2024 State of Agency M&A: Rise of Challengers, Hot Targets, New Buyers, and Deal Structures Explained
RockWater Annual Letter, Part 1 of 3
Hi readers,
Our 2024 annual letter has two main goals; provide a reflection of 2023, and highlight market themes that will shape 2024. Our analysis will focus on capital markets (M&A and fundraising) for the media, agency, and creator economies.
The goal of this letter is to help founders and investors better deploy capital, grow their business, and earn good ROI.
Our findings are based on market research, client advisory assignments, and executive conversations. It is thus a mix of science and on-the-ground operator feedback.
I’m entering my 19th year of advising or building media-related businesses. I’ve experienced four business cycles, two up and two down. I believe we’re on the precipice of entering a new third bull cycle.
But I believe the markets still require rightsizing.
It’s the hangover effect from poorly allocated capital and misdirected growth strategies from the past few years. Further, sellers are stuck on old valuations while buyers remain risk averse. So layoffs and shut-downs will persist as companies transition to viable business models and while the bid-ask spread closes. Fortunately this transition is already happening.
In turn, our media and advertising community will emerge stronger. And I believe we’ll see more growth bets get made as we exit the low point in the cycle.
Below is part 1, which discusses consolidation amongst advertiser agencies. Part 2 will focus on consolidation amongst media and creator economy businesses, and part 3 will focus on the fundraising markets.
More on RockWater → we specialize in financial and strategy advisory for media, agency, and creator economy. Recent client projects include running a sales process for an influencer representation company, a valuation and “diagnostic” for a social agency evaluating strategic options, a fundraise for a digital media rollup, a sales process for an influencer ambassador tech platform, and go-to-market strategy for a digital studio. Our full suite of services are here – DM me or email me at chris @ wearerockwater dot com if you need help.
Onward,
Chris, Founder of RockWater
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2024 State of Agency M&A: Rise of Challengers, Hot Targets, New Buyers, and Deal Structures Explained
The rapid growth of digital consumption has led modern brand marketers to require a new, diverse set of capabilities. From paid media, influencer marketing, and social media management to branded content, UGC ambassador programs, and analytics. Historically few agencies provided this full suite of services. The result was marketing execs having to navigate a highly fragmented agency ecosystem.
A friction-full experience.
The result has been rapid industry consolidation. Our team has tracked 50+ completed acquisitions since 2022.
A few themes stand out:
⤴️The Rise of Challenger Networks / Nextgen Ad Agencies
These are modern ad agencies with a broad suite of digital marketing capabilities. They’re helmed by seasoned marketing executives, have investor-backing, and are growing aggressively through M&A. Example companies are Stagwell (5 acquisitions since Jan 2023) and The Acceleration Group of Companies.
🔥Talent and Influencer Agencies are Hot Targets
This agency’s M&A sub-market is one of the most active. We track 25+ completed acquisitions since 2019, and over 11 deals in 2023. The reason is that after ATT and the loss of the cookie, influencers are the new way to reach target audiences at scale, and in a brand-safe environment. And the gatekeepers to those influencers are their talent managers or agents. So talent agencies are buying up smaller peers, and have large war chests to execute. Companies to watch here are Providence-backed Wasserman (13 deals in 2 years), Crestview-backed Gersh (just bought A3’s digital team), TCG-backed Night (just bought LFM), Point72-backed Range Media (just bought Stoked Management), and the big 3 (CAA, UTA, Endeavor). We’re also seeing other buyer groups emerge, from the challenger networks mentioned above to digital media businesses and even sports leagues who want to bolster their brand partnership offerings.
🤝Buy-Side Deal Teams Free Up in 1H 2024
Many corp dev teams were not evaluating new deals between last year’s end of summer and the holiday season. Two factors drove this. Some teams were at capacity diligencing or negotiating their existing deal pipeline. And other teams were going through leadership reshuffles and strategy re-setting. But now in 2024 these teams are emerging with a mandate to grow through M&A, and are freed up to engage in new deal talks.
