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Why Booming Ad Tech M&A Is Bad News For IPOs

April 29, 2016

by Bill Wise for MediaPost

The ad tech market is seeing an uptick in big-name M&A transactions. Last year saw the first of many with Verizon’s $4.4 billion acquisition of AOL and the February merger of Telenor and Tapad. And the massive speculation around who will win the coveted bid for Yahoo shows that this trend isn’t slowing down anytime soon. 

More than ever before, telecommunications and ad tech companies are joining forces to stay ahead of the market, and here’s why. 

TV has become a more interconnected medium, with social media playing a huge part in how networks engage with their audiences. Furthermore, viewers are spending more time than ever on second screens. Instead of playing “winner takes all” against the competition, networks and cable providers incorporate more crossover into their programs, using hashtags and leveraging celebrities to drive further engagement for television through a digital medium. If you’ve ever seen a commercial urging you to “join the conversation on Twitter and Facebook,” you know that this web of connectivity is alive and well. 

As television continues to become more interconnected, so too will the infrastructure around TV and digital buying. This transition has already begun, and with it has come a shift from buying demographics determined by Nielsen to buying more targeted audiences. To stay ahead in an increasingly competitive market, companies are finding strength in the aggregation of tech, media, data, and audiences, which is why we’re seeing an upswing in telecoms acquiring media and ad-tech companies. 

In addition, the market is becoming increasingly unfavorable for smaller ad-tech companies to IPO. In fact, at the moment, the conditions seem to make it nearly impossible. It wasn’t always that way. Five years ago, it was advantageous to be a start-up in the ad-tech space because there was room for innovation -- the most successful were able to be nimble and quick against legacy players and disrupt the industry. Now, the market is all about scale. And with the scale players getting even larger through strategic M&A choices, there’s not much room left for scrappy startups to take on the industry goliaths. 

Another factor to consider is that there is not enough product differentiation in the current market to fuel favorable IPO conditions. Without differentiation, there is no margin expansion. Until a company enters the market with scale that can compete with the likes of Google and Facebook -- who currently take nearly 70 cents on the dollar -- there is no oxygen left in the room to fuel an ad tech IPO. 

To be a leader in this space, you have to grow faster than the market. And at the present time, the big players in the telecommunications and ad tech space are the only ones with the scale and ability -- fueled through strategic M&A -- to keep up the pace.