PRINT THIS PAGE Marketing services and technology: 2005 annual review
19/07/2006. Source:Petsky Prunier LLC.
Direct marketing industry M&A activity reached a new plateau in 2005, says Petsky Prunier. The industry recorded 469 announced transactions, which generated an estimated $46.3bn in deal value – up 65 per cent from $28.0bn in 2004. Petsky Prunier LLC defines the industry to be inclusive of three broad sectors: marketing services, marketing technology and multichannel marketing.
Marketing Services — This sector generated the most deals — 233, reflecting a multi-year trend of robust M&A activity within this highly fragmented sector. Numerous marketing service segments are rapidly expanding: Internet-driven marketing service segments accounted for nearly half of the deals. Significant Internet marketing service deals for 2006 included Hellman & Friedman’s buyout of DoubleClick for $1.1 billion; E.W. Scripp’s acquisition of Shopzilla for $560 million; News Corporation’s $501 million acquisition of Intermix Media and Epsilon’s $120 million acquisition of Bigfoot Interactive.
Marketing Technology — M&A activity in this sector is characterized by a proportionately higher percentage of early and growth-stage investments from venture capitalists; hence, the median transaction size among marketing technology companies is less than $9 million — nearly half that of other sectors. Active segments for VC investment include marketing software, CRM and BI/ERP, with significant deals including BA Venture Partners’ $45 million investment in Omniture; Apax Partners’ $30 million investment in Perfect Commerce; New Enterprise Associates’ $19 million investment in SugarCRM and Advanced Technology Ventures’ $18 million investment in ChannelAdvisor.
Multichannel Marketers — This sector generated the largest dollar volume — $18.0 billion — even though it encompassed less than 100 transactions. Several key principles are driving large transactions among multichannel marketers, including (i) though highly fragmented, this sector’s M&A activity is centered around established industry leaders with predictable cash flows, including Charming Shoppes’ $265 million acquisition of Crosstown Traders and School Specialty’s $272 million acquisition of Delta Education; (ii) consolidation among competitors and well-established brands, including BMG Direct’s $400 million buyout of Columbia House and Lab Safety Supply’s acquisition of AW Direct; and (iii) fast-growing Internet marketers are achieving very high multiples based on their expected growth, including eBay’s $524 million acquisition of Shopping.com and General Atlantic’s $250 million buyout of Webloyalty.com.
A multitude of drivers made 2005 such an exciting period for direct marketing M&A. We are expecting similar — if not accelerated — activity in 2006. See below for the seven investment themes that PPLLC believes will help to carry this activity.
IPO Activity
The batch of nine direct marketing industry IPOs in 2005, generating an aggregate $786 million, includes a mixture of cats and dogs — hardly a common theme or two — and is dwarfed by 2004 direct marketing IPO activity, which generated more than $32 billion from 15 IPOs. This year started with FTD Group, Odimo and Fastclick.com — all Internet-related companies following along on the coattails of Google’s massive IPO in 2004. Fastclick.com subsequently was acquired by ValueClick in August for $136 million.
Of the six IPOs completed between August and year-end, the highest valuations come from Website Pros, a provider of full-service Web site development and consulting services that raised $68 million, and DealerTrack, a provider of software and data solutions to the automotive retail industry that raised $170 million — both valued at more than six times enterprise value. Overall, IPO valuations for the direct marketing industry centered around three times revenue and 19 times EBITDA.
7 Direct Marketing Industry Investment Themes for 2006
As many of our clients are realizing, it is a great time to be a seller. Being a disciplined buyer in today’s competitive market is challenging, if not frustrating. There are, however, several investment themes that we believe provide support to today’s higher valuations. Additionally, an overly exuberant marketplace is yielding investment themes that are not yet fully-baked — buyers need to remain vigilant in their assessment of these opportunities.
Technology-Enabled Marketing Services Drive Value — Multichannel marketers are leaning more heavily on their service providers for well-informed marketing solutions, as well as the containment of costs that drive these solutions. A key differentiator among service providers is their ability to employ technology to improve their clients’ marketing performance. True technology empowerment will also drive the operating leverage and profitability of the service provider itself.
