Digital Commerce is poised to benefit in terms both of market and M&A activity. M&A interest will hail from financial and strategic investors who will shift their attention to digital and e-commerce-related companies as previously hyped up targets in AR/VR or artificial intelligence will lose momentum or no longer be valued as highly.

Testament to the surge in e-commerce is Shopify’s market capitalisation, which has skyrocketed during the pandemic. Furthermore, recently BigCommerce placed a very successful IPO. Overall, GLORE estimates that the stock index GLORE50 (comprising the 50 most important e-commerce companies) has grown by 73 percent year-to-date, and 91 per cent over the last twelve months.⁽¹⁾

In our last report, we noted that the Digital Commerce sector was increasingly dominated by online marketplaces, e-tailers and social commerce. These trends are being exacerbated by COVID-19. 

A Statista survey from March 2020 revealed the impact of coronavirus on in-home media consumption: more than 40 per cent of respondents claimed they were spending longer on messaging services and social media.

Similarly, in an early April 2020 Digital Commerce 360 survey, 36 per cent of retailers said they adjusted their marketplace strategy as a result of COVID-19.

As people continue to avoid brick-and-mortar retail and spend more time on electronic devices for leisure and purchases, brands and sellers are forced to strip back any non-essential digital commerce efforts and focus on these core channels.

It is safe to say that in a decade or so from now, we will look back at the 2020 coronavirus outbreak as a catalyst towards digital – an event which cemented the new age of digital commerce, of e-commerce software and of many services around it.

Source: GLORE⁽¹⁾

DTC: The Superior Model in 2020

What is DTC? 

Direct to consumer companies primarily manufacture their own brands, selling through a self branded e commerce site and with physical retail or third party e commerce only as secondary channels.⁽¹⁾

Once they have identified a sweet spot in the market, these innovative, bottom up brands market their product using hyper targeting tactics on social media with the help of available shopper profiles and shopper data.

Why is the DTC model winning during COVID-19?

New brands looking for healthy profit margins are favouring the DTC model.

This is because social media, marketplaces and existing software tools allow them to sell without spending unnecessarily on a multi tier sales model which appears to be more and more irrelevant as brick and mortar sales continue to suffer from COVID 19.

Incumbent brands have leared that: 

• Their systems or processes need to be scalable or ‘DTC able’, so they must quickly invest in software and e commerce processes.
• They need to ‘go DTC’ or acquire DTC companies and software.
• Their current technology stacks are inadequate to address the DTC opportunity.

7 THINGS TO KNOW ABOUT DTC⁽²⁾

1. DTC is fast becoming the norm, particularly as retail continues to suffer during COVID 19.
2. In future, more and more products will be sold DTC even traditional consumer goods such as automobiles.
3. DTC depends on repeat customers, as upfront costs must be amortised by repeat buys.
4. The DTC product must go viral and be widely adopted by passionate users and buyers, who will convince others through their social media (and other ways) to also buy this product.
5. A particularly successful model involves a founder who has a close connection to a specific community and to the product which that community wants to buy.
6. Early stage DTC companies cannot depend on customer acquisition through paid marketing Instead, community is key for the product to go viral.
7. New platforms will come to serve younger generations who are not interested in older platforms. As we have seen in the case of TikTok new platforms can quickly go viral.

Source: GroupM⁽¹⁾; Eric Hippeau, TechCrunch⁽²⁾ 

DTC: Success Stories

Beauty

According to research by BCG, the beauty market lost 60 per cent of US retail sales between March 2019 and March 2020. Beauty retail was shut down, and even as stores and outlets begin to reopen, the industry will face difficulties in ensuring the environment is hygienic.

However, DTC beauty is thriving.

In June, COTY acquired a majority stake in Kim KardashianWest’s beauty business, KKW Beauty. Coty will have overall responsibility for the portfolio’s development in skincare, haircare, personal care and nail products. The relationship aims to further build “a high growth, DTC beauty brand”.

Earlier this year, COTY announced a strategic partnership with Kylie Cosmetics, the brand of another Kardashian influencer. Kylie Jenner has 230 million followers on Instagram. Coty will have overall responsibility for the portfolio’s development, leveraging its global knowledge and capabilities in R&D, manufacturing, distribution, commercial and go-to-market expertise, as well as its deep understanding of the fragrances, cosmetics and skincare categories.

