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Buy, sell, hold: how M&A activity in marketing industry is shaping up in 2020

The Drum 05 May 2020 12:00
How is M&A activity shaping up in 2020?

Covid-19’s impact on merger and acquisition (M&A) activity in the first quarter will be minor compared to what’s to come in the next few months. But, with economic upheaval will come opportunity for buyers and sellers alike as the year progresses.

Entering 2020, the M&A market was already facing a slowdown. After years of a “bull market”, where acquisition targets had been fiercely contended and prices consequently pushed, there was a “subtle softening” of global activity at the end of Q4 2019 according to Jonathan Davis, a partner at Clarity Capital – the M&A advisory that in last year alone managed transactions including digital agency Dept’s sale to The Carlyle Group, Livingbridge’s equity injection to Brainlabs and Accenture’s purchase of Hjaltelin Stahl.

“There was a concern among some investors, more than strategic buyers, that we were coming to the end of a bull market and entering a recession. We did see a subtle softening of what the banks were prepared to lend and what investors were willing to invest," says Davis. "The businesses we were representing that are exposed to advertising cycles had concerns over how resilient they would be. But no one anticipated the end of that bull run being triggered by this.”

“There was a huge upswing in activity in January and February,” says the group’s European partner Tristan Rice. “We were expecting 2020 to be a bumpy year but it was all looking positive and then things dropped off a cliff from middle of March.”

Greg Paull, principal at consultancy R3, said his firm brokered 102 acquisitions through the first quarter in 2019 and has seen less than 30 in 2020. Clarity’s Davis estimates that as many as 80% of the transactions it was overseeing have been paused or cancelled altogether since March. Rice said of the 10 deals it was managing in March, four have been put on hold as sellers opted to focus on getting through the current situation rather than an acquisition strategy.

But it seems the worst is yet to come and all M&A experts The Drum spoke to admitted that while Q1 has been affected, they are braced for a tougher Q2.

On the sell-side, shareholders looking to raise capital or sell have been questioning if it’s the right time to go to market and explore a sale option when the numbers will be unstable in 2020. Conversely, on the demand-side, buyers have found themselves with less access to finance as banks lockdown on any major lending, which has had a sudden impact on pricing and the ability for certain acquirers to be in the market.

Despite the dismal assessment of the first quarter of the year, there have been small pockets of activity that are beginning to swell in regions that haven’t been as hard hit by the virus. Julie Langley, partner at Results International, says her firm has seen deal volume slow compared to last year, but that it hasn’t come to a standstill. Indeed, Huntsworth announced last week that it had completed a $524m deal to be taken private by a US private equity firm, while Accenture announced in early April that it would buy a 400-person agency called Yesler.

In Asia, which is beginning to emerge from the coronavirus chaos, Rice reveals SI Partners is seeing much less of an impact. “There were a couple of deals that got paused by four to six weeks, but actually we barely have seen a dent in business out there – across Greater China, South East Asia and Australia, all mandates have continued, albeit slower than before if they were involved with Europe or US buyers. We expect them to come out the other side much faster.”

Overall, Davis says he anticipates volumes for the year will be down 50% across the board in this sector. “Maybe even more,” he laments. “Q4 will be when deal flow comes back in a meaningful way, but I don’t expect it to return to pre-Covid levels until mid-way through 2021 when businesses can prove that Covid-19 is behind them and a stronger year is in front of them. That’s when good businesses and shareholders will start to take a look at going out to market.”

The buyers and sellers likely to emerge

Even the consultancies with deep pockets and less exposure to a downturn in client ad spend – like Accenture – will likely focus on the integration of what they’ve bought in lieu of bringing any new agencies into the mix.

“Those are the buyers that we will see leading the deal activity in the second half as private equity has a lot of capital to deploy – they are sitting on ’dry powder’ as they call it. I would expect they would be looking to bolster those businesses.”

S4 Capital founder Sir Martin Sorrell told The Drum in an interview last week that he is already eyeballing smaller acquisitions of firms with data and analytics capabilities in what he expects will be a “bloodbath” market.

“We’ll see price pressure from strategic and private equity looking for better deals and testing whether entrepreneurs’ expectations shift by what has happened. We will see a rationalisation.”

Agencies and platforms specialising in digital transformation and consumer experience will be the first to benefit over the mid and long-term. “We’ve seen a huge amount of interest in that space [from buyers],” says Davis.

Langldy sums up the most appealing marcomms prospects as those that “help the CMO do more with less“.

To help shape our coverage, The Drum would like to hear from you if you are exploring acquisition or sale opportunities or are simply interested in learning more about M&A. Please email The Drum co-founder Diane Young for more details.

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