibly over-stated, The Metaverse and Web 3.0 could still be a significant inflection point in internet utility, enabling disruptive new online business models.

Inflection point in internet utility or “just” a massive M&A market? 

The question of whether The Metaverse will represent an inflection point in internet utility is up for debate. Many major retailers and brands are trying to size up the opportunities Web 3.0 affords and how to respond to them strategically; creating new modes of customer engagement, partnering with gaming and entertainment companies to create offerings in potential new virtual market-places, which require new marketing and advertising tech capabilities.

Inflection point or not, the market is already material and attracting significant investment. According to a recent study by Precedence Research, the size of this market could be in the region of $1.3tn by 2030.¹

If the prospect of The Metaverse is bringing the worlds of entertainment, gaming and retail into a new paradigm, then 3D/CGI content creation will be a serious enabler. Companies whose tech platforms and pipelines incorporate these capabilities will increasingly be of interest to brands, entertainment and games companies while also rapidly becoming a significant driver of competition and differentiation amongst agencies, VFX and CGI studios.

Although the necessary standardization required to make 3D interoperable across the web isn’t available yet, providers of game engine software, real-time rendering, IT hardware and cloud computing are all vying to establish a plan for Metaverse 3D graphics ubiquity. One example of this is the Khronos Group (a consortium of leading companies in the world of 3D graphics) with members such as AMD, Epic Games, Autodesk, Meta and Microsoft among many others and who’s motto is “Render Everything Everywhere”.

Significant investment followed by a prolonged period of M&A

Assuming that Metaverse adoption continues apace, there will be an unprecedented wall of expertise required to service demand. Brands, entertainment companies as well as advertisers all need to have the ability to create and deploy content in Web 3.0.

Skills in virtual world creation will have increasing value in the supply chain, making tech-focused creative companies a prime target for acquisition and portfolio growth. To that end, services companies such as Accenture, WPP and DEPT are all placing significant bets on its success.  

Accenture has already launched Metaverse Continuum Group, an 800 person (and growing) strong division helping clients in areas such as extended reality, blockchain, digital twins and edge computing.   

WPP’s specialist creative content production company, The Metaverse Foundry, through Hogarth, develops brand experiences in The Metaverse delivered by a global team of over 700. In parallel they announced a technology partnership with Epic Games, training employees in technologies such as Unreal Engine for 3D creation and virtual production.  

Global Digital Services group DEPT, who JEGI CLARITY raised capital for from Carlyle Group in 2020, launched their 300-person Web3/DEPT offering dedicated to The Metaverse, blockchain technology and NFT services, with a stated intention to derive 20% of group revenues and growing divisional headcount to 1,200 people by 2025.  

With all this investment there is no doubt that acquisitions will follow, and we are already witnessing the start of a wave of M&A, with TechMonitor estimating well over $100bn of related M&A in the last two years alone: 

• Match Group paid $1.7bn for Hyperconnect, a South Korean social discovery and video tech company with whom it is developing “Single Town” a virtual space where singles can meet.

• Unity Technology acquired Weta Digital’s technology division (engineering division, artist pipeline and tools) for $1.6bn, to enable “a new generation of creators to build, transform, and distribute stunning RT3D content.”

• Epic Games raised $2 billion for Metaverse Endeavor from Sony Group Corporation and Kirkbi (family behind LEGO) in a deal that values the Fortnite creator at $31.5bn,to help fund the kid-focused metaverse content in partnership with LEGO.

• Tencent raised its stake in games developer Ubisoft, valuing the business at $10bn, with funds used to leverage existing IP in the metaverse; and probably the largest metaverse-related investment to date.  

• Microsoft’s government contested acquisition of Activision Blizzard for $69bn as their own “building block for The Metaverse.”
• Growth Catalyst Partners is building out a design agency focused on the Metaverse through bolt-on acquisitions for their platform Journey. In 2022, they acquired leading agencies in digital and physical experiences (Squint/Opera and ICRAVE), voice (Skilled Creative) and metaverse/gaming/Web3 (Future Intelligence Group and TheDevHouse Agency).

Ones to watch 

Conclusion  

Although no unifying definition of The Metaverse yet exists, signals clearly show that building or acquiring capabilities in this space is of increasing strategic importance as market opportunities evolve. As a result, we expect to see a material increase of investment from both industry participants e.g. marketing groups, content producers and consultancies, as well as from financial investors looking to ride positive sector tailwinds and build the next generation of Web 3.0 related products and services. 