Agency Services Control Clients’ Pocketbooks — Long-theorized and recently realized, agency services — including creative, strategy and research — set the direction for marketing solutions and media spend. As multichannel marketers rein in the number of vendors providing these solutions, the largest integrated marketing service providers have begun seeking agency acquisitions as a potential path to controlling the direction of their clients’ needs.
Beware of Hodge Podge Assets — While the 1990s M&A strategy of “rolling up” an industry is not commonplace in today’s direct marketing industry, there are several groups that have recently acquired a series of companies at four times EBITDA and expect to exit at more than 10 times EBITDA within a short time frame. We are likely to see more of these situations in the months ahead. Unless a business strategy is fully vetted and the acquisitions are fully integrated, it is unlikely the arbitrage opportunity presented by the potential seller of these roll-ups is worth much to most likely buyers.
Interactive Services are Red Hot — As went 2005, so goes 2006: the fastest growing media and marketing service sector is interactive. The segment is led by Internet services, but other developing channels, such as mobile marketing and video games, are attracting interest from multichannel marketers as they continue to seek new below-the-line advertising media. Online lead generation, shopping portals, e-mail communications, performance-based affiliate networks and Web-based content and communities are among the interactive offerings that interest marketers as well as investors.
Data, Data, Data — As technologies are employed to develop precision targeting, offer deployment and cost containment for multichannel marketers, the foundation of these technologies will be reliable data. Whether data is internal to the marketer or purchased from a third-party provider, it needs to be accurate and it needs to be modeled to provide relevant analyses for which marketing solutions can be developed. Proprietary sources of data — that is, data compiled from original sources — are a top M&A interest of leading marketing service providers.
Vertical Market Focus Propels Value — A long-standing PPLLC edict for growing marketing service and technology companies by focusing on vertical markets not only fosters efficiencies within an organization, but also paves the way for a lucrative liquidity event. Marketing solutions that address the specific needs of industry verticals — whether pharmaceutical, automotive, financial services, packaged goods, etc. — are highly-valued by each vertical’s respective customer base. Additionally, they are clearly seen by acquiring marketing service firms and private equity groups as delivering sustainable growth potential and long-term value.
Traditional Media and Marketing Services Converge — As consumer markets fragment, traditional branded marketers seek new channels for building awareness and driving consumer purchase behavior. More often than not, these new channels are away from broadcast, newspapers and magazines and toward below-the-line direct marketing channels, including the Internet, direct mail, DRTV, specialty media and other alternative vehicles. 2006 will see traditional media behemoths from newspapers and magazines (and to a certain degree, broadcast) converge on marketing service companies, seeking acquisitions that expand the advertising/marketing opportunities for existing advertisers.
Marketing Services
Key Statistics
On the heels of an active 2004, the marketing services sector witnessed even more robust M&A activity in 2005. There were a total of 233 transactions involving marketing service companies — accounting for 50 percent of the total M&A activity in the direct marketing industry. Aggregate sector transaction value was estimated at $15.0 billion, up 68 percent from 2004. Median deal size nearly doubled in 2005 to $15 million.
Active Segments
Interactive advertising, interactive agency, search and lead generation, four of the most active Internet-driven marketing service segments, accounted for 46 percent of the sector’s M&A activity in 2005. Other active segments included direct marketing agencies, call centers and printers.
On average, deals within the marketing services sector got larger. There were 40 transactions valued at $50 million or more in 2005 compared to 35 in 2004. Combined, private equity players accounted for 48 percent of total M&A activity among the interactive advertising, interactive agency, search and lead generation segments, including Spectrum Equity’s $71 million investment in NetQuote, Vantage Point’s $60 million investment in Datran Media and TA Associate’s $30 million investment in AzoogleAds.com.
As retailers and consumer service companies move toward enhanced multichannel selling platforms, creative agencies and marketing consultants that marry offline and online strategies are growing in demand. Interactive agency deals totaled 35 transactions in 2005, while dollar volume increased more than 70 percent to $2.9 billion. Deals include Sapient Corporation’s acquisition of Planning Group International for $40 million, WPP’s acquisition of Direct.com and Isobar Communications’ acquisition of Molecular.
