Mergers and Acquisitions in the Time of Coronavirus

Deals are still happening, but PPP loans and lockdowns pose complications

two gloves hands shaking hands
Deals are ongoing, but negotiations can get complicated. Illustration: Dianna McDougall

Key Insights:

There were 351 mergers and acquisitions in the ad-tech space last year–nearly one deal a day. Emerging platforms and changing regulations meant there was no sign of a slowdown in 2020.

Then the novel coronavirus pandemic hit. Ad spend has shrunk drastically, while stay-at-home orders have changed consumer behaviors and adjusted the motivating factors for M&A.

Deals are still happening, however. There was LiveRamp’s Acuity Data purchase this week, and S4 Capital has acquired three companies since March with a goal of raising $126 million to fund its coming acquisition spree.

“In line with our mantra of ‘faster, better, cheaper,’ now is not the time to slow down. We believe that it is precisely the time to quicken the development of our capabilities around digital transformation, accelerated by the pandemic,” Martin Sorrell, executive chairman of S4 Capital, said in the fundraising announcement.

S4 Capital has three potential deals on the horizon: one involving ecommerce and Amazon (an announcement is expected imminently), one in digital content in Germany, and another in analytics and measurement in the U.K.

Sorrell later told Adweek that while the pandemic has accelerated merger talks and subsequent integrations, S4 Capital isn’t looking to buy distressed assets, but instead companies with strong top-line growth and healthy margins. (Although this contrasts with media reports from earlier this year that cite leaked S4 documents.)

Ad spend has fallen during the pandemic, which has led to payment delays and even pullbacks, adding stress to balance sheets. This is especially the case for ad-tech companies whose technology is becoming commoditized, leading some firms to look for quick outs in order to salvage what’s left of the business.

“A lot of companies are going to be using Covid as a blanket excuse for either completely going under or doing some type of lateral sideways merger with somebody else,” said Ana Milicevic, principal and co-founder of consultancy Sparrow Advisers. “That’s going to become the excuse du jour, if you will.”

Strategic move or capitulation?

Earlier this month, advertising automation firm Mediaocean bought 4C Insights, a mar-tech company that specializes in video and social media, to prepare for the fall of linear television and the rise of streaming. The two companies have been business partners since 2017.

Bill Wise, CEO of Mediaocean, said that established relationship was important given the uncertainty around the pandemic, especially since this is “by far” the largest deal Mediaocean has done. “I think if I didn’t know them, the deal probably wouldn’t have gotten done,” Wise said.

Wise said the deal was a strategic one, and that 4C is growing despite the pandemic.

The deal was worth around $175 million, part cash and part earn-out, and 4C is expecting between 10% and 15% year-over-year growth in 2020, according to multiple sources. “Anyone that’s growing in this market is fortunate,” Wise said.

Meanwhile, other companies, especially startups “on the wrong side of the current funding squeeze,” may be forced into capitulation deals, according to Terence Kawaja, CEO of noted investment bank Luma Partners.

Rhombus, a startup founded in 2018 that places contextual ads around embedded content, was apparently hit hard by the industrywide pullback on ad spend and had to cut employees’ salaries as a result, according to multiple sources who declined to be named. Now it finds itself a rumored acquisition target. Rhombus declined to comment on the record when approached by Adweek.

Keeping the company informed

Milicevic said many deals get off the ground at industry events, but since they’re being canceled or shifting online, the beginning stages of dealmaking can be a challenge.

“Earlier phases of entering a potential acquisition funnel used to be very, very dependent on an in-person interaction. So, the current climate is really favoring people who have been through the process before,” said Milicevic.

On Monday, Mediaocean and 4C held a companywide town hall over videoconference, informing over 1,000 employees of the deal.

M&A can often lead to layoffs, as combining companies look to cut costs and eliminate redundant positions.

“We reiterated on our call … that the motivation for this deal is not cost-cutting,” said Wise, adding that the company will announce its full organization structure after the deal closes at the end of the month.

Merger discussions are typically held among senior executives, while lower-level employees usually aren’t made aware of a deal until it’s near done or upon completion.

“You don’t want to expose your staff to false starts, even if you are a very small and insular group and believing in transparency,” Milicevic said.

What to do with PPP loans?

Rhombus and 4C have all secured Paycheck Protection Program (PPP) loans, partially forgivable funds provided by the U.S. Small Business Association (SBA) to help keep companies afloat and workers employed during the pandemic.

4C received loans of between $2 million and $5 million, and Rhombus received a loan of $150,000-$350,000.

“There’s been no guidance issued thus far on what the impact of a merger has on the forgivability [of the loan] post-closing, and so there’s a lot of unknowns there,” said Matthew Pelkey, partner at Colligan Law, which specializes in advising entrepreneurs and businesses.

4C is returning its PPP loan as part of the acquisition.

“At the time, it was viewed as necessary to do exactly what the PPP was meant to do, which was ensure jobs remained. And as soon as we saw a line of sight to another option, we began preparing the paperwork to give back the money,” said Lance Neuhauser, 4C CEO and incoming Mediaocean president.

It’s unclear what Rhombus will do with the loan if it’s sold.

“If the PPP loan was included in the asset sale, and the buyer wanted to assume the loan and release the seller, SBA consent would likely be needed,” according to analysis from law firm Morgan Lewis.

A PPP lender would likely be the ultimate authority in determining whether a PPP loan would need to be repaid in full in connection with a transaction, according to Morgan Lewis.

Pelkey also stressed that companies who have taken out PPP loans should get written consent from their lenders prior to any major reorganization, such as a merger, change in ownership or consolidation.

@andrewblustein Andrew Blustein is a programmatic reporter at Adweek.