Even before coronavirus caused an economic upheaval, M&A spending was tightening up for CX&C targets. A parade of 10-figure deals marched through this market in 2018 – however, spending has been light since. According to 451 Research's M&A KnowledgeBase, spending on CX&C targets fell almost in half during 2019 and continued to slow through the first quarter.
According to the M&A KnowledgeBase, buyers paid a median 10.6x trailing revenue in their $1bn-plus CX&C acquisitions in 2018. Last year, neither of the 10-figure deals – Publicis Groupe's purchase of Epsilon, an aging marketing software and data shop, and Platinum Equity's take-private of Cision – hit 4x. Overall valuations have continued to drop since then as the heaviest spenders stepped back from the sector. In the first quarter, the median multiple for all CX&C acquisitions stood at just 1.4x, less than half the median for such transactions across the previous decade, our data shows.
A Spreading Sickness
The pain from those cuts won't be spread evenly among software vendors. The largest among them have bigger balance sheets and can sustain themselves in a shrinking market. Moreover, many marketers have multiproduct deployments with those same vendors, giving the biggest organizations a greater defense against budget cuts as CX&C applications are often linked via shared data and cross-channel campaign management.
After years of heavy spending for targets in marketing automation, commerce software, customer service and other CX&C applications, the four largest players in this sector – Adobe, Oracle, Salesforce and SAP – have built up substantial market share across multiple CX&C product categories. According to 451 Research's Voice of the Enterprise: Customer Experience & Commerce, Vendor Evaluations, each of those vendors has software deployments inside over 20% of the organizations we surveyed across four or more product categories.
Enterprises also have been forced to change in the crisis. Airlines, hotels, banks and other businesses whose call centers have been crushed in the pandemic are now more likely to invest in technology projects that can scale customer service. Although the market for CX&C software will dip initially, it could emerge with a higher growth rate than before the crisis amid an increase in demand for the software to build, manage and analyze digital customer engagement.
This ordeal will have businesses reevaluating investments in their CX&C stacks and likely fuel investments in emerging categories that were already getting attention. As we noted in a recent report on that topic, CX&C technologies such as modernizing digital experience platforms, embracing virtual assistants and unifying customer data could accelerate their growth rates. Those emerging segments are largely populated with startups that will struggle to survive the pandemic, providing larger firms with grist for bargain-priced acquisitions.
Like the pain from the downturn, don't expect those budgets to flow evenly to all CX&C companies. That same survey shows that enterprises rely on relationships with application vendors to execute their digital transformation projects, as 65% said software vendors are 'essential' to their digital transformation efforts. The broad deployments of the largest CX&C providers give them an inside track to capture future spending on these projects. The combination of shifting priorities and a boost in new digital transformation projects could drive the large CX&C firms to increase their pace of small acquisitions.
Today there are fewer categories of CX&C software where the largest players don't have an extensive presence, but in those that remain, we could see sizable prints. For example, none of the big four have yet to follow SAP's $8bn move into voice of the customer analytics (via Qualtrics), although an eventual acquisition there will likely carry a high price – Medallia and SurveyMonkey, both publicly traded companies with market caps above $1.5bn, are the two largest targets there.
For the many middling businesses and categories in this market, exits – especially at premium valuations – will be tougher to find. The midmarket buyers (smaller public companies and private equity-backed firms, for example) that are responsible for most of the deal volume in this sector are likely to see their purchasing power hampered by the pandemic. And while the largest acquirers aren't likely to see their ability to do deals decline, they weren't putting premiums on smaller acquisition targets before the outbreak. For an illustration, look at the exits we've seen among marketing personalization specialists before the crisis.
Although the large companies all talk up the need for personalized customer engagement, none have been willing to spend much on purchasing the technology. Among the recent targets in that subsegment, few have fetched north of 4x. Many struggled to expand their toplines selling innovations within categories where the biggest vendors have substantial market share. Paying top dollar for businesses struggling to grow sales with innovative products in mature segments isn't likely to become a priority if the recession pushes more market share toward the largest players.
Scott Denne is a Senior Analyst with 451 Research, where he helps direct the firm's coverage of technology mergers and acquisitions. He also contributes to 451 Research's Customer Experience & Commerce Channel with coverage of the advertising technology industry.
Sheryl Kingstone leads 451 Research’s coverage for Customer Experience & Commerce, which covers the many aspects of how customer experience is a catalyst for digital transformation. She oversees the company’s coverage of a variety of customer experience software markets spanning ad tech, marketing, sales, commerce and service.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.