Charting the right route through a rocky 2023

There is a Latin American saying that roughly translates as: ‘Stormy waters bring good fishing.’ It’s a phrase investors and business owners may be wise to remember going into a turbulent 2023 where buyers are likely to look for the value being churned up in the market.

Rising inflation and macroeconomic concerns have already dampened appetite for media-related mergers and acquisitions, with UK sector buyouts falling 56% in the second half of 2022. It is the largest drop in three years.

Looking forward, the prospect of long-term conflict in Ukraine plus at best a stagnant outlook for the domestic economy mean companies that a year ago might have harboured lofty ambitions of achieving multiples in the mid-to-high teens, driven by froth in the market and interest from US investors, may now have to recalibrate their expectations to single digits.

That is if they can transact at all.

In the current climate, BDO’s latest Business Trends analysis warns that 13% of UK mid-market technology, media and telecoms businesses risk becoming zombies: companies that generate just enough cash to continue operating and service their debt, with limited capital available for growth investment. Hence, attention may turn to survival rather than lucrative equity events.

A tightening market means deals are likely to focus on two areas: fire sales at one extreme and resilient, evergreen companies with a winning formula at the other. Guess which will be able to command the best valuations and court the greatest number of suitors.

For leadership teams looking to be in that winning group, the path is clear. First, focus on revenue retention and (where possible) growth, while keeping a firm grip on cash flows. 

This may be easier for businesses embracing tech-led business models, such as programmatic advertising. Management teams should be looking at options to harness existing or explore emerging technologies to promote improved connectivity with the end consumer, such as the metaverse. This provides the added benefit of protecting against some of the challenges facing the market over the last year or so, including the well-documented erosion of customer data taking place online. It is worth noting that media buyers are going to be heavily focused on ROI, with data analytics supported by technology critical.

Just as important as this top-line view, however, will be a laser-sharp focus on cost control. Leadership teams should be looking now at ways to manage operational costs over the coming months—and should not be afraid to seek expert advice on the matter. It is not all about cutting costs, but ensuring your cash is being spent in the right ways, on the right services.

One example: UK and European marketing and media companies have long relied on lower-cost IT and analytics skills and support from highly specialised teams in Poland and Ukraine, but resources in the latter are clearly compromised at present (albeit not completely inaccessible).  With the tech platforming announcing headcount reductions, are there opportunities to recruit highly qualified staff that will support future growth? 

However, in line with a comparatively more robust economic outlook in the US, some BDO clients are looking west for expansion—and this opens a whole new market for technically skilled outsourced services from the cost-competitive Latin American region. Investigating more options for such diversification of markets and staff provision in 2023 makes sound business sense, especially given long-running challenges around talent retention and availability.

Evidencing a clear revenue and cost strategy with growth potential is critical to attracting attention from investors, which still hold around $1.7tr in dry powder globally and remain alert to sound opportunities in the media and marketing sectors.

The drive for value that is set to take place in 2023 will favour companies that can demonstrate resilience and sound financial management. Getting the right advice could be invaluable in the coming months… and a knowledge of Latin American proverbs could be useful, too.
 

Read the full MEDIAtalk report.