How 'Horizontality' Is Driving M&A in Ad Tech

Ad tech is back in vogue with the investment community, and, more importantly, buyers, as the once unpopular sector is one of a handful that have benefited from the Covid-19 pandemic. Speaking at Adweek's Outlook 2021: The Year Ahead in Marketing and Media event Wednesday, Terence Kawaja, CEO of investment bank Luma Partners, told virtual attendees that after a dip in M&A activity in early 2020, the ad-tech, mar-tech and digital content sector saw a 20% annual increase in deals with 96 such purchases in Q4. "From our annual market report, you can see that huge uptick from the nadir of deal activity in the second quarter," he said. "This momentum has been incredible, and it continues into 2021." This acceleration has been prompted by the societal changes brought on by the Covid-19 pandemic, and in some cases has accelerated preexisting trends, which means the industry's biggest players need to adapt. "It's real simple: Change leads to M&A," he said, later quoting fellow Outlook 2021 presenter Rishad Tobaccowala, "Change sucks, but irrelevance is worse." In particular, this is leading to consolidation in the sector as media owners, not to mention intermediaries such as large demand-side platforms, realize they have to present a more comprehensive offering with key areas of interest: Luma Partners This is necessary in order to compete with the digital ad industry's largest players, namely Facebook, Google and, increasingly, Amazon, aka Big Tech. While companies offering convergent TV solutions were the most popular during the reporting period, buyers were also eager to emulate the success of the ad industry's triopoly. At the core of these players' value proposition for advertisers is data and identity. Logged-in users across a number of devices can exhibit to marketers how ads served on their platforms drive certain behaviors. "Identity is the foundational keystone to this entire cycle," said Kawaja. "And so what happens when you have regulations and restrictions is that it causes significant changes and data restrictions from the browser and the tech companies, who restrict the availability of information. This creates a challenge, the biggest of which is you can't simply do audience-based one-to-one targeting on the open web. It's now just relegated to the walled gardens, where they don't have to worry about identity because they have logged-in identity." And now the rest of the media industry wants to emulate the success of these companies' ad offerings even if it means spending tens, if not hundreds, of millions of dollars. For instance, in recent years WarnerMedia-owner AT&T spent more than $1.6 billion on AppNexus, and more recently Comcast's ad-tech unit FreeWheel bought Beeswax in a deal estimated to be in the hundreds of millions. Such acquisitions are often referred to as "strategic deals," where one player in the media market purchases another to create a more comprehensive offering in what ad industry doyen Martin Sorrell called "horizontality." Kawaja explained his thesis that supply-path optimization (SPO)—a process whereby advertisers reduce the number of intermediaries they work with in order to cut costs—will increase the pace of M&A in 2021, as would-be challengers to the dominance of Google's comprehensive ad stack seek to tool up. "We think SPO is going to bring horizontality back," Kawaja said. "These are all plays to develop a horizontal capability in advertising technology. So, the message to the rest of the LumaScape? Your move. "Whether it's the major programmatic display on the demand or supply side, or perhaps the premium publishers in display, or CTV or audio? It's going to behoove them to create marketplaces that apply this sort of horizontal strategy." See more of Adweek’s 2021 Outlook coverage, including deep dives from our editors into the future of marketing.