In late July 2020, German chemical and consumer goods giant Henkel AG acquired a 75 per cent stake in three beauty brands from Invincible Brands Holding in a move to strengthen its DTC activities.

Hello Body is active in the skin, body and hair care categories; Mermaid+Me focuses on hair care; and Banana Beauty offers cosmetics. The brands are sold mostly in Europe and address the trend of sustainable beauty products. In the 12 months through June, the businesses generated sales of roughly $119 million and employed around 180 people.

Fitness

The fitness sector lost 33 per cent in US retail sales YoY, but DTC fitness brands have continued to grow through connected devices and influencer marketing.

MIRROR, the home fitness brand which sells a $1,495 reflective display so subscribers can exercise while simultaneously streaming workouts, was acquired by Lululemon for $500 million.

Gymshark recently reached a $1.3 billion valuation after the gym apparel company announced a strategic partnership in which General Atlantic will take a 21 per cent stake in the business.

Peloton saw more than 1.1 million people download the Peloton Digital app which offered a 90-day trial of home workouts that did not require the $2,245 bike or the $4,295 treadmill.

Marketplace businesses skyrocket in 2020

Walmart, BestBuy, real.de or eBay propelled ahead - An increasing number of companies are growing at “the Amazon pace” as they harvest new sellers through COVID-19.

Positive consolidation with ever more services and solutions - The marketplace arena is seeing positive consolidation. Marketplaces are showing signs of professionalisation as software, logistics and service providers become more relevant.

More marketplaces and higher investments now than ever - The number of marketplaces has skyrocketed, with over 500 marketplaces worldwide and over 1,000 domains (amazon.de, amazon.co.uk, etc.).

Marketplaces can fully exploit CRM models - CRM software can fit the individual sales structure of any tech field. Marketplaces are increasingly using loyalty programmes and special – often customisable – CRM retargeting.

M&A activity in the marketplace space continues to grow - Online marketplaces attract diverse buyers, with Lidl’s parent company Schwarz Gruppe acquiring real.de; and eBay selling its classifieds business to Norwegian competitor Adevinta.

M&A Summary

New uptick in transaction volume

M&A activity across the digital commerce space has shown impressive development again this year. After reaching peak transaction volumes in 2016, the sector saw renewed activity with almost 800 deals in 1H2020 - with 60 per cent of deals occurring in Q1 2020. Furthermore, the sector saw an uptick in disclosed transaction value which reached a healthy $61 billion, with the median disclosed transaction value over the past 30 months around $20 million. For this large number of deals across a myriad digital commerce segments, it is counterintuitive to summarise EBITDA and revenue multiples as they would not be indicative of overall trends in this broad ecosystem. However, the individual multiples can be found on their respective subsector pages. 

LARGEST DISCLOSED DEALS OF 1H2020

$13 billion - 20 Feb
Morgan Stanley acquires E*TRADE Financial Corporation at 4.7x EV/S and 9x EV/EBITDA

$9 billion - 16 Jun
Warburg Pincus, General Atlantic, Ocean Link Partners acquire 58.com Inc. at 3.7x EV/S and 9.8x EV/EBITDA

$8.1 billion - 10 Jun
JustEat Takeaway acquires GrubHub at 5.6x EV/S and 126x EV/EBITDA

$7.1 billion - 24 Feb
Intuit acquires Credit Karma Inc. at 7.1x EV/S 

$5.3 billion - 13 Jan
Visa acquires Plaid Inc.

$1.9 billion - 16 Jan
Far Point Acquisition Corp acquires Global Blue AG at 5.4x EV/S and 9.3x EV/EBITDA

$1.33 billion - 25 Feb
Salesforce acquires Vlocity

$1.2 billion - 07 Apr
Social Finance [dba SoFi ] acquires Galileo Financial Technologies at 12x EV/S

Median disclosed transaction value over the past 30 months: $20m 

The Digital Commerce sector saw a huge number of billion-dollar and nine-digit deals in the first half of 2020. The split between financial and strategic buyers in this table is fairly even, with Morgan Stanley closing the largest deal of the sector, and JustEat-Takeaway winning the GrubHub bid at $8.1 billion in June.

