January 2016 INSIGHTS Disruption in the Advertising Industry: Consumers, Technology, and New Participants Leading the Way Linda Gridley, Partner
II. Market Size and Key Trends in the Advertising & Digital Marketing Industry
III.Overview of Important CMO Issues and Key Digital Marketing Offerings
IV.Recent M&A and Private Placement Transactions
I. Overview Confidential 2
Period of Major Disruption and Opportunity in the Advertising Industry The advent of digital, mobile and big data technologies is causing dramatic changes in the advertising industry Advertising / Marketing / Customer Relationship Management has now become a “CEO” level strategic issue. It no longer represents simple “tactical” spending on which TV program to advertise on and/or how to figure out which 50% of the marketing spend is accountable CMOs must work harder to understand technology & its uses for marketing. The days of delegating this to the CTO are over
MAD MEN DAYS TODAY
‒ Advertisers in Control ‒ Consumers in Control ‒ Mass oriented ads pushed to Consumers ‒ Ads are increasingly personalized and targeted based on specific consumer ‒ Minimal targeting or knowledge about ad behavior effectiveness ‒ Effective consumer engagement “rules” ‒ Creative “ruled” ‒ The “CMOs table” is increasingly crowded ‒ “Superbowl ticket” relationship between ad and competitive…not just about Superbowl exec and CMO client tickets anymore ‒ Agency served as middleman between client ‒ Other marketing vendors bypassing agencies and all other marketing related vendors and building direct-to-client relationships
Source: AGC Partners Confidential 3
Period of Major Disruption and Opportunity in the Advertising Industry The increasing role of digital and big data technologies in advertising has changed the dynamics of the traditional ad agencies’ relationships with their CMO clients
The “ad agency disruptors” understand that there is a huge strategic/execution/technology opportunity that exists today in a much bigger way than 5-10 years ago − They are using M&A to bolster their capabilities to go after this marketing and technology spend more aggressively Traditional Ad Hold Co.’s AdTech
CMO - Key drivers in use of data to change - Stuck in “Mad Men” Days
marketing process - Don’t want to own tech - More tech focused - Consolidation leading to scale & a few big - Highly unattractive acquisition - Ability to be more effective and industry leaders structures →hard to invest in growth efficient with marketing spend - Complex to understand with important - Customer experience and ramifications if wrong → CMO’s team needs lifecycle analysis approach to understand Traditional Media/Vertical Market Consulting Firms Expertise
Software / Mk. Automation
- Marketing is now key strategic issue
- Less developed theme but some specific for CEOs
examples - These firms have the logical “ear” to
- Publishers see marketing as a way to the CEO & CMO - Similar theme to ad tech with improve declining traditional media revenues - As campaigns become more data email & creative automation & big & creative synergies centric (less creative), they are a data analytics as the core - Some firms building integrated vertically huge threat to the agencies’ competency to what they bring to oriented solutions to compete against more traditional CMO relationships the CMO general traditional relationships Source: AGC Partners Confidential 4
Ad Agency “Disruptors” - Select M&A Transactions Ad Tech
Mobiento – Sweden (ND) : iCrossing ($400m) Ubermind (ND)
: Olson Group ($300m) Ironworks ($100m) : Selectable Media (ND) CityTech (ND)
: Beacon Partners (ND) Sources: Capital IQ and 451Research Confidential 5
II. Market Size and Key Trends in the Advertising & Digital Marketing Industry
Size and Growth Characteristics of the U.S. Ad Industry Ad spending across major media channels in the U.S. is expected to total $183 billion in 2015. When marketing services spending is added in, the total spend is expected to be approximately $407 billion.
U.S. Ad Spending Forecast (a) Source: (a) ZenithOptimedia (Advertising Expenditure Forecasts, June 2015 Confidential 7
Overall U.S. Advertising Industry Growth Traditional ad spending excluding digital was relatively flat in 2013 and 2014 and is down 2-3% per quarter in 2015
Digital ad spend was up 18-20% in 2013 and 2014 and is up 17-22% per quarter in 2015
Some of the stats around traditional ad spend are pretty bleak Print ad spend has declined $54 billion since its peak Consumer magazine ad spend has declined in 15 of the last 17 quarters National TV ad spend growth has slowed for six consecutive quarters Newspaper ad spend has declined for the past 35 consecutive quarters including double digit declines in Q2 and Q3 2015.
