Analysts Say 2025 is the Year for M&A
Analysts Say 2025 Is the Year for M&A
Why We Are Less Optimistic
Expectations are high that deal activity in 2025 will be robust, heralding a long-expected recovery.
At Stage18, we regularly work and network with companies and funds across the digital media, adtech, martech, market research and datatech industries. While M&A may be more active in 2025 due to macro issues such as a business-friendly U.S. presidential administration, we believe that the benefits are most likely to benefit Big Tech and the large media companies more than mid-sized companies (we touch on the recently announced Kantar deal below.). Outside of white hot AI and cybersecurity (and maybe a little media holdco action tossed in), we feel 2025 will be challenging for the rest of the mid-cap market, and as a result, companies and investors should prepare accordingly.
Source: Diamond Capital Advisors © 2024
Four trends cause us to raise a yellow flag:
Buyer–Seller Imbalance. Most companies in our mid-cap orbit expected to be sold or recapped in 2024 or earlier. And for most, that did not happen. Now everyone is rushing for an exit. But who are the buyers? We observe few buyers who have the financial capacity to provide these exits. In our conversations, it seems that for every 10 sellers there are 1-2 buyers (or merger partners). Many private equity investors have been holding their positions far longer than anticipated and are eager to return cash to their LPs. At the same time, several of the larger strategic players in our sectors, which historically have been active acquirers, are themselves looking to IPO or trade in 2025 and are reluctant to pursue potentially dilutive transactions while in preparation for a change in control. Private equity funds that fueled the last recapitalization wave are facing a long-term reset of interest rates at a higher level, making their historically high rates of return more challenging and leading to far more disciplined buying compared to just a few years ago.
Cautious Buyers. Stage18 supported PE diligence efforts for several deals over the past two years. A consistent theme was price discipline, extra attention to systemic risks, higher target growth rates and general skepticism of seller projections. It’s not that deals weren’t getting done, but they took longer, had smaller pools of potential buyers and often yielded valuations far lower than original expectations. We have seen some deals drag on for over a year without completion. Other deals busted entirely after long processes, and likely damaged the sellers as management became distracted, and existing investors throttled back their support of the business. We don’t see these trends changing in 1H2025. Companies and buyout funds are still adjusting to an era where money is not free while absorbing earlier high premium acquisitions, many of which they are regretting (even though we know of no acquirer that would admit they paid too much for a 2018 or 2022 buyout). Case in point - the recently announced sale of Kantar Media to HIG. While this is a good sign for the industry, the sale process took over a year and according to public reports, only one buyer made a formal bid for the business. And it appears that the price was lower than what Bain had been seeking more than a year ago when commencing the process.
Slow Growth and Limited EBITDA. Companies are still adjusting to slower post-pandemic growth rates, particularly in the industries we follow. Top line growth for many of our sectors is hard to come by. Despite this, many low-growth companies are looking to sell. These companies are further burdened by cost structures which were built to support rapid growth, resulting in low or even negative EBITDA margins. Meanwhile, buyers are looking for financially accretive deals with defensible growth rates that can support the additional debt service resulting from higher interest rates. Most companies in the industries we follow were simply not built to generate cash flow while generating double digit growth, making them less appealing to new investors or strategic buyers.
Challenges of Differentiation. The zero money era distorted markets. Venture capital funds like Tiger Global had so much cash that they pushed up valuations in virtually every industry seeking capital. As a result, too many companies were funded, and many expanded into non-core areas in a search for new revenues (after exhausting their core addressable market). This has resulted in the challenge of differentiation. Differentiation will occur through a strong and disciplined financial profile and a product focus on core, scalable offerings that are attractive and additive to buyers. We are seeing markets with little differentiated offerings and high fragmentation. We have heard the word “commoditization” used frequently - not a great driver of premium valuations.
For companies that can overcome these hurdles, 2025 could be a year for a long-awaited exit. But for most others, 2025 will be another period of retrenchment; facing the challenges of running a business that operators and investors expected would have been sold years ago.
In our next post, we will outline a few concrete steps companies can take to mitigate these trends and better position themselves for success.
At Stage18, we help our clients in digital media, adtech, martech, market research and datatech industries drive growth through operational improvements, product differentiation and corporate development to help maximize funding and growth opportunities. Contact us for more information or assistance with navigating an exit.
Eric & Bruce - January 21st, 2025
