While the digital services industry faced challenges in 2023, there are signs of recovery and growth in 2024, with a focus on building integrated capabilities, leveraging AI and driving scale through M&A.
According to research recently undertaken by JEGI CLARITY in partnership with growth strategy consultants, CIL, marketing services agencies are more likely to bounce back than businesses in other areas of the digital services market.
Market conditions:
Expectation of budgets bouncing back for digital marketing services agencies
The digital marketing services agencies sector is expected to have strong single digit growth in 2024 with M&A activity the key driver for this growth.
Last year saw many larger agencies pursuing smaller new businesses to stay competitive in this struggling marketplace. Our research found that 55% of respondents are feeling optimistic with an expectation of clients’ budgets bouncing back faster and being deployed more rapidly.
Other areas of digital marketing services market are more suppressed
This contrasts with the view of technology services players such as digital transformation ‘DX’ and e-commerce having poorer revenue visibility with clients’ budgets delayed or paused for larger transformational projects, causing a more suppressed market sentiment. Nevertheless, visibility is starting to improve.
M&A Outlook
While M&A activity within the digital marketing services sector was 20% lower in 2023 than 2022, valuations remain robust. With the combination of more stable macro-economic conditions, improving businesses performance and increased availability of capital, there is an expectation of a more upward M&A trend this year.
Over the next 12-18 months, it is anticipated that several scaled platforms will also take advantage of the improving M&A environment to come to market, expand into new geographies, add capabilities, or develop core competencies. The majority (89%) of respondents from our research are considering near-term M&A activities to support geographic and operational expansion, with a particular emphasis on penetrating the US market as a key driver of growth.
Therefore, expansion into the US through M&A remains a top priority for many European companies due to its scale, with a focus on leveraging existing client relationships. For those originating from outside the UK, entering the UK market via M&A is often viewed as a strategic step toward accessing the US market.
Industry Trends – integration and artificial intelligence (AI)
This year also sees an expected shift towards creating a unified brand with divisional sub-brands as a key to integration. This integration aims not only to drive top-line growth but also to unlock back-office synergies.
Not surprisingly, AI remains front of mind among the research respondents as a key disruptive trend. Feedback on its likely impact is mixed, with many focusing on the potential for efficiencies, while uncertainty persists regarding whether these efficiencies will benefit agencies or just increase financial pressures from clients. Nevertheless, respondents recognize the potential for AI disruption, with 60% actively implementing AI into their workflows. Key applications include automated creative processes, A/B testing and targeting, data collection and analysis, as well as internal project management tools.
In Conclusion
The outlook for the European digital services sector is positive after a challenging year in 2023. M&A remains a dominant value creation lever and will underpin most growth strategies as businesses seek to add capabilities to their offering and expand into new geographies, particularly the US. Our research shows that businesses must navigate the influence of AI and the challenge of consolidating brands to help drive topline growth and increase operating efficiencies.
Jonathan Davis, Partner, JEGI CLARITY
For the full report, visit https://www.jegiclarity.com/european-digital-services-market-the-investment-opportunity/
About JEGI CLARITY
JEGI CLARITY is a pre-eminent M&A advisory firm for leading media, marketing, information, and technology industries. With over 35 years of industry leadership and with one global team, its team offers trusted advice, rigorous execution, and outstanding results.
About CIL
CIL provides strategy consulting, value creation and due diligence support to management teams and investors. Our teams go beyond the market data, leveraging real-world understanding of their sectors to provide clear, actionable insight.