Equally, there will be increasing demand and expectations made of the technology platforms that this content will sit on. Current early movers such as Decentraland, The Sandbox, Epic and Meta are likely to be challenged as demands for real time rendering across devices become the expected standard.  

Once again, expect more investment and M&A as the larger players try to keep up with technological advances.  

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As we look forward to 2023, we expect it to be a year of resetting and cost cutting; a time where CEOs will be asked to do more with less.  Set against these macro-conditions, however, there are reasons for optimism.  

Authors: Chris Karl, Chief Business Development Officer, North America & San Datta, Partner, EMEA

The post-pandemic period of exuberance for much of the Media, Information and Technology sectors which saw sky high valuations, record private equity investment and highly leveraged growth has definitely retreated through the second half of 2022 due to an array of factors from macro to micro.  Whether you chalk it up to supply chain disruption, political turmoil, challenging capital markets, tightening monetary policy or the war in Ukraine, the second half of 2022 saw a dramatic fall of 33% in global M&A activity compared to the first half, resulting in total 2022 M&A volumes being down 37% on 2021.

As we look forward to 2023, we expect it to be a year of resetting and cost cutting; a time where CEOs will be asked to do more with less.  Set against these macro-conditions, however, there are reasons for optimism.  

Across our sectors, we continue to see revenue growth and profitability coming from companies that integrate tech-enabled services and expand offerings to drive positive outcomes for customers.  These powerful underlying drivers, coupled with robust corporate balance sheets, will continue to drive both growth and M&A appetite from strategic acquirers through 2023 and beyond. 

From a private equity perspective, an estimated US$2Tn of dry powder in the hands of global private equity funds¹ and a rapidly evolving media and technology marketplace provides the foundation for more investor-led M&A and capital deployment in the coming year.  

While the exact timing is uncertain, we are confident that M&A in the mid-market will return to robust levels of activity as debt markets ease and the wave of digital transformation continues to roll across industries. 

So, what are some specific areas of growth and opportunity for 2023?  

 Digital Services: consolidation continues 

Digital services growth, both geographic and through the marketing stack, will continue to thrive and, with a market of over $100Bn in North America and the UK alone, the market opportunity remains huge for the winners. The increasingly long list of private equity backed digital platform plays such as Dept, Bounteous, Material+, Wpromote, Valtech and Tinuiti will continue to scale through acquisition and reach further into adjacent markets bringing the CMO closer to the CTO and CIO.    

Events: face-to-face is back… and it matters 

At the epicentre of B2B lives the Events space, a sector that saw an unprecedented post-pandemic bounce-back during 2022. With the North American market forecast back at 97% of 2019 levels in 2023, and Europe at 96%, momentum has returned, and M&A is back on the agenda.  The physical channel remains attractive to business, the interweaving of in real live (IRL) and digital to create a drop-in, drop-out hybrid world has paved the way forward for the industry, and we expect to see buyers focusing on companies which enable this proposition, for example Clarion’s acquisition of Quartz or Brunico’s acquisition of NAPTE.  

 Content Creation: a new revolution?  

Technology has transformed the nature of dissemination of content via a rapidly expanding universe of service providers that help media owners and brands capture, curate, distribute, and monetize their content assets, in turn driving a wealth of M&A and investment. Be it strategic, such as Unity’s $1.6Bn acquisition of Weta Digital’s tech division, or from private equity, such as Bridgepoint’s investment in multi-channel content platform, ITG, or PSG Equity’s investments into Backlight, we anticipate that new technologies will transform the way content is produced, automating much of what was historically done in studios, on production sets and on location. We are already beginning to see AI driven content creation technologies delivered through high-end animation and more sophisticated visual effects. 

These capabilities will bring down the cost of production which is a welcome trend in these inflationary times. 

The Metaverse: one for all or all for fun?  

Although we are not at a mass adoption point for Web 3.0 or VR/AR, demand for connected communication, gaming, eSports and content will play into the metaverse becoming more than just a concept for many.  Indeed, we anticipate more investment and M&A activity in the core technologies that drive Web 3.0, in service providers and technology tools that help B2B users and in connected consumer content.

Witness for example, Microsoft’s government contested $69Bn acquisition of games publisher Activision or, on a smaller scale, Arogo Capital’s $665Mn acquisition of EON Reality, a provider of AR/VR solutions for virtual offices. 

