With venture capital money for ad tech and marketing technology businesses scarce and strategic buyers also hard to find, marketers are emerging as potential acquirers.
The slump in optimism around ad tech and martech businesses hasn’t been enough to deter a growing number of advertisers. So far this year, several high-profile advertisers have swooped for companies that sat on the periphery of the ad tech and mar tech sectors. McDonald’s bought personalization platform in March, Walmart snapped up ad tech startup Polymorph Labs to deliver more relevant ads to online shoppers in April, Nike bet on predictive analytics company Celect in August; travel startup OYO Hotels and Homes-bought Danamica, a Copenhagen-based startup that specializes in dynamic pricing through machine learning in September; and the same month MasterCard cut a deal for customer data platform SessionM.
As different as the acquired businesses are to one another, none of them can be described as a core part of an ad tech or martech stack — i.e., a demand-side platform, an ad server, a content marketing platform or search engine optimization tools. None of those types of businesses are easy to manage. Agencies and publishers have tried to make those deals work in the past and struggled to varying degrees. When mobile phone operator Three kicked off a search to acquire a DSP in the first quarter of the year, for example, the procurement process quickly ground to a halt, said one consultant with knowledge of the plan on condition of anonymity. With the latest wave of acquisitions, however, advertisers aren’t trying to shoehorn sprawling ad businesses that weren’t developed with them in mind. Instead, they’re eyeing smaller but arguably more strategic vendors that can turbocharge specific objectives.
“We’re not talking about premium ad tech and martech businesses that are attracting the interest from advertisers,” said Tristan Rice, partner at M&A advisory SI Partners.
The motivations for these deals aren’t too dissimilar to why advertisers have bought agencies, built their own technology and hired internal specialists over the years. Data-driven personalization is a common thread that draws together many of the deals that have been completed by brands. Owning those types of companies directly could save time and money while also provide greater control over results.
Take Walmart’s acquisition of Polymorph Labs and McDonald’s deal for Dynamic Yield, for example. Walmart is able to serve highly targeted ads, and McDonald’s can offer diners individually tailored menus. The idea of using data and technology to enable a better customer experience and ultimately drive higher conversion rates is a key factor in many of these deals.
Growing interest in ad tech and martech from advertisers is viewed as something of a lifeboat for entrepreneurs worried they weren’t going to see a payday for their businesses, which provide solutions to specific problems rather than the full-scale propositions of larger players in the ad tech and martech space. For a start, the companies that have caught the eye of advertisers are valued on the tech solutions needed rather than the strength of their financial models. The likes of Dynamic Yield are smaller vendors that haven’t been able to grow at the same rate as larger, more traditional ad tech and martech players have. The valuations between the two types of ad tech and martech businesses are worlds apart. McDonald’s bought Dynamic Yield for $300 million (£234 million), whereas AT&T acquired ad tech vendor AppNexus for $1.6 billion (£1.3 billion, for example).
“Brands and retailers at risk of being disintermediated by Google, Amazon, Facebook and Apple are actively fighting back,” said Julie Langley, partner at M&A advisory firm Results International. “We will undoubtedly see a lot of interest in tech businesses that can help physical retailers bridge the gap, and turn physical stores into a positive as part of their broader digital transformation.”
Like the McDonald’s deal, Mastercard’s move for SessionM earlier this month was motivated by how much data, targeting expertise and measurement sophistication it could bring to the financial firm, specifically its branded credit card loyalty programs. In the case of Nike, it doesn’t take that much of a leap to expect further acquisitions in both ad tech and martech when former eBay CEO John Donahoe, who is also the CEO of cloud computing company ServiceNow, takes over the reins in January 2020.
“Large brands, in particular, want to own elements of their tech stack,” said Nick King, founder of consultancy Canton Marketing Solutions. “However, they are wisely not trying to buy or build what I call the foundation stones of ad tech, as off-the-shelf solutions are programmable to a high enough level. “The opportunity sits within data and personalization tech as the needs are often so unique. Given the time of building from the ground up, acquisitions are a very quick way to get ahead of the completion.”
While these sorts of advertiser-led acquisitions initially caught some observers in advertising by surprise, they’re starting to make a lot more sense.
“In an era where tech-enabled marketing is rapidly allowing marketing functions to move back in-house, it’s not surprising to see some of the world’s most powerful brands with massive proprietary first-person data assets, seeking to build the value of that data and drive greater engagement and utility from it,” said Jim Houghton, partner at M&A advisers Waypoint Partners.
The observation runs counter to the narrative behind M&A activity in ad tech and martech over the last two years. It was more about the numbers. But none of the advertiser-led acquisitions have been driven by the size of their EBITDA or the liquidity of its cash flow in the way they were for venture capital investors. The shift from venture capital to advertiser-led deals means both the size of the fees and how they’re structured are unlikely to be anything like what ad tech vendors and martech entrepreneurs have been exposed to in the past.
Still, the flurry of activity makes up a small proportion of the number of M&A deals emerging in the ad tech and martech sectors now. Private equity investors are still the most active investors. But advertiser-led acquisitions will accelerate over the coming months, said Houghton as vendors focused on data-driven targeting and customer experience continue to be key targets for advertisers.