US Advertising Growth by Media Source: Goldman Sachs Research – 2015 Quarterly Ad Monitor Confidential 8
Size and Growth of the U.S. Digital Ad Market Digital Marketing in the U.S. is expected to increase 12% annually from $57Billion in 2014 to $103Billion in 2019. It represents 27% of all ad spend in 2015. Search will continue to dominate the spend (54% of 2014 total & 44% of 2019 total) Spending on mobile and social are the big growth drivers
US Digital Market Forecast (a) Areas of Increase and Decrease in 2015 Budget (b)
Source: (a) Forrester Research: US Digital Marketing Forecast, Nov 2014 (b) Salesforce 2015 State of Marketing Cloud Confidential 9
U.S Digital Ad Market By Sector Spending on search has dominated the overall digital ad spend
Mobile has seen tremendous growth and that is expected to continue
Advertising Format Share, 2006 – 2015* (% of total revenue) (a) Source: (a) IAB/PwC Internet Ad Revenue Report, HY 2015 Confidential 10
Social and Mobile are Driving the Growth in Digital Ad Spend
Between 2014 and 2015, marketers have seen a significant increase in the importance of social and mobile marketing. According to a study done by Salesforce, 64% of marketers see social media marketing as a critical enabler of their products and services and 70% see mobile marketing as a critical enabler.
Social Media Marketing Impact on Business (a) Mobile Marketing Impact on Business (a) Source: (a) Salesforce 2015 State of Marketing Confidential 11
Retail is the Largest, Highest Growth Vertical in Digital Ad Spend
Internet Ad Spend by Industry US Ad Spending by Category (a) Category YTD 2015 vs. 2014 (b) Source: (a) Advertising Age Datacenter (b) IAB/PwC Internet Ad Revenue Report, HY 2015 Confidential 12
III. Overview of Important CMO Issues and Key Digital Marketing Offerings
Overview – Increased Role of the CMO The CMO’s job has become much more complex in this new “customer centric” marketing environment. A good CMO needs to understand change management, data management, and consumer experience design, not simply provide creative and media channel expertise. Key challenges/issues include the ability to:
Provide a single, integrated view of the customer across channels across all of the customer’s lifecycle
Manage multiple campaigns across multiple channels efficiently and effectively
Offer highly targeted personalized ad campaigns
Determine what capabilities to do in-house and what to use partners for and who the best type of partner is Confidential 14
Key CMO Issues and Challenges The CMO’s increased role brings with it a broad array of business challenges especially around customer lifecycle issues.
Most Pressing CMO Business Challenges (a)
Source: (a) Salesforce 2015 State of Marketing Confidential 15
Key CMO Issues and Challenges According to a Salesforce study, 86% of all marketers that they surveyed said it was critical or very important to create a cohesive customer journey.
The Effectiveness of Various Technologies at Creating a Cohesive Customer Journey (a) Source: (a) Salesforce 2015 State of Marketing Confidential 16
Key CMO Issues and Challenges According to a study done by Teradata in September 2014, the key driver for new technology spending is improving the customer experience and the key issues around that spend are the need to integrate data across various technologies and privacy concerns. Only 37% of the 400 enterprises surveyed reported that they had a “single view” of their customers.
Drivers of New Technology Spend (a) Key Criteria for New Technology (a)
Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 Confidential 17
Key CMO Issues and Challenges Historically, media campaigns and channels were independent – getting their own budget allocations. Today, with a more “customer centric” marketing environment, priorities and marketing teams must work on a more integrated, multichannel approach.
However, with this more integrated approach, there is also a big priority by companies to more accurately figure out what part(s) of the marketing spending are actually working. Hence, attribution is a key issue for the CMO.
Actions Taken By Companies Surveyed to Drive % of Companies Surveyed with “Customer Centric” Work (a)
Plans for New Technology Investment (a) Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 Confidential 18
Key CMO Issues and Challenges The CMOs surveyed in the Teradata study reported that they are managing an average of 37 different ad campaigns simultaneously during their busiest season. The most active CMOs are managing 112 different campaigns simultaneously. It is not surprising that those same CMOs said workflow management at scale is a big challenge for them in today’s environment.
# Si multaneous Digital Campaigns at Busiest Challenges in Technologies and Data (a)
Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 Confidential 19
Key CMO Issues and Challenges The ability to offer personalized campaigns is seen as an important capability in today’s “customer centric” marketing environment.
However, shown in the chart below, the level of personalization capabilities offered today by most companies is relatively basic.
Existing Personalization Capabilities by Companies Surveyed (a) Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 Confidential 20
Key CMO Issues and Challenges Many people believe that there is a general trend for CMOs to build up more digital marketing capabilities in-house rather than using agencies and/or technology partners. Data Analytics seems to be the biggest focus of current in-house capabilities.
