M&A activity spike ignores sluggish economic reports
Microsoft bought Skype for $8.5 billion in May 2011
Mergers and acquisitions in the marketing services industry more than doubled year-over-year in both value and volume in May, despite disappointing economic and unemployment numbers for the month.
In the most notable agency deal of the month, Paris-based holding company Publicis Groupe bought digital shop Rosetta for $575 million in mid-May, a week after Microsoft Corp. made the segment's largest acquisition of the past 12 months when it bought Skype for $8.5 billion. Microsoft had not made a significant acquisition in the space since its 2007 purchase of aQuantive for $6 billion.
"If there are going to be sustained long-term levels of low economic growth, then it would impact valuation and forecast of financial performance," said John Prunier, partner at investment bank Petsky Prunier. "But other factors drive M&A that figure more prominently than unemployment levels."
Those market dynamics include liquidity, debt capital and expectations for return on equity, as well companies' desire to buy services and talent, said industry experts.
Despite the national unemployment rate ticking up to 9.1% in May and the retail sector's first drop in overall sales in a year, M&A activity in the marketing, media, technology and services industries totaled $18.7 billion in the month, according to Petsky Prunier. May's total M&A value was also the largest in the past year, up 131% compared with May 2010 and 16% compared with April.
In addition to the deals by Publicis and Microsoft, Google acquired PostRank and Admeld, a social media analytics company and an ad optimization firm, respectively. Google said it acquired the companies to obtain "talent and technology," not because of any business conditions, according to a company spokesperson. However, other industry experts explained that a major reason for the spike in M&A is that companies have cash on hand after the recession.
"The investment bankers I talk to say there was a lot of cash being stockpiled during the recession, and there's enough pressure for growth now from investors," noted Kenyon Blunt, CEO of Sigma Marketing Group, a database analytics firm.
Jay Bower, CEO of direct marketing agency Crossbow Group, added that it's typical to see "a burst of M&A activity after a downturn because you can get assets cheap."
However, he added that M&A activity could negatively affect brand marketers, depending on the mix of services offered by both the buying and acquired firms.
Although some deals trigger an improvement of offerings, others "caused things to drop off quickly" because "marketers were cross-sold extra services that they didn't need," he said.