Largest Deals
Eight of the top 10 deals within the marketing services sector were Internet-related, led by IAC’s acquisition of search engine Ask Jeeves for $1.9 billion and Hellman & Friedman’s buyout of DoubleClick for $1.1 billion. Additionally, Per-Se Technologies acquired NDC Health Corp to strengthen its leadership in the healthcare services and technology market, while Experian acquired PriceGrabber.com and LowerMyBills.com to strengthen its position in online customer acquisition and provide clients ready access to the interactive channel.
Buyers
Strategic buyers dominated the marketing service deals, accounting for 72 percent of the sector’s M&A activity in 2005. Private equity M&A transactions increased 25 percent, although the total deal value remained steady; however, there was a shift in the prevalent types of private equity deals in 2005. Venture capital investments nearly doubled in number and more than quadrupled in value to 52 deals and $2.1 billion, respectively, in 2005. Many of the VC investments are in fast-growing Internet-related properties.
With 12 transactions in 2005, Think Partnership (until recently, known as CGI Holding Corp.) was the most active buyer of marketing service companies, purchasing Primary Ads, KowaBunga! Marketing, Litmus Media, iLead Media, Crystal Reference Systems and Smart Interactive.
In 2005, 16 strategic buyers and eight private equity firms completed two or more marketing service transactions, including Experian (4 deals), Yahoo! (4), RareMethod Capital (4), Pitney Bowes (3), ValueClick (2), R.R. Donnelley (2), News Corporation (2), infoUSA (2), Harte-Hanks (2), Bankrate.com (2) and Acxiom (2). Active private equity buyers (each with two deals) included Vantage Point Venture Partners, The Resource Group, Lake Capital, J.L. Halsey, IDG Ventures, Draper Fisher Jurveston, Canaan Partners and ABS Capital Partners.
Marketing Technology
Key Statistics
During 2005, PPLLC registered a total of 144 transactions involving marketing technology companies, accounting for 31 percent of the total M&A activity within the direct marketing industry. Transaction value for the sector was estimated to have almost doubled to $13.2 billion, compared to $7.7 billion in 2004. Median deal size for marketing technology companies doubled to $20 million.
Active Segments
Transaction processing was the busiest segment within the marketing technology sector with 30 deals. Other active segments included software (29 deals), business intelligence/ERP (25), analytics (21) and CRM (17).
Transaction processing deals accounted for 21 percent of the total marketing technology deals in 2005. This is up from 17 percent in 2004. Total deal value for the segment was estimated at $3.2 billion — accounting for 23 percent of the total sector value. Notable transaction processing deals included the management buyout of publicly traded IPayment for $925 million, Fiserv’s $350 million acquisition of BillMatrix to strengthen its foothold in electronic bill payment technologies and eBay’s $370 million acquisition of Verisign’s payment gateway business.
Within BI/ERP, 25 transactions generated an aggregate deal value of $3.4 billion, accounting for 27 percent of the sector value. IBM’s $1.1 billion acquisition of Ascential Software was the largest deal in this segment. Oracle was the most active buyer in this segment with the acquisitions of Retek and Global Logistics Technologies. Other significant deals included HP’s acquisition of Peregrine Systems for $373 million and Autonomy’s acquisition of Verity for $336 million (in a move to strengthen its direct sales channel and business operations in the U.S.).
In 2005, there were a total of 17 transactions involving CRM companies, accounting for $4.2 billion in value (quite the opposite from 2004, when 37 deals accounted for only $475 million in value). Oracle’s acquisition of rival Siebel Systems for $3.7 billion was the largest of all marketing technology deals. Fifty percent of the transactions within the CRM segment involved private equity players, exemplified by Francisco Partners’ $200 million buyout of FrontRange Solutions, New Enterprise Associates’ $18.8 million investment in SugarCRM and Constellation Ventures’ $10 million investment in Siperian.