Top Acquirers, 2018-2020

Number of active acquirers over the past 30 months: 3,123

Number of acquirers that made >1 acquisitions: 348

Top acquirers and their three most recent acquisitions

dentsu aegis network - 23 acquisitions in 30 months

• (via subsidiary Merkle) Media Storm, digital & traditional marketing services
• Digital Pi LLC, marketing automation consulting services & SaaS
• E-Nor LLC, marketing optimisation services

accenture - 12 acquistions in 30 months 

• Hangzhou iTrigger Computer Technology,  CRM and ERP SaaS
• Yesler Inc., B2B digital marketing services
• INSITUM, brand development & advertising consulting

salesforce - 9 acquisitions in 30 months 

• The CMO Club, online marketing executive community
• Vlocity Inc., Salesforce-based CRM SaaS
• Evergage Inc., customer data & personalisation SaaS

Walmart - 8 acquisitions in 30 months 

• FloCare and BigTrade, wholesale trading platform
• Polymorph Labs Inc. (assets), custom ad infrastructure management SaaS
• Flipkart.com, India-based online retailer

CoStarGroup - 6 acquisitions in 30 months 

• Ten-X LLC, online real estate classifieds & auctions
• RentPath Inc., US Rental digital marketing services
• STR Group, hospitality data research & analytics services

verticalscope - 6 acquisitions in 30 months 

• Carbon Media Group, outdoor enthusiast online video & advertising
• Outdoor Hub, LLC, online advertising platform
• MTBR.com, mountain bike enthusiast website

ALPINE - 6 acquisitions in 30 months 

• Early Echo LLC [dba GatherUp], customer experience automation SaaS
• AuthorityLabs LLC,  SEO monitoring SaaS
• SERPs Inc., SEO marketing management SaaS

Spotify - 5 acquisitions in 30 months 

• The Ringer, ad-based sports podcast network
• SoundBetter Inc., online audio production marketplace
• Parcast, online podcast network

coinbase - 5 acquisitions in 30 months 

• Tagomi Holdings Inc., online cryptocurrency brokerage services
• Xapo (institutional business), online cryptocurrency trading exchange
• Venovate Marketplace, investment curation SaaS

Subsector Breakdown

47% - Internet Services Platform Solutions
Digital commerce services, analysis reference providers, online advertising, directories, search, exchanges, education.

16% - Digital Commerce Software
Digital marketing and e-commerce software, CRM, advertising enablement, marketing automation.

8% - Agencies & Services Providers
Online advertising, mobile & web marketing, e-mail marketing and measurement, web design & development.

10% - Media, Social & Gaming
Social networking, online games, e-sports, entertainment, online communities, video, blogs, music, news content.

19% - Online Retail
E-commerce retailers, online marketplaces, classifieds, auctions.

The subsector breakdown shows the importance of the Internet Services Platform Solutions segment, which accounted for 47 per cent of the total volume of digital commerce transactions in the first half of 2020. Aside from the digitalisation of many fields and processes, we have also seen the proliferation of online content and platforms which have replaced in-person exchanges and interactions - for instance, with the rise of online content libraries for social media messaging, or e-learning and tutoring platforms. Meanwhile, online retailers accounted for the second largest portion representing 19 per cent of M&A deal volume in digital commerce. These two segments have retained the majority share of transactions since 2016.

However, activity in the Digital Commerce Software segment is experiencing a noticeable surge in 1H2020. This is aligned with our previous observation regarding the acute necessity for brands to develop or buy new e-commerce software to adapt to “the new normal” - that is to say, to establish or upgrade efficient e-commerce and direct-to-consumer business.

Internet Services & Platform Solutions

Volume and valuation multiples on the rise

In this subsector, transaction volume shot up in 1H2020, with 370 deals recorded - the most on record. The trailing 30-month median revenue multiples have shown further stability, sticking around 3x since 2018. Meanwhile, the median EBITDA multiple picked up again, reaching 10.6x from the 10.5x in the last reporting period. 