👀Non Traditional Buyers Emerge
It’s not just agencies buying agencies. Buyer interest increasingly includes companies who seek more service offerings for their brand marketer clients, or who want to newly launch a brand partnerships team. This includes digital publishers, video aggregators, MCNs, and even sports leagues and beauty brands. Relevant deals from 2023 include gaming services company Keywords Studios acquiring Digital Media Management, and visual production studio StudioNow acquiring Bad Moon Talent. These buyers want agencies with a target client and audience focus, like sports or food or beauty, that matches their own. I think this will become more common, but the offers from these buyers are usually at the lower valuation range VS their agency peers. This is because the combination model has yet to be fully tested, meaning more integration and deal risk versus a typical agency-to-agency deal. But if done right, it could be a force multiplier. I expect more new buyer lean-in for 2024 as influencers increasingly command audience attention and brand dollars.
🔎Subscale Agencies Seek Strategic Alternatives
Few independent, scaled ad agency businesses remain. In turn, subscale agency owners are questioning their future viability in a market where it’s increasingly harder to compete for digital marketing budgets, influencer clients, and high-performing team members. So founders are asking if they should seek an exit immediately or in the near future, merge with peers, or grow through M&A. The answer varies based on your financial performance, suite of services, vertical focus, team quality, and growth prospects.
🎯More “Structure” in M&A
Some sellers are holding on to pre-2022 valuations when we were in a ZIRP environment. Yet agency buyers today seek lower entry prices to reflect today’s new cost of capital, and to mitigate execution risk in an uncertain economic environment. So, there’s a price gap between buyers and sellers. To close the gap, we’re seeing more structure to help get deals done. Specifically…
The consideration mix increasingly includes equity in addition to cash. The cash component can include an upfront payment (ranges we’ve recently seen are 20-70%), a holdback, and an earnout based on the achievement of target KPIs like net revenue or EBITDA. We’ve even seen seller financing, where the seller agrees to carry a note that the buyer pays back with interest in the future.
The equity component can include ownership in the acquiring parent co or a newly formed entity. There’s also rollover equity, where the seller keeps 20-40+% of the business, and which can be monetized in a future sale of the parent co, or a put option where the seller has the right to force the purchase of its remaining stake.
On top of upfront cash and equity, there are increasingly earnout structures. Key earnout components include target KPI definitions, earnout timeline, the consideration mix that is paid in success, payment timing, and mechanisms to guide what happens when KPIs are partially achieved or exceeded.
Deal structures have a lot more components, but these are the key points. Good dealmakers need to be smart here when they start trading term sheets to ensure their clients get the best terms, and because deal creativity is helping to close the bid-ask M&A spread.
🌍International Agencies Seek to Buy Way Into US Market
We’re getting a lot more calls from agencies across the pond who want to make inroads with US brands and audiences. These agencies have had trouble building organically in the States, since hiring an exec team in a competitive high-growth market with a very different agency culture ecosystem is not an easy feat. So buying their way in is a growing mandate. I’ve gotten calls from Euro-based branded content studios to podcast agencies and larger holding companies who are making trips to the US for “agency roadshows” in 1H 2024, and who plan to transact by the second half of the year.
🏃Demand for Performance Marketing / Content
We’re observing and hearing more about buy-side mandates for performance marketing companies. These are agencies that run social media ad campaigns and affiliate marketing services, to ambassador platforms and performance content companies that create UGC social media assets for paid amplification. I think of Izea’s acquisition of Zuberance, an advocate marketing platform. These businesses can be attractive due to longer-term client contracts with recurring monthly revenue, and, in certain cases, are more systems and technology-enabled which helps them scale faster, streamline integration into new owners, and where there are likely cost synergies in combination. This is in contrast to service-oriented agencies where cultural fit and team retention are critical to success. But, I’ve also heard counterpoints here, that marketer clients are squeezing paid media margins, and players are in a race to the bottom. However, I believe that when you have a meaningful budget running through your firm, and get access to learnings about campaign spend and its effectiveness, you’re in a good place to direct client marketing dollars to additional services. That’s valuable for a diversified agency business.
That wraps part 1. Next week part 2 will focus on consolidation amongst media and creator economy businesses, and part 3 will focus on the fundraising markets.
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I’m the founder of RockWater Industries. We do financial and strategy advisory for media, agencies, and creator economy. From M&A and fundraising to consumer research and go-to-market planning.
DM me on LinkedIn or email me chris @ wearerockwater dot com