% of Companies Surveyed with These Capabilities In-House (a) Source: (a) Teradata: Enterprise Priorities in Digital Marketing, Sept 2014 Confidential 21
Key CMO Marketing Execution Considerations Create Optimal Consumer Experience – Not Mass Advertising. Look for what consumers want/need, not simply what the marketing message should be.
Focus on building brands that consumers trust and that provide useful value. It’s not just about creating pretty brand images anymore.
Increasing importance of consumer and peer influence in the development of the brand.
Increasing number of marketing channels and devices creates campaign execution complexity.
Increased use of data to drive advertising/marketing decisions. Companies that manage a lot of digital data (e.g. ecommerce platforms) may become “next gen” CRM data managers as they are collecting real time data based on actual behavior. Implications for traditional database marketing companies?
New technologies will lead to many new creative ad formats (cinemographs, animation on top of video, etc.).
Will large marketing suite vendors build customized marketing suites for agencies? Source: Forr ester Research: Innovation Agencies, Dec 2014 Confidential 22
Key CMO Marketing Execution Considerations Increasingly marketers are shifting attention away from traditional metrics like ROI and conversion to metrics that better reflect customer satisfaction. This trend further complicates the “effectiveness equation” for any particular ad campaign.
Popularity and Effectiveness of Digital Marketing Channels and Strategies (a) Source: (a) Salesforce 2015 State of the Marketing Cloud Confidential 23
Key Ad Agency Capabilities A December 2014 report by Forrester talks about the following as key capabilities for a successful agency today: Innovation around products and services Integration of channels and customer data Implementation of enabling tech systems
The same report talks about the importance of agencies’ ability to provide their clients with high level business strategy services and educational services around change and innovation. These types of capabilities have not necessarily been core competencies of agencies in the past
Agencies Reposition To Meet Marketers’ Demand (a)
Source: (a) Forrester Research: Innovation Agencies, Dec 2014 Confidential 24
Key Ad Agency Capabilities The same report also published their Forrester Wave of the Most Innovative Ad Agencies.
All of the entities shown in the “Wave” are part of a larger organization (mostly ad holding companies) except for T3 and Mutual Mobile. T3 is a family owned agency in Austin, Texas that Forrester likes for its “Think Tank” approach to customer experience strategy. The agency is also known for its innovation around mobile experiences. Mutual Mobile is a small agency focused on emerging technologies & helping clients build discrete digital products based on collaboration, user-centered design, and iteration.
Innovative Agencies (a)
Ownership of Companies Featured
Sapient Nitro / Publicis R/GA / IPG Huge / IPG Frog / Aricent Razorfish / Publicis Isobar / Dentsu AKQA / WPP Critical Mass / Omnicom Mutual Mobile – Independent
T3 – Independent
Source: (a) Forrester Research: Innovation Agencies, Dec 2014 Confidential 25
Competitive Landscape Only 1 of the top 5 digital agency networks is owned by an ad holding company There are only 8 independent agencies in the top 50 digital agency networks Total 2014 revenues for the top 50 digital agency networks was $13.8 Billion, up 14% vs. 2013
Independent Digital Agencies in Top
Top 10 Digital Agencies 50 Ranking 2014 Rev %Growth 2014 Rev %Growth ($mm) ($mm) 1. IBM Interactive Experience (IBM) $1590 NA 14. Merkle $271 +28% 2. Deloitte Digital (Deloitte) $1470 NA 34. Gyro $114 +4% 3. Accenture Interactive $1408 NA (Accenture) 36. Platform Advertising $107 +2% 4. Epsilon (Alliance Data) $1201 +6% 44. TMP Worldwide $87 -1% 5. Wunderman (WPP) $1175 +4% 6. Digital @ Ogilvy (WPP) $1103 +5% 45. Richards Group $80 +34% 7. Sapient Nitro (Publicis) $937 +9% 46. In Touch Solutions $77 +13% 8. Digitas LBi (Publicis) $871 +8% 47. Resource Ammirati $75 +14% 9. PwC Digital Services (PwC) $747 NA 49. Hello World $70 -17% 10. Havas Digital Group (Havas) $697 +12% Source: Ad Age Annual Agency Report Confidential 26
Overview of the Largest 10 Digital Ad Networks Source: Advertising Age and Company Websites Confidential 27
