After Record Downturn, Media M&A Shows Signs of Rebound

A cocktail of adverse economic factors has brought the number of merger and acquisition deals in the media sector this year to its lowest level since 2020, according to financial data provider LSEG Deals Intelligence. But a recent swell of positive indicators—including, in time for the fourth quarter, a general market upswing and a resurgence in ad demand—suggests that activity in the space could resume by the turn of the year, according to interviews with media analysts and M&A advisers. “There is a big chance that M&A activity picks up in the second half,” said Michael Hirsch, managing director at M&A advisory firm JEGI Clarity. “Companies that are going to be well-positioned for transactions will be the ones with healthy balance sheets, strong brand equity, and diversified solutions and revenue streams—particularly those that lean performance-focused and provide predictability.” Adweek’s 2023 Media All-Stars Are Redefining Media Strategies and Expanding Audience Reach Critically, the last year has also brought about a significant shift in the ways in which media companies are valued, according to Hirsch. The broader pivot to profitability, as the fates of digital media companies like Vice Media have demonstrated, has shifted emphasis from the potential of a publisher—measured by metrics like revenue or reach—to its immediate commercial health, gauged by cash flow and EBITDA. Chilled M&A looks to thaw So far this year there have been 1,907 M&A deals in the media and entertainment sector—down 15% from the same period in 2022 and 14% in 2021. With the exception of 2020, 2023 has seen the fewest media M&A deals since 2014. Deal value has declined more dramatically. Compared to the same periods, total value has dropped 80% and 49%—from $243 billion in 2021 and $101 billion in 2022 to $50 billion this year—meaning deals have decreased in both volume and average value. This sluggishness is due to ongoing fears of a recession contributing to a downturn in the advertising economy, whose effects were compounded by inflation and rising interest rates that chilled debt financing, according to Joseph Teasdale, head of technology at media firm Enders Analysis. Some of these elements still persist, and they have been joined by new concerns, such as the Hollywood strikes and rising oil prices, said Daniel Kurnos, an equity research analyst at The Benchmark Company. But others have shown signs of abating. Economists increasingly believe the U.S. has avoided a recession, fears of which had frozen marketing budgets. Advertising has also rebounded in the tech sector—Meta and Alphabet, for instance, reported revenue increases of 11% and 7%, respectively, in the second quarter. If ad spend more broadly follows suit, strategic buyers could feel more comfortable using cash to make acquisitions, according to Jay Kirsch, partner at Oaklins DeSilva + Phillips. Additionally, the majority of analysts who spoke to Adweek believe that interest rates are likely to remain at their current levels, which could spur spending among private equity firms—a key buyer in media M&A. How Publishers Are Using Gen AI to Streamline and Improve Revenue Operations These factors work in concert with broader seasonal trends. Ad spend often rises in the fourth quarter, and publishers typically generate more than 25% of their revenue and a larger percentage of their EBITDA during the period, said Hirsch. Such an infusion of cash could buoy stock prices and bolster buying power, reigniting M&A activity among strategic buyers, especially among historically acquisitive media companies like Future plc., Ziff Davis, IAC and Valnet, according to one analyst. Likewise, new entrants, particularly in the gaming and creator economy sectors, could also act as buyers, according to Erica Gruen, a principal at Quantum Media. Epic Games’ acquisition of Bandcamp in March 2022, as well as Jellysmack’s June acquisition of creator-focused Network Media, reflect the growing crossover between the media, gaming and creator economy industries, opening up a new pool of potential buyers for publishers. Resetting the media valuation calculus The economic turmoil of the last 18 months has laid bare the vulnerabilities of ad-reliant publishing models, prompting buyers to gauge value with metrics like cash flow and EBITDA rather than revenue to determine valuation multiples. For instance, prior to the pandemic, publishers’ valuations were often between four and eight times their revenue, but now they can be between five and 10 times their cash flow, according to Kurnos. From Media Maven to Fandom CMO: Unveiling the Journey of Stephanie Fried The switch in metrics alone will reduce valuations because most publishers operate at EBITDA margins of between 20% and 40%, Kurnos explained. So if a company generated $100 million in revenue with a 20% EBITDA margin, a multiple of five times revenue would value it at $500 million, whereas a multiple of 10 times EBITDA would value it at $200 million. The unpredictability of the ad market has also led buyers to more highly value media companies with diverse revenue models, especially ones with sources of predictable income like subscriptions. As a result, rather than generalist publishers with broad reach, the most desirable targets for acquisition will now more closely resemble business-to-business models—companies that super-serve targeted, loyal audiences and monetize them through a variety of methods. “If a company is completely ad-dependent, they are in a bad position,” Gruen said. “If they have thought about the new ways in which users are consuming media and how they are going to diversify to meet those needs, they are going to be alright.”