Having been asked recently to chair a key panel session at TMT Finance's M&A conference, Daniel Domberger summarises some of the themes discussed in that forum. First, the differences between Adtech and Martech.
Adtech vs. Martech
Both Adtech and Martech seek to realise the promise of data-driven marketing. While definitions of Adtech and Martech are pretty flexible and often overlap, the key distinction is that Adtech generally focuses on anonymous audiences, while Martech normally targets known or identified consumers.
Adtech is focused on the programmatic buying and selling of media in online exchanges, while Martech is more focused on providing tools to help marketers do their jobs. In this respect, Martech is normally closer to the client, and often has a more senior sponsor, such as the CMO, while Adtech might be considered more tactical and in many cases the client is much more focused on the ends than the means , and likely to be dismayed by the the array of barely distinguishable options available. This also tends to mean that Adtech is often intermediated by an agency relationship, while the client may well commission and use Martech tools directly.
Different models, different markets
The Adtech environment is rapidly evolving and characterised by low barriers to entry, very short business cycles, very high churn, and intense fragmentation. Indeed, even Google has been heard to lament that it can't integrate quickly enough with all the new entrants to this space each month, and that there are too many players in the ecosystem for the (current?) level of demand, hence the almost systemic losses of most of the independent companies, which choose to focus instead on gross revenue and revenue growth.
Martech is a newer segment, but already exhibiting signs of greater economic maturity than Adtech , dominated by a few large players such as Adobe, Marketo, Oracle and Salesforce; greater emphasis on SaaS provision or recurring revenue models; recognising the value of profits as well as revenue, and so on.
Adtech volumes, Martech valuations
In 2015, there were 155 Adtech transactions, valued at US$8.7bn. In 2016, this fell by over 20% and there were only 122, although the aggregate value was 75% higher, at US$15.2bn (Vista's acquisition of Marketo accounted for nearly 10% of this in one deal). It's difficult to tease out an average valuation multiple because so many of the acquired businesses were so small or not profitable.
In contrast, volumes of transactions in Martech went up nearly 15% from 256 in 2015 to 291 in 2016, and aggregate value increased from US$5.7bn to US$9bn over the period. The average multiple of EBITDA paid in those deals that reported metrics was 11.5x.
So what happens next?
Adtech seems therefore to be falling from investor and acquirer favour as attention turns to Martech. Indeed, almost all the major ad tech platforms that have gone public are now trading below their IPO prices. There has been a wave of VC and private equity investment in to A, B and C rounds in ad tech companies, many of which are now 'stuck' at US$60-100m valuations.
As investor sentiment has evolved, these groups will need more revenue scale to break out of this zone , and this informs the increasing levels of interest in Martech, with its more established and mature business models, revenues, and even profits.