Competitive Landscape – Overview of the Largest Independent Digital Agencies Source: Ad Age Annual Agency Report Confidential 28
IV. Public Companies and Select Recent M&A and Private Placement Transactions
Selected Recent Advertising Private Placements Source: CapIQ Selection criteria based on size and publicly available information. Confidential 30
Selected Advertising Agency Public Companies AdTech Public Companies US$ M Market Data Operational Metrics LTM Enterprise EV / Revenue EV / EBITDA Revenue EBITDA Revenue Growth LTM Adj. Gross Company Value (a) (b) 2015E (c) 2015E (c) 2016E (c) 2015E (c) 2016E (c) 2015E (c) 2016E (c) '15E/'14A '15E/'16E Margin Op. Margin WPP $32,539 1.8x 11.0x 10.6x $17,953 $18,592 $2,955 $3,073 56% 4% 87% 16% Omnicom 20,957 1.4x 9.5x 9.1x 15,167 15,815 2,217 2,309 (1%) 4% 25% 13% Publicis 15,559 1.5x 8.6x 8.1x 10,314 10,803 1,801 1,924 42% 5% 39% 16% IPG 10,085 1.3x 9.7x 9.1x 7,607 7,890 1,037 1,108 1% 4% 36% 11% Havas 3,492 1.5x 9.0x 8.3x 2,338 2,489 389 420 25% 6% 39% 14% MDC 1,931 1.5x 9.8x 8.5x 1,328 1,431 198 228 9% 8% 33% 7% 25th Percentile $10,085 1.4x 9.0x 8.3x $7,607 $7,890 $1,037 $1,108 1% 4% 36% 13% MEDIAN $15,559 1.5x 9.5x 9.1x $10,314 $10,803 $1,801 $1,924 25% 4% 39% 14% 75th Percentile $20,957 1.5x 9.7x 9.1x $15,167 $15,815 $2,217 $2,309 42% 5% 39% 16% Notes: (a) Based on closing stock prices on January 12, 2016. (b) Calculated as Equity Value plus total debt, minority interest (at book value unless otherwise noted) and preferred stock, less cash & equivalents). (c) Projections represent Wall Street estimates. Source: CapitalIQ Selection criteria based on size and publicly available information.
Selected Recent Advertising M&A Transactions US$ M Implied Ent. Date Announced Acquirer Target Target Description Value LTM Rev EV / LTM Rev Apr-15 KPMG Beacon Partners Provides management consulting and investment banking advisory services ND ND ND Medimedia Pharma Feb-15 ICON Offers scientific and medical communication services $120 ND ND Solutions Select Optum Life Sciences Jan-15 MAPI Developpement Offers information technology-enabled health services in the US and internationally ND ND ND Services Nov-14 Publicis Sapient Provides a range of online marketing campaign creation and management services 3,419 1,356 2.5x Oct-14 ICF International Olson Provides a range of digital marketing, public relations, and web design for businesses 295 126 2.3x Aug-14 MedAssets Sg2 Provides healthcare BI SaaS as well as related consulting services 142 100 4 Provides digital marketing services for the healthcare, medical device and Oct-14 Cognizant Cadient ND ND ND pharmaceutical industries Jul-14 Boston Consulting Group Strategic and Creative Provides web design, product design and mobile marketing design services ND ND ND Provides digital and social media marketing campaign creation and management Oct-13 McKinsey Brick and Click Solutions ND ND ND services Provides online marketing campaign creation and management, social media May-13 Accenture Acquity 280 141 2.0x marketing, search engine optimization and Web design services Provides Web design, banner advertising, email marketing and mobile application Oct-12 Accenture Avventa 5 ND ND development services for businesses globally Provides Web design, mobile app development, search engine optimization, pay-per- Sep-12 Publicis LBi International 547 279 2.0x click campaign management and social media marketing Sep-12 Athenahealth Healthcare Data Services Provides healthcare data analytics, quality control and management SaaS 6 ND ND Provides Web design, online marketing campaign creation and management, and Jun-12 WPP AKQA 540 189 2.9x social media and mobile marketing services Provides online marketing campaign creation and management, social media May-11 Publicis Rosetta 575 250 2.3x marketing, search engine optimization (SEO) and Web design services Jun-10 The Lowe Group / IPG Face Digital Offers advertising and communication services 42 29 1.5x 25th Percentile $81 $120 2.0x MEDIAN $280 $165 2.3x 75th Percentile $544 $257 2.6x Source: CapitalIQ, 451 Research M&A Knowledgebase Selection criteria based on size and publicly available information.
AGC COMPLETES 28 DEALS IN 2015 UNDISCLOSED COMPANY Confidential 33
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