2009 Market Survey 2009 Market Survey Merger and Acquisition Prospects for MARKETING SERVICES AND INTERNET MARKETING FIRMS I N DECEMBER 2008, AdMedia Partners, Inc. conducted its fifteenth annual survey of senior executives at leading advertising, marketing services and interactive marketing services firms on prospects for industry mergers and acquisitions in the year ahead. The survey was done amid a growing awareness that economic conditions in 2009 would be as difficult as any year in memory. Respondents were unanimous that a recession is under way, with one-third expecting it to continue throughout 2009 and another 13% anticipating an even longer slowdown. Nonetheless, respondents were outspoken that the current downturn would inevitably create unique opportunities for buyers and sellers, especially those companies with innovative business models in emerging marketing and media. Respondents expect overall advertising spending in 2009 to decline by five percent, impacting both independent agencies and large holding companies. Many newer agencies, especially online firms, are finding themselves at a critical juncture as the validity of their business model, strength of their management team and overall financial wherewithal are being severely tested, most for the first time. Notwithstanding these challenges, respondents expect five percent growth in interactive advertising spending as well as five percent growth in their own businesses. Even with a troubled economy, 60% of respondents expect to take M&A-related steps in 2009, only a modest decline from last year when 67% anticipated doing so. This outlook appears to reflect both consolidation opportunities for smaller agencies with cutting-edge business models or strategic client relationships and game-changing opportunities for larger agencies to merge in order to gain critical mass and reshape the agency landscape. Volatile financial markets will continue to affect the universe of buyers. One-third of respondents expect M&A by strategic buyers to be up in 2009, versus more than two-thirds in last year’s survey. Publicly held marketing communications companies have seen their valuations cut nearly in half over the past six months, hindering their ability to be aggressive in the M&A marketplace. Similarly, only 14% of respondents predict industry M&A by financial buyers will grow in 2009, in contrast to 41% last year. The majority of financial buyers have been sidelined by frozen credit markets; however, a number of private equity players are sitting on large cash reserves, positioning themselves to act on attractive deals, albeit using less debt and more of their own equity. Easing off the record valuations reached in 2007 and 2008, respondents expect valuations to soften in 2009: 5x EBIT for advertising agencies (the one group with consistent multiples over the last several years), 5x EBIT for marketing services firms (versus 6–6.5x last year) and 6–7x EBIT for digital marketing agencies and digital marketing technology companies (versus 7–8x last year). So while the year ahead may not be remembered for record-breaking M&A volume or lofty valuations, nimble buyers – both strategic and financial – are sure to find suitable investment opportunities that will help them weather the downturn and be positioned for strong growth once the economy picks up – with a new, more accountable marketing mix model likely emerging. Likewise, sellers with a desirable mix of digital and traditional services and attractive financial results will potentially find opportunities to align with financial and strategic partners who can provide resources for accelerated growth in the years beyond 2009. In the following pages are the results of our 2009 Merger and Acquisition Prospects for Marketing Services and Internet Marketing Firms survey. MARKETING SERVICES AND INTERNET MARKETING FIRMS Prospects for 2 2009 Market Survey | www.admediapartners.com Weaker 78% Same 16% Stronger 6% EXPECTATIONS FOR T