Marketing Services M&A Update – August 2023

Digital Marketing’s Ubiquity Drives Sector M&A Activity

The Marketing Services sector has been thrust into a period of substantial innovation and efficiency as a result of COVID-19 and the succeeding economic downturn, leading to the omnipresence of digital marketing. Driven by heightened usage of online channels, digital marketing solutions have continued to permeate the space, with many participants differentiating offerings by specializing in a specific end market and technology stack. Due to the influx of Digital Marketing entrants, this specialization has become essential in attracting new clients and merger and acquisition (M&A) interest. As a result, sector revenue and M&A opportunities have largely been unabated by current economic volatility, especially for providers that can directly contribute to clients’ lead generation efforts.

Organizations Bolster Lead Generation Through Performance Marketing

Many organizations have opted to bolster lead generation efforts amid the economic slowdown to maintain and enhance revenue opportunities, a strategy that has supported businesses in the Performance Marketing sub-segment. Performance marketing companies are paid based on results, which has been an increasingly attractive value proposition for organizations looking to enhance their return on investment (ROI) and justify marketing expenditures. In this sub-segment, search engine optimization (SEO) has been one of the most profitable marketing channels, yielding an average of $22.24 in sales for every $1.00 spent, according to Forbes.¹

In addition, pay-per-click solutions have been heavily leveraged to provide greater ROI visibility, budget control, and campaign effectiveness. Capstone expects participants in the Performance Marketing sub-segment to experience heightened investor and acquirer appetite throughout 2023 and beyond.

We have witnessed intense acquirer interest in the Digital Marketing space. With the advent of new measurement methodologies and technology-fueled targeting techniques, marketing has become more effective, and its ROI is more easily tracked than ever before.

Bob BalabanHead of Business Services Investment Banking, Capstone Partners

Marketing Services M&A Remains Strong, Buyers Focus on Profitability

Marketing Services M&A activity has remained strong, with 176 transactions announced or completed to-date, slightly outpacing year-to-date (YTD) levels in 2022 and 2021. Deal flow has largely been supported by private strategics (52.8% of YTD transactions) rolling up competitors to gain market share, expand digital capabilities, and bolster client bases. Public strategics have been less acquisitive in YTD 2023, likely driven by volatile public equity markets hindering available acquisition capital. Private equity firms have maintained their presence in the space namely through add-on deals, which accounted for 28.7% of transactions to-date. The elevated cost of debt capital has forced many private equity firms to rely on equity-heavy transaction structures, encouraging sponsors to focus on expanding portfolio businesses rather than chasing large platform acquisitions. As buyers, particularly sponsors, have placed greater scrutiny on targets’ financials, profitability has continued to be a key investment criteria in the space. “Most of the good marketing companies are very profitable. That profitability has allowed them to weather some of the recent backlash and change in investment philosophy that some private equity firms have had,” said Stephen Master, Principal at private equity firm GTCR, in a March Wall Street Journal article.²

Marketing Services M&A valuations have remained robust, with the average purchase multiple amounting to 12.8x EV/EBITDA from 2021 through YTD 2023, outpacing the Business Services industry average of 8.4x EV/EBITDA during the same period. Limited customer concentration, margin strength, and subject matter expertise have continued to drive M&A purchase multiples in the space. Buyers’ heightened selectivity has also contributed to elevated M&A pricing in the sector, a trend seen across the broader M&A market.

Digital Marketing Garners Elevated Revenue and M&A Interest Compared to Traditional Marketing

Revenue growth for Digital Marketing segment participants has significantly outpaced traditional marketing providers, contributing to heightened buyer appetite, particularly compared to the Direct Marketing segment. Of note, total revenue in the U.S. Digital Marketing segment is forecasted to reach $60 billion by 2028 through a compound annual growth rate (CAGR) of 10.5% from 2023 to 2028, according to IBISWorld.³ In contrast, total revenue in the U.S. Direct Marketing segment is projected to decline to $10.1 billion by 2028, falling at an annualized rate of -4.0% during the same period, according to IBISWorld.⁴ Strong demand for end market-specific performance marketing services has uplifted Digital Marketing sales, with 42.8% of total 2023 U.S. Digital Marketing revenue derived from SEO services. The rapid growth in this segment has encouraged a flurry of new entrants, creating a heavily fragmented market ripe for consolidation.