Largest Deals
Four of the top 10 marketing technology deals involved transaction processing companies. Significant deals included Prides Capital’s buyout of Pegasus Solutions for $245 million, Activant Solutions’ acquisition of Prophet 21 for $215 million (which bolstered its position as a technology provider to the wholesale distribution market), CompuCredit’s acquisition of CardWorks for $270 million and SSA Global Technology’s acquisition of E.piphany for $167 million.
Buyers
Strategic buyers accounted for the majority (70 percent) of the M&A activity and 85 percent of the total transaction value within the marketing technology sector. VCs accounted for 35 percent of total marketing technology investments with 38 transactions.
With four deals in 2005, Oracle was the most active buyer of marketing technology companies — in addition to acquisitions of Siebel Systems, Retek and Global Logistics Technologies, the company also acquired ProfitLogic, a leader in retail profit optimization solutions. In 2005, 14 companies completed two or more marketing technology transactions, including eFunds (three deals) and the following with two deals each: Activant Solutions, Autonomy, Business Objects, Digital River, eBay, Google, Microsoft, SAP, VeriSign, Cardinal Venture Capital, GRP Partners and Total Technology Ventures.
Multichannel Marketers
Key Statistics
Multichannel marketers registered 92 transactions in 2005, representing 20 percent of the total M&A activity within the direct marketing industry. Though the total number of multichannel marketer transactions decreased in 2005, the total deal value increased 59 percent to $18.0 billion (which was 39 percent of the total direct marketing industry deal value). During the year, 25 percent of deals were valued $100 million or more. During the third quarter alone, five multichannel marketer transactions were valued in excess of $1 billion. The median deal size was the largest among all three sectors, at $25 million.
Active Segments
Interactive marketers drove multichannel marketer M&A activity in 2005 with 40 transactions — accounting for 43 percent of total multichannel marketer activity in 2005. Total transaction value for the segment was estimated at $8.5 billion, accounting for 47 percent of the total deal value for the sector. Catalog transactions were not far behind with a total of 37 transactions, representing 40 percent of the total deal activity within the sector.
Notable catalog transactions included Golden Gate Capital’s acquisition of Appleseed’s, a retailer of classic apparel for women, and Draper & Damon’s, a multichannel retailer of women’s apparel and accessories; American Capital Strategies’ $188 million acquisition of Potpourri from Linsalata Capital Partners; AEA Investors’ acquisition of In The Swim from Svoboda Collins; Spire Capital Partners’ acquisition of SkyMall from Gemstar-TV Guide for $47 million; and Reliant Equity Investors’ acquisition of Paragon Gift Holdings.
Largest Deals
Six of the top 10 multichannel marketer deals were interactive deals or catalog transactions. eBay’s $4.1 billion acquisition of Skype Technologies (representing an interactive marketer’s bet on Internet communications technology rather than another interactive marketer) was the largest deal. eBay also acquired Shopping.com, an online comparison shopping search engine for 30 times EBITDA.
In an effort to concentrate on core operations, Cendant divested its affinity marketing division to Apollo Advisors for $1.8 billion. Similarly, Sara Lee sold its direct selling business to Tupperware for $557 million. Yahoo! made its foray into China by acquiring a 40 percent stake in Alibaba.com, one of China’s largest e-commerce companies, for $1 billion. Another significant transaction was Home Depot’s $1.3 billion acquisition of National Waterworks.
Buyers
Strategic buyers accounted for 57 transactions and 62 percent of the total transactions within the multichannel marketer sector. Although private equity M&A within the multichannel marketer sector remained steady in 2005, the balance between venture capitalist and buyouts changed significantly. Similar to the marketing technology sector, venture capitalists accounted for a greater share of multichannel marketer private equity transactions, compared to buyout groups.
In addition to eBay, five other companies completed multiple deals (each with two transactions): Collegiate Pacific, Interline Brands, Lifetime Brands, RCG Companies and Golden Gate Capital.
Petsky Prunier is an investment bank providing merger and acquisition and private placement advisory services for clients in direct marketing, marketing services & technology, advertising & promotion and information industries. Petsky Prunier is also differentiated through its affiliation with Winterberry Group, a leading strategic consultancy and research firm that assists in building shareholder value and opportunity mapping in the same industries.
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