 CTV: a new advertising battleground

The “Future of TV” is here as the connected TV (CTV) market is the fastest growing media channel at over 23% in 2022 and forecasted growth will continue in the coming year as Netflix introduces an ad supported tier.  Advanced formats will be introduced, and M&A will follow, with deals like LionTree’s acquisition of Transmit.Live to start the year.  Demand for content will drive innovations that serve individual homes with customized streams supported by dynamically inserted relevant ads and CTV moves into “must buy” status with media buyers.  

 ROI: making it count 

Over the last couple of years, we have seen a real acceleration in ROI-driven sales and marketing solutions powered by content, data and technology which are increasingly taking budget from traditional advertising and marketing spending. The economic slowdown will only make these businesses more attractive to brands and corporates as every marketing dollar gets more scrutiny. Whether this is the “tip-of-spear” +$25Bn sales acceleration market populated by the likes of ZoomInfo and Cognism, or further up the funnel, the $10Bn content-led affiliate marketing world, expect to see large scale integrators looking to acquire ROI-focused capabilities.

Other catch phrases and technology we predict you’ll hear a lot more about in the coming months include Chat GTP, Applied AI, ESG, Sustainability, Staff Augmentation and Cloud Migration. 

You will also want to pay attention to Google and Facebook’s waning hold on advertising budgets, TikTok’s issues with their ownership structure in China, and Musk’s progress with remaking Twitter.  As these leading digital platforms face headwinds there is potential for upstarts, challengers, and the “others” to grow revenue even in a down year.  That’s good news for many companies.        

In Conclusion  

Contemplating what to watch out for in 2023, we are reminded that even in the face of macro headwinds, the digital and technology revolution charges on.   

Entrepreneurs and founders always find a way and often it’s on the back of technology that makes it all possible.  2023 will be a year where resilience breeds a new collection of winners, solidifies new and efficient use cases for hyped technologies, and the beginning of a new economic cycle of prosperity begins.     

 ¹ S&P Global Market Intelligence

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Rising demand from streamers and studios for high-quality animation content outpacing supply of quality capacity on a global scale

Author: Jonathan Davis, Partner at JEGI CLARITY

Contact us or email us at contact@jegiclarity-emea.com if you wish to learn more.

Background

With high interest rates, inflationary pressure and a looming recession, it’s not a surprise that streaming companies and studios are altering course and implementing revised content strategies. The heightened necessity to demonstrate shareholder returns, or at least a path to profit, means studios are looking carefully at their production slate to work out what to cut and what to keep.

While there is an argument to say that theatrical releases might be impacted by a downturn, studios, and particularly the streamers will continue to invest in content that attracts and retains subscribers. Naturally, genres such as “high-end” Episodic Drama as well as Feature Animation, could therefore take centre stage.

With several streaming portfolios underweight in Animation, the continued thirst for high-quality output is outpacing the industry’s ability to service that demand due to a shortage of quality capacity on a global scale. According to FTI Consulting analysis, CG Animation Services grew significantly in 2021 to $2.3bn and forecast to reach $2.9bn by 2025 driven by a material increase in Digital Episodic and Feature content.

A buoyant M&A market

This shortage of capacity has led to a series of M&A transactions over the last 24 months, with major platforms, such as Netflix, taking matters into their own hands by securing VFX and Animation capacity through a series of acquisitions including Scanline VFX and animation studio Animal Logic as well as independents such as Framestore who opportunistically acquired Company 3 and Method, and Cinesite who have made three animation acquisitions, looking to capture greater market share.

Seeking to capitalize on positive sector tailwinds, Private Equity have also been heavily involved in different transactions, including EagleTree investing in FuseFX, Aleph investing in Framestore or Key Capital Partners investing in Jellyfish Pictures, all transactions that saw JEGI CLARITY involvement.

Other key trends (for another blog) are leading to yet more activity, from evolving technologies such as Virtual Production driving Sony’s recent acquisition of Pixomondo, to the advent of Web 3.0 environments encouraging games engine pioneer Unity to acquire Peter Jackson’s iconic studio, Weta‘s tech and tools, in a sector defining transaction.

Conclusion

While the market is (perhaps) pausing to take stock of the wider economic environment, we continue to believe in the long-term health of the sector, with film, TV, advertising, gaming, theme parks and various incarnations of the “metaverse” all needing an increasing volume of VFX and Animation studio services.

With that in mind, we expect to see further M&A activity in the coming months as investors seek to cash in chips from the current incarnation of the “golden age of content” and VFX houses and Animation studios attract capital to invest in tech, build capacity and broaden capabilities. Following recent difficulties announced by Technicolor, perhaps one of the next defining transactions is just around the corner … an interesting time so watch this space!