Highly Dynamic M&A Market in the German Digital Segment

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You can read about mergers and acquisitions in the digital market almost every week Consolidation and buying power currently seem to have no limits.


Interview with the founder of Hampleton Partners (London), Miro Parizek, as well as Ralph Hübner, Sector Principle responsible for the markets E-Commerce and Digital Marking. In Germany, Hampleton Partners helped managing – among others – the acquisitions of Tradebyte by Zalando and of Pixi* by Descartes last year.


The M&A market is currently highly dynamic, right?
Miro Parizek: Yes, you can really speak about a more than highly dynamic market right now. In the US and UK Deal Flow and valuations are on an “all time high” for quite some time right now; but also in Germany are there some market segments get going which were rather dormant until now.


So is this a dynamic peak and the bubble will burst again in the near future?
Ralph Hübner: We will certainly not infinitely remain on such a high level. However, there are fundamental reasons for this trend towards consolidation at the moment.


What reasons are these?
Ralph Hübner: On both sides of the deal, i.e. on the parts of the sellers and the buyers alike, there are strategic drivers motivating them and providing the script for many acquisitions. Let’s look at the sellers’ side first: be it in E-Commerce, in Digital Marketing or the Agencies. Many major customers and advertisers shifted their budgets from analogue to online and E-Commerce only in the last few years. We are speaking about totally different budget volumes here. For the smaller software companies and agencies it is not that easy to invest in all of the new topics such as programmatic, IoT, Big Data or Virtual Reality. And the right personnel is also scarce in the market and is getting more and more expensive. Growth and internationalization are thus almost only possible with a strong partner.


“New buyer groups are driving the M&A market.”
Miro Parizek, Hampleton Partners


And on the Buyers’ side?
Parizek: With the acquisitions, the buyers close their gaps in terms of technology, but also from a regional aspect and with respect to human resources. It simply takes too long to build up efficient teams. So they rather acquire a well-functioning unit. And there are two important additional facts. First, E-Commerce and the different marketing disciplines are now really growing together, everything is to be offered from one source. The major accounts are asking for that. Secondly, we see whole new buyer groups driving the market.


You are referring to investors from outside the industry?
Parizek: Exactly. If one agency acquires another one, this is always to some extent a zero-sum game. However, if McKinsey, IBM, Mercedes-Benz or Ströer enter these markets, they often have completely different synergy levers and are able to capitalize that in most diverse ways.


Where are the company purchase prices standing at the moment? Which factors are most decisive in the valuations?
Hübner: Classical factors are of course sales, growth, profit and number of headcount. However, the really decisive factors for a successful deal are strongly varying, so that you cannot generalize in this respect. It would be easy to say that a specific profit has to be generated, or that the company has to have a specific size.


Can you be more precise here?
Parizek: Well, you can derive mean values from our published quarterly reports on the individual market segments. But as I said, these are median values. In E-Commerce, the values are currently hovering at around 3 x the annual sales and in Digital Marketing it is 13 x the annual profit, just to name two reference values.


“There are fundamental reasons for the trend towards consolidation at the moment.”
Ralph Hübner, Hampleton Partners


Hübner: In this respect, we need to highlight two further aspects, however. Particularly in Germany the majority of acquisitions is not made public, at least as far as the transfer prices are concerned. And we may not confuse mergers such as diva-e and PI/A with acquisitions such as Zalando acquiring Tradebyte or IBM and Aperto/ecx.io. The underlying metrics are completely different. These involve a lot more “imaginativeness”.


What do you recommend the German mid-size software companies and agencies against this background?
Hübner: Well, currently it is certainly the right time to deliberate what they want to achieve within the following 2-3 years, and what can be achieved by themselves. It is not without reason that we are currently talking with 6 agencies of the German Top 50. The market recognized the opportunities, and it is the undeniable right of a founder to be awarded for many years of hard work. I think that Mr. Schrader is a reference case here. It’s like sports, you easily miss the chance to stop at the peak of your career.


And how can you proceed with this exercise? It is not necessarily a way to place an ad “For Sale” in INTERNET WORLD Business?
Parizek: Well, you could try, say on the 1st of April … No, seriously: It is a truly complex project and for most stakeholders it is a “once in a lifetime” experience. This is why they mostly do not have any experiences with that and ask for help from the outside. Not least because everything has to be dealt with very discretely and the entrepreneurs have to continue taking care of the daily business. In the end, it takes 6-9 months to finalize such a project, and missed target figures at the end of the negotiations would easily cause serious allergic reactions among the buyers, thus reducing the valuation or even imperilling the entire deal.


Why does it take 6-9 months? The proverbial “Handshake Deal” does no longer exist then, right?
Hübner: I am glad for every entrepreneur who is able to sell his company with a handshake at a bar. But these things happen very rarely, and even less if you try to convince a buyer from abroad. It takes several weeks to prepare the company data and then – in close consultation with our client – we address 60-70 potential buyers. All that takes time. Once you started negotiating with a stock-listed potential buyer, there are still many details to clarify even in the last third of the project term, as you can certainly imagine.


For the entire online version of the German interview, please see www.internetworld.de