The S&P 500 and Nasdaq indexes have hit record highs as technology stocks continue to rise — Microsoft recently closed above $2 trillion in market capitalization for the first time, and Facebook hit over $1 trillion. This investment likely comes as a result of increased online consumption during the pandemic and an influx of money from initiatives such as President Biden’s Covid relief plan. With a surplus of funds in the financial markets, many companies in the later stages of investment — especially those in the advertising technology sector — can benefit.
In the first quarter of 2021, investors spent over $23.7 billion in the adtech and martech markets, with 67% of this coming from mergers and acquisitions. We also saw companies leverage newly viable means such as special purpose acquisition companies (SPACs) to raise funding or exit, with U.S. SPAC M&A volume growing by 3,000% year on year in Q1.
Having led the merger of two companies within MGID Inc., and advised several martech and adtech companies in Europe, the Middle East and Africa in preparing for an IPO or new investment round, I can say this process requires careful deliberation and that companies must understand investors’ motivations, the opportunities available and how to harness them.
The key drivers behind the rise of SPACs in adtech
First of all, Google Chrome’s upcoming phaseout of third-party cookies and the need to address user privacy concerns have driven investor interest in identity solutions and ad measurement tools, which have attracted over $7 billion and over $4 billion in funding respectively.
Furthermore, the rise of SPACs now means that businesses can exit in approximately three to six months, compared to typical IPOs that can take 12 to 18 months. As shell companies, SPACs raise funding through an IPO while searching for a privately held business to purchase. They typically have a two-year timeframe to make their acquisition, and for the dynamic adtech market, this approach is often more feasible than IPOs. The ecosystem’s rapid evolution can impact adtech companies, making IPOs’ high levels of public scrutiny difficult to navigate.
SPACs: the benefits and considerations
One reason acquisitions are speedier with SPACs is that there are fewer regulatory hoops to jump through when it comes to disclosures. The long, traditional IPO process also typically incurs greater fees, which is a high barrier for some companies. Auditors, underwriting and bank fees can collectively deter businesses from going public, but SPACs provide a less costly route and better negotiation opportunities for target companies. Before mergers are publicly announced, businesses can determine important factors such as how much current owners are paid and available cash for operations and growth after the deal closes. Overall, this can create a smoother acquisition process.
There are some issues, however, that should be addressed in the negotiation stages. For instance, early investors often have an in-depth knowledge of the business, so a target company must ensure that newcomers also have an accurate understanding of its purpose and capabilities. Additionally, if new investors buy common shares, they will be able to elect board members that oversee major decisions. For targets, it’s vital that all parties’ visions for the business align prior to the acquisition.
How adtech companies can harness market conditions
To secure the best investment, there are some important considerations that all companies should keep in mind:
- Prepare for the right opportunity. If your company hasn’t been gearing up for an IPO for the last year and a half to two years, don’t rush. In 2021, many of the companies that have gone public through typical IPOs have been systematically preparing for a while, waiting for the optimal moment.
- Assess your options. Despite being unfavorably compared to the dot-com bubble of the 1990s, SPACs remain an appealing tool for adtech companies. With the connected TV and e-commerce sectors thriving, investors are now evaluating adtech companies as they would any other technology business. If your company operates in a sector that has boomed during the pandemic, has reached an estimated value of more than $250 million, offers high-quality services and performs well financially, then the SPAC route could be a viable option for you.
- Prioritize your company’s value. When contemplating an IPO or SPAC, it’s essential to have a strong understanding of the value of your business and the product you offer to customers, as well as the wider industry. After the deal is sealed and your shares begin to be publicly traded, you’ll need to reassure your investors of the company’s potential and capabilities.
Regardless of whether businesses opt for traditional IPOs or streamlined SPACs, going public is a huge undertaking. Despite the influx of adtech investment, businesses must make informed decisions that suit their specific circumstances. A silver lining to the disruption of 2020 is that there are now greater opportunities for adtech companies that have already been planning to exit or raise funding. By heightening the quality of product offerings, thoroughly preparing for change and carefully evaluating which options benefit your company the most, you can be ready to make a move when the time is right.