An antitrust lawsuit asking Alphabet’s [NASDAQ:GOOG] Google to unwind its “anticompetitive acquisitions” in advertising technology could kickstart more sector consolidation.
The Justice Department’s suit, filed Tuesday (24 January), alleges Google abuses its position as a leading provider of software tools that online advertisers and website publishers use to buy and sell ads, and as the biggest auctioneer of those ads. Google has used acquisitions to build that business and “quash the rise of rivals,” starting with its USD 3.1bn DoubleClick deal in 2007, the DOJ alleges.
In the short-term, the complaint should enable independent ad-tech companies to take business from Google and strengthen, says Conor McKenna, a director at Luma Partners. “In the long-term, it creates a more vibrant and open ecosystem that brings more competition, which creates the opportunity for more M&A.”
Even without that news, dealmaking in North America’s ad-tech industry was expected to moderately increase in 2023 after an anemic 2022.
Executives inked just 54 ad-tech deals worth USD 1.4bn last year, a steep drop from 2021’s record 98 transactions worth USD 17.5bn, according to Dealogic data. Fueled by booming stock market valuations and low interest rates, 2021 saw six deals in excess of USD 1bn: Verizon Media, Taboola, SpotX, Lucid, MoPub, and Xandr.
Google’s cookie crumbles
Macro factors, such as rising interest rates and a valuation overhang among private companies, help explain 2022’s disappointing year, says Ari Paparo, who sold Beeswax to Comcast [NASDAQ:CMCSA] in late 2020 and is now CEO of Marketecture Media.
A couple of micro factors are also to blame. Privacy initiatives from Apple [NASDAQ:AAPL] and Google have dampened dealmaking further, says Wally Ruiz, CFO at Inuvo [NYSE:INUV]. Apple introduced its ATT (app tracking transparency) feature in 2021, requiring mobile apps to ask permission to track user activity. Google intends to end third-party cookies – used to track users between websites – on its Chrome browser in 2024. Both have created uncertainty around business models, although companies like Inuvo are developing new ad-targeting technologies.
Talk of a looming recession is an added factor to ad tech’s dealmaking doldrums. Brands have already cut back on ad spend, creating a weaker business outlook for many ad-tech firms, and making the gap between seller and buyer expectations harder to close, adds Luma’s McKenna.
Buyers’ market
The steep drop in valuations of publicly listed ad-tech companies, such as AppLovin [NASDAQ:APP] and Pubmatic [NASDAQ:PUBM], has been a major drag on dealmaking. “It’s hard to do deals in ad tech because everyone’s stock is getting killed,” says another sector advisor.
Some see an opening as a result. “We’ve seen a huge drop” in valuation multiples, says Doron Gerstel, CEO of Perion Network [NASDAQ:PERI], an Israel-based ad-tech provider with a focus on the US market. That makes it a buyers’ market, he believes. Perion’s USD 400m in net cash gives it a “great opportunity” to acquire something “significant” in 2023, he says.
Ad-tech dealmaking should remain light in the first half of the year, followed by a strong second half as ad-tech valuations stabilize and expectations “season,” predicts Luma’s McKenna. Smaller companies combining for scale are likely in 2023, he says. So too is dealmaking in three major growth areas.
Growth areas
Those growth areas are retail or commerce media, connected television (or CTV), and performance marketing.
Dealmaking has already started in retail media – where retailers use the customer data they own to deliver ads across websites. Because it is not sensitive to the demise of third-party cookies, activity should heat up further, says Paparo. Walmart [NYSE:WLMT] is among those making acquisitions, having bought Polymorph Labs in 2019 and Thunder Industries in 2021.
In CTV, ad spend has soared – and M&A with it – as people watch more on-demand streaming, and Netflix [NASDAQ:NFLX] and Warner Bros. Discovery-owned HBO [NASDAQ:WBD] begin offering ad-supported options, notes Paparo. Flagship CTV deals include Microsoft’s [NASDAQ:MSFT] USD 1bn acquisition of Xandr in 2021 and Innovid’s [NYSE:CTV] USD 160m purchase of the UK’s TVSquared in 2022.
“While there’s still some uncertainty [for dealmaking], we’re starting from a different place,” says McKenna.
