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Mainstreaming Means Mergers and Acquisitions says AdMedia Partners Study
By Jim Hedger, StepForth News Editor, StepForth Placement Inc.
February 7 2006
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The rapid growth of search engine marketing over the past two years has
firmly established the SEO and SEM sector as an important concern for
the mainstream advertising industry. Lacking the long-term background
and technical resources to properly serve the intense demand for search
marketing from clients, the traditional ad agencies are starting to think
about the search marketing industry.
A study released yesterday by Madison Ave. based AdMedia
Partners suggests
that advertiser interest, coupled with the changes in the way consumers
perceive and receive advertising makes many search marketing firms tasty
targets for acquisition or likely candidates for mergers.
“Search remains extremely hot as an acquisition category. If anything,
demand might be stronger than before because traditional media companies
within the larger game are realizing search is an incredibly important part
of media,” said Seth
Alpert, Managing Director of AdMedia Partners
in an interview with StepForth, “They have to be planning and buying
for clients but don’t have internal knowledge or staff to do it.”
As an investment banking and financial advisory firm focused on advertising
and marketing, AdMedia Partners thrives on verifiable numbers. They conduct
annual surveys of the advertising and publishing industries. This year’s
look at trends in 2006 shows that 79% of respondents, “… anticipate
strong merger and acquisition activity in Internet marketing…”
The survey, “Merger
and Acquisition Prospects for Marketing Services and Internet Marketing
Firms”, shows a shift in thinking in both the
traditional advertising industry and the search marketing sector. Traditional
ad agencies want to serve the search marketing needs of their clients while
concurrently, many of the smaller firms providing search marketing services
want to grow either through mergers or by being acquired by a larger entity.
The survey found that “54% of those who identify as prospective buyers
expect to complete an acquisition during 2006, up from 51% last year.” It
goes on to note a much larger shift among those looking to get bought up
by someone larger showing “42% of those who identify as prospective
sellers expect to sell all or part of their business in 2006, vs. 25% who
thought they would do so last year.”
There is a lot of energy around mergers and acquisitions in the search
sector right now. “Internet marketing works. Traditional forms are
becoming more segregated or more subject to lack of attention span and concurrent
disruptiveness of technology,” said Alpert, “Right now, the
buyers have cash, either because business is doing well or they have cash
backed by private equity funds.”
Search has proven to be the most disruptive form of online marketing for
traditional publishers and ad agencies. It also presents a double edge sword.
Witness the realignment announcement issued by the reigning titan of publishing,
Time
Inc., early Tuesday. While search marketing has shown significant impact
on Time’s bottom line, it has also opened up a number of opportunities
for the media giant, particularly through its ownership of AOL and AOL’s
affiliations with Google.
Exploiting emerging opportunities is obviously on the minds of many marketers
these days. One question asked if respondents were, “Considering Entering
or Expanding their Presence in the Following Businesses”. The survey
listed eleven types of marketing, allowing respondents to answer yes to
one or more of the options listed.
The results of this question are interesting in that over 90% of respondents
said they did expect to expand into other forms of advertising. Nine out
of ten firms think they need to do something new and most of that thinking
is focused on search marketing. Sixty-nine percent of the advertising or
publishing agencies surveyed say they intend to enter or expand in the search
marketing sector in 2006.
As they enter the search sector, many of the larger firms intend to purchase
or partner with established search engine marketing firms. 85% of respondents
who identified as prospective buyers said they expected to approach a potential
acquisition though only 54% of them expected their approach to result in
a completed acquisition.
The potential buyers might be in for a pleasant surprise however as 79%
of those that identify as prospective sellers expect to be approached though
only 42% expect to be acquired.
Those thinking about purchasing a company are advised to act quickly. It
is currently a buyer’s market with 84% of respondents saying that, “… given
the current climate, buyers should act now”, but the pendulum appears
to be swinging in favour of sellers. In last year’s survey, 87% of
respondents advised buyers to act swiftly.
This year, 52% of respondents say now is the time for sellers to act, a
jump of 21% over 2005 and the most favourable response since the dot-com
crash. Clearly, the balance is moving towards the search marketing sector.
Search marketing knowledge is increasingly valuable on today’s market.
Appreciation of search marketing talent is reflected in the median multiples
used to create a reasonable estimate of the value of a company. Take the
operating profit of a given company and multiply it by X and you have a
general sense of what that company is worth.
Over the past three years, the median multiples of traditional ad agencies
and other off-line marketing services have remained fairly constant, ranging
between 5 and 7 times the operating profit of any given company. The value
of Interactive Ad agencies is now estimated between 6 to 10 times their
operating profits.
“There have been seminal events have changed business and public
perception of the business of marketing online,” said Alpert, discussing
the impact of search on advertising. “An example of a negative event
was the tech bubble bursting five years ago. Business is back in a very
interesting way. Valuations are healthy (or crazy, depending on point of
view) will continue for quite a while.”
Predictably, the second greatest growth area is seen in Strategic Consulting,
helping both ad agencies and advertisers figure out how to best spend advertising
dollars. The marketing world is not getting any less confusing, on either
side of the coin and neither the agencies or their clients can afford to
make mistakes.
According to Alpert, there are a number of things buyers are looking for
when examining a potential merger or acquisition.
•
Great clients and the ability to retain those clients is one of the
most important.
•
Firms should have great skill sets as evidenced by results and what
they can do for their clients.
•
Sustained revenue growth and healthy profit margins make a company
more attractive and increase valuations (however,)
•
SEM is a scalable skill; smaller firms with great talent are of interest
to potential buyers.
•
Location is also an important factor as travel and meeting clients
is often necessary.
•
Lastly, proprietary techniques and technologies are important assets
for sellers.
The survey establishes that Internet marketing is extremely important to
the traditional advertising sector but it was unable to find a similar consensus
on what form of marketing will see the greatest growth in 2006.
Search lead with 18% saying it will show the largest growth over the year
but Pay per Performance, Interactive Media, Customer Relation Management
and Lead Generation all polled well. The only actual consensus in growth
shows what is not hot this year with none of the respondents suggesting
Affiliate marketing will see any perceptible growth in 2006.
One of the respondents to the survey said, “Open media (podcasting,
blogging, video blogging, etc.) has opened a world of opportunity… Think
the Internet and World Wide Web in the early 1990’s”
Within the search marketing industry, there is a lot of sustained optimism,
(no pun intended), and has been for a number of years. Moving into the second
half of the global decade, search and search marketing is more important
each year. The sector is capturing an increasing share of the global advertising
budget; enough to make the traditional ad agencies finally sit up and notice.
SEO and SEM shops take notice, not only is Madison Avenue looking to enter
your sector, they are also looking at you.
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