In the Marketing Services M&A market, digital marketing providers have continued to experience robust buyer appetite from strategic and private equity acquirers. In YTD 2023, Digital Marketing segment participants accounted for the majority (57.4%) of total M&A targets, mirroring full-year 2022. As organizations have increasingly demanded ROI visibility from digital marketing partners, segment participants with performance marketing models have piqued acquirer interest. Notably, PopReach (TSXV:POPR) acquired OpenMoves in April 2023 for an enterprise value of $7.5 million, equivalent to 1.3x EV/Revenue and 5.6x EV/EBITDA. OpenMoves operates as a digital marketing agency, offering paid media, SEO, and social media services. The company specializes in pay-per-click media services across social channels. “OpenMoves has built a great business around key core categories of performance marketing that are highly complementary to our other businesses. This is an important segment that I expect to be more resilient in a challenging economy as brands and advertisers look for a more direct link to ROI on their marketing spend. The opportunity to add a growing, founder-led organization in this area and to help them scale their business is a win-win for both our organizations,” said Jon Walsh, CEO of PopReach, in a press release.⁵

Acquirers Prioritize Digital Marketing Targets with Technology and End Market Expertise

Strategic and financial buyers in the Digital Marketing segment have increasingly prioritized M&A targets with demonstrated expertise in specific technology stacks and end markets. Due to the breadth of digital marketing, specialized service providers have garnered premium valuations compared to their generic counterparts. This trend has largely materialized in the middle market (less than $500 million in enterprise value), particularly with target companies serving the Entertainment, Healthcare, and Retail verticals. Several notable transactions in the space are outlined below.

• Bright Mountain Media Acquires Big Village’s Insights and Agency Divisions (April 2023, $20 Million) – In April 2023, Bright Mountain Media (OTCPK:BMTM) acquired Big Village’s Insights and Agency divisions for an enterprise value of $20 million. Big Village’s Agency division specializes in developing and managing digital marketing campaigns for retail brands including Jägermeister. The acquisition supports Bright Mountain Media’s initiative to bolster its programmatic marketing technology stack, optimizing digital marketing methodologies, consumer insights data, and media investments. In addition, the transaction is expected to add ~$50 million of annualized revenue to Bright Mountain Media’s balance sheet and maximize value to shareholders, according to a press release.⁶
• Trinity Hunt Partners Acquires Supreme Optimization (March 2023, Undisclosed) – Trinity Hunt Partners, a middle market-focused private equity firm, acquired Supreme Optimization in March 2023. Terms of the transaction were not disclosed. Founded in 2015, Supreme Optimization operates as a digital marketing agency serving the Healthcare vertical, with clients in the Pharmaceuticals, Diagnostics, Laboratory Equipment, and Biotechnology areas. Supreme Optimization provides specialty services including WordPress development and Google SEO research. “We are excited to partner with Sheldon and the rest of the Supreme team to launch Trinity Hunt’s life sciences marketing platform. Our team is impressed with Supreme’s unique culture and ability to achieve outsized growth outcomes for its clients. We look forward to building on Supreme’s strong foundation as we scale the business both organically and through M&A,” said Mike Steindorf, Partner at Trinity Hunt, in a press release.⁷The transaction demonstrates private equity’s interest in verticalizing portfolios in the Marketing Services sector.
• Keywords Studios Acquires Digital Media Management (March 2023, $100 Million) – In March 2023, Keywords Studios (AIM:KWS) acquired Digital Media Management for an enterprise value of $100 million, equivalent to 2.9x EV/Revenue and 11.8x EV/EBITDA. Based in Los Angeles, California, Digital Media Management provides integrated social media strategy services, digital campaign management, and creative and influencer solutions to the Entertainment and Video Game verticals. Keywords Studios provides creative, technical, and marketing services to the Video Game vertical. Digital Media Management’s client base, comprised of film studios, streaming platforms, video game publishers, and entertainment brands, expands Keywords Studios’ reach in the Entertainment space. In addition, Digital Media Management’s social media and short-form video expertise complements Keywords Studio’s YouTube management services. The transaction is expected to add ~$34 million of annualized revenue and ~$8.5 million of annualized EBITDA to Keywords Studios’ balance sheet, according to a press release.⁸
• Swoop.com Acquires TI Health (March 2023, Undisclosed) – Swoop.com, a subsidiary of New Mountain Capital-backed Real Chemistry, acquired TI Health in March 2023 for an undisclosed sum. TI Health offers data-driven marketing and predictive analytics solutions to healthcare providers. Through the acquisition, Swoop.com, a leading provider of exclusive privacy-safe patient audiences, delivers a fully unified system of engagement for healthcare providers and marketers. “By combining TI Health’s best-in-class HCP [healthcare provider] targeting and activation with Swoop’s highly precise patient audiences, brands are now able to coordinate engagement with their ideal patient and HCP audiences, driving greater Rx [prescription] lift and delivering sustained benefits to patients,” said Scott Rines, President at Swoop.com, in a press release.⁹As part of the post-acquisition integration, Swoop.com has launched four new digital marketing offerings, leveraging its proprietary database of 1.6 million healthcare providers, according to the press release.

