What is the New New Normal for Digital Commerce?
The Digital Commerce sector has experienced precipitous highs and equally stark lows since the coming and going of the Covid-19 pandemic. With Hampleton Partners recently releasing our newest M&A report into this space (which you can read here), this is a good moment to take stock of what’s been happening, and cast our eye over what could be termed the “new new normal” for e-commerce.
A rollercoaster ride
E-commerce had, of course, been thoroughly incorporated into many of our lives well before Covid reared its head. But the society-shaking impact of the pandemic made e-commerce companies newly indispensable, with physical retailers shutting down and billions of people relying on remote, online purchases both in their personal or professional lives.
This triggered a surge of acquisitions and mega capital raises in the e-commerce sector. As a previous report by Hampleton Partners noted, the “new normal” of the pandemic witnessed a “phenomenal investment frenzy” which saw transaction volume surge up by 70% between 2019 and 2021.
However, the gradual end of lockdowns and the reopening of physical retailers, not to mention inflationary pressures and other economic uncertainties, put the brakes on deal activity in the sector. Transaction volume dropped by 22% between Q1 and Q2 of last year, with a further drop later in the year.
With this context in mind, why is it that our more recent report on e-commerce describes it as a “stable, mature and resistant market within the global economy”? Well, it comes down to the correct interpretation of the deal data. What looked, at first glance, like a worrying drop-off in investor and acquirer interest in 2022 can more accurately be regarded as the market normalising after experiencing sudden and temporary acceleration during the peak of the pandemic.
What’s more, our analysts observed a +5% rise in deal activity in Q4 2022, with transaction activity reaching a level higher than what was seen in the pre-pandemic era. To be more specific, we observed 473 e-commerce transactions in Q4 2022, which is a higher number than we saw in any quarter between Q1 2016 and Q3 2020 (the final quarter before activity shot up during the pandemic acceleration period).
So, with the phrase “new normal” now a relic of the pandemic era, it might be said that e-commerce has entered a more stable, “new new normal” era, marked by robust transaction levels and acquirers taking a more selective and conservative approach to their deals.
Gaming making waves
One subsector that’s been particularly robust is Media, Social & Gaming, which has accounted for the largest percentage of deals over the past six months. The subsector had been one of the big beneficiaries of the lockdown, with deal volumes shooting up by 134% between 2020 and 2021. Then, as with the rest of the e-commerce space, there was a decline in transaction count in the middle of 2022, with an uptick towards the end of the year.
The “gaming” category encompasses both video games and online gambling. Indeed, one of the most notable deals in the subsector in 2022 was made by gambling tech behemoth IGT, which acquired online casino games supplier Softbet for $174 million.
This strategic move allowed IGT, already no slouch in the iGaming industry, to double its library of proprietary games and offer a game aggregation platform to boot. The acquisition, which was a reminder of industry resilience during the tough times of 2022, was hailed by IGT’s CEO as a major enhancement of the company’s “competitive capabilities with a proven, complementary content portfolio across Europe and North America.”
The four other winning subsectors
While Media, Social & Gaming has seen the highest amount of M&A activity, our analysts have also identified four other subsectors of interest. One is Digital Commerce Software, which includes companies specialising in CRM, marketing automation and payment solutions.
This subsector enjoyed a record high number of transactions at the outset of 2022, followed by the much-discussed drop-off and then the indications of a “new new normalisation” in Q4 2022. One of the biggest deals seen last year was the $1.6 billion acquisition of Billtrust, a provider of cloud-based tools for managing invoicing and payments, simplifying how e-commerce companies operate. This was a private equity acquisition, with Swedish PE firm EQT snapping up the business in an all-cash deal.
Another subsector to watch is Internet Services & Portals, which includes companies providing analytics tools and online advertising and search solutions. It stood apart from many other subsectors within e-commerce over the pandemic period, because M&A activity levels did not experience the same kinds of striking highs and lows. A significant transaction in the Internet Services & Portals space came at the end of last year, with auto retail giant AutoNation splashing out $190 million for RepairSmith, a mobile solution which allows drivers to arrange for car repairs quickly.
We’ve also been keeping our eyes on the Agencies & Service Providers subsector, which is where you’ll find web marketing, design and campaign management consultancies. It proved resilient in the face of 2022’s headwinds, with companies acquiring businesses in this space in order to grow their own presence in their respective markets. An example is Azerion, publishers of digital advertising in video games, which purchased leading adtech agency Hybrid Theory for $9 million. This has given Azerion instant access to the markets in which Hybrid Theory operates, including US and Asia Pacific.
Finally, of course, there’s the Online Retail subsector, which is what many people first think of when they think “e-commerce”. Companies here had the most visibility during the pandemic period, and the good news is that – following the 2022 dip – the subsector saw an uptick in deal activity at the end of last year.
It’s too soon to predict how things will progress for online retailers in the remaining quarters of 2023, but certain verticals like fashion and home furnishings have certainly seen interest from both strategic and financial investors. Frasers Group alone has made multiple acquisitions, including the purchase of retailer Missguided for $24 million.
For a deeper dive into all things Digital Commerce, download our full report now.