What sort of year was 2023 for deal making? Lack-lustre some might say on first reading. If we look at the number of transactions – and the trend mirrors most other business sectors – marcoms M&A fell around 15-20% over the last twelve months.

It would be all too easy to draw the conclusion that reduced buyer / investor demand was the core driver of the slowdown. After all, there are quite a few headwinds for buyers and investors to consider, whether that’s the significant hike in interest rates, tougher trading environments, geopolitical tensions and more volatile capital markets. But that would be a huge oversimplification – and far from the truth…

What we saw from the networks

Over the last couple of years, we’ve seen increasing activity from the once dominant global networks, many of whom have taken the time to reorganise and build up capital reserves. As a cohort deal flow increased by nearly 10% from 2022 to 2023. And whilst Publicis led the pack on net revenue growth, it was Havas that took pole position on acquisitions with 10 in 2023 – although both were broadly flat on 2022 acquisitions levels. Not only were deal flows up, but the networks were behind some of the most recognisable deals throughout the year, including Havas’ acquisition of Uncommon and WPP’s acquisition of GOAT + Obviously.

Beyond the networks – a nuanced picture

It is the Challengers where we’ve seen the biggest reduction – with deal flow down ~25% across the cohort. However, if we zoom in, we start to open up a more nuanced narrative. Dept – a prolific acquirer for many years saw a sizeable drop-off in M&A activity, completing one acquisition in 2023 vs seven in 2022. Perhaps no surprise given the speculation of a sale in 2024.

Other category leaders such as Stagwell and S4 Capital were also down YoY. But against that, we had PMG, MERGE and Power Digital all make acquisitions in 2023, vs none in 2022. The vast majority of this cohort are privately funded, and whilst buy-and-build is a core component to most of their growth strategies, its not unusual to see the pace and rhythm of acquisitions flex, in response to the trading and funding environment. 2023 will have also given these groups some time to take stock of previous acquisitions and integrate / reorganise themselves – much like the networks had done in years prior.

Let’s not forget the consultancies

The consultancies haven’t had much airtime recently, so let’s break the pattern. And we can’t do that without talking about the “old favourite”, Accenture Song which upped its activity completing five acquisitions in 2023, compared to three in 2022. Other activity was driven by names such as LEK, EY, Bain and Elixirr – lesser covered names in previous years – as the world of marketing services continues to merge into adjacent fields.

So yes, the tougher environment certainly had a role to play in the reduction of deal flow, but lots of interesting buyers and investors were still out there, wanting to transact. In fact, there are very few examples of serial acquirers in 2022 that didn’t make acquisitions in 2023.

In our view, the most significant contributor was a significant reduction in the number of high quality sell-side opportunities being marketed. And there were some common themes:

  1. Trading wasn’t in line with budgets / expectations set at the start of the year
  2. Concerns about valuations decreasing

Growth of any sort can be appealing

In a flat market where growth is hard to come by, everything is relative, and high single digit growth is a positive thing – and compares favourably to what the market’s largest players are delivering.

Of course, if an agency’s start-of-year forecasts were for 20% growth, it might cause a delay when the actual numbers are lower, but a deal isn’t necessarily scuppered. It just takes longer to carry out deal due diligence and may require some creative thinking on the deal structure to ensure no loss of overall value.

Whatever the growth rate, the real element of importance is visibility and confidence in the figures you’re presenting to avoid any surprises, whether that be upwards or downwards swings. It also comes down to how the deal is handled and how the data proves underlying momentum so that a price shift can be avoided.

So what about valuations?

The lack of sell-side candidates is partly down to a perception that pricing across the market has come down. Couple this with reduced trading outlook and the assumption is a double-whammy hit on value. In some instances, that certainly could be true.

As such, agencies have been biding their time to see what happens rather than going to market now. Interestingly, this has created a similar dynamic to the start of Covid. Businesses are coming under significant pressure, but some are still flourishing and these resilient companies are commanding good valuations because of a supply and demand dynamic.

The take out is, if you’re a business that’s outperforming the market, even though you may be tracking below the target you set yourself, that makes you a highly attractive acquisition target.

Ensuring the deal unlocks value

M&A isn’t just about the day one price – or at least it shouldn’t be. It’s about what the transaction unlocks for the company strategically, whether that’s the ability to pull away from an existing investor / shareholder that’s slowing down the business or creating access to new markets or developing and advancing new services / technologies.

Structuring the deal the right way can create the value that the business needs. There doesn’t have to be a shiny ‘I’m ready’ moment, in the same way that there’s often never a good time to start a family!

What it means for 2024 – intelligent deal making

A sale shouldn’t happen just because an agency has ticked off a set of “industry-standard” KPIs.

Getting a business to a point where it’s M&A ready requires focused and tailored support, understanding and exceptional coaching to ensure that it and its team are match fit.

Successful M&A should be focused on delivering value creation across the lifecycle of a business and understanding what it is trying to achieve and within what time scale.

If you’re running a successful business that’s ripe for a transaction, but you’re holding out for better times, our message is that 2023 was actually a good year to do a deal and 2024 might be even better.