To discuss the widespread impacts of digital marketing, provide an update on your business, or learn about Capstone's wide range of advisory services and Marketing Services M&A knowledge, please contact us.

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Max Morrissey, Manager, was the lead Market Intelligence contributor to this article.

Endnotes

1. Forbes, “Why Businesses Should Continue Marketing During a Recession,” https://www.forbes.com/sites/forbesagencycouncil/2022/08/16/why-businesses-should-continue-marketing-during-a-recession/?sh=6e4dff586850, accessed June 5, 2023.

2. The Wall Street Journal, “Marketing Industry Mergers and Acquisitions Continue Record Growth Despite Economic Headwinds,” https://www.wsj.com/articles/marketing-industry-mergers-and-acquisitions-continue-record-growth-despite-economic-headwinds-11658347977, accessed June 5, 2023.

3. IBISWorld, “Digital Advertising Agencies in the U.S.,” https://services.ibisworld.com/identity/login?signin=87baea7b204ed3a00e3bd61b9a1e4018, accessed June 5, 2023.

4. IBISWorld, “Direct Mail Advertising in the U.S.,” https://services.ibisworld.com/identity/login?signin=93eea34375ded7a516f951512b59b459, accessed June 5, 2023.

5. CISION, “PopReach Acquires OpenMoves,” https://www.newswire.ca/news-releases/popreach-acquires-openmoves-876714764.html, accessed June 6, 2023.

6. GlobeNewswire, “Bright Mountain Media Announces First Quarter 2023 Financial Results,” https://www.globenewswire.com/news-release/2023/05/11/2667477/0/en/Bright-Mountain-Media-Inc-Announces-First-Quarter-2023-Financial-Results.html, accessed June 6, 2023.

7. BusinessWire, “Trinity Hunt Partners Announces Strategic Investment in Supreme Optimization,” https://www.businesswire.com/news/home/20230314005128/en/Trinity-Hunt-Partners-Announces-Strategic-Investment-in-Supreme-Optimization, accessed June 6, 2023.

8. NewsnReleases, “Keywords Studios Acquires Digital Media Management,” https://newsnreleases.com/2023/03/30/keywords-studios-acquires-digital-media-management-inc-for-upto-100-million/, accessed June 6, 2023.

9. Swoop.com, “TI Health is Now Part of Swoop,” https://www.swoop.com/blog/ti-health-is-swoop-unify-hcp-and-dtc-marketing, accessed June 6, 2023.