The subsector covers digital commerce services, online advertising, directories, search, education, exchanges, analysis and reference providers. It also includes market data and information services for the financial sector, which shows that commerce and traditional banking and financial services tools continue to see extensive overlap. 

Largest deal on the line after lawsuit

In February, Morgan Stanley announced it was acquiring discount brokerage and online trading firm E-Trade for a whopping $13 billion. The addition of E-Trade allows Morgan Stanley to tap into a new source of revenue through an additional 5.2 million customer accounts and $360 billion in assets, giving it a firmer footing in the battle for middle America’s wealth management and online trading market. 

A few months later, a lawsuit emerged accusing E-Trade’s directors of keeping the all-stock merger on track despite irregular financial projections from both sides - which, in practice, caused the value of the merger deal to be drastically reduced and provided a negative premium for stockholders. 

In spite of this, the planned merger will go ahead and close sometime in Q4 2020 after earning E-Trade’s shareholder approval⁽¹⁾.

Second largest deal hails from payments space

In January, Visa acquired Plaid for $5.3 billion - twice its final private valuation. Plaid provides a data transfer network to power fintech and digital finance products. The platform enables fintech applications to connect with users’ bank accounts - akin to what Stripe does for payments, but Plaid helps developers share banking and other financial information more easily instead. Plaid’s fintech-centric business opens new market opportunities for Visa both in the US and internationally.

Edtech M&A activity on the rise

Edtech is helping us adapt to new ways of studying remotely. When COVID-19 was declared a pandemic by the WHO, education app downloads worldwide surged 90 per cent compared to the weekly average in Q4 2019. 

A few months later, Chegg - an American public company which specialises in textbook rental and tutoring - acquired Mathway for $100 million. Founded in 2002, the company provides an online math tutoring service, operating in 100 countries and available in more than 13 languages. Mathway has become one of the highest rated education mobile apps The deal adds to Chegg’s breadth of tutoring subjects and gives it a strong foothold in the maths department.

Source: Finance Magnates⁽¹⁾ 

Online Retail

Sub-sector overview

The Online Retail sector has seen fluctuation in deal volumes over the past two years, with 155 deals inked in 1H2020. Though this is fewer deals than we saw in the second half of 2019, valuations in the subsector have skyrocketed to their highest level ever, at 18.7x EV/EBITDA and 1.2x EV/S. This median multiple is predominantly due to three food-related deals over the past 30 months: Delivery Hero’s acquisition of Woowa Brothers (79x EBITDA); Takeaway.com’s acquisition of Just Eat (60x EBITDA); and the merged entity’s subsequent acquisition of GrubHub at a whopping 126x EBITDA.

Online auctions set to benefit from COVID-19?

CoStar Group, the real estate classifieds website, acquired Ten-X (formerly known as Auction.com) from Thomas H. Lee Partners (which purchased a controlling interest in the company in 2017). The deal amounted to $190 million.

Ten-X provides online commercial and residential real estate classifieds and sales auction websites. Realtors, banks and homeowners typically use Ten-X when they decide to conduct an auction for a property. The site verifies titles, inspects properties and opens the auctions to qualified bidders throughout the world. 

The deal will help CoStar increase its role in the huge distressed commercial property market that the COVID-19 pandemic is expected to fuel⁽¹⁾.

Chinese online classifieds garner attention

In June, a buyer group comprising Warburg Pincus, General Atlantic, Ocean Link Partners and 58.com founder Jinbo Yao acquired 58.com for a whopping $9 billion. A Chinese company, 58.com - China’s answer to Craigslist⁽²⁾ - operates a classifieds advertising website enabling businesses and consumers in China and around the world to buy and sell goods or services.

Consolidation continues in food delivery space

A field rife with competition, the online food delivery market continues to show signs of consolidation, especially amid coronavirus. In June, JustEat Takeaway - the European company that only just got its own $7.8 billion merger approved by regulators in April 2020 - officially announced it was acquiring GrubHub in the US for $8.1 billion. JustEat Takeaway said the combined operation, which processed 593 million orders in 2019, will have over 70 million combined active customers globally.

GrubHub had been in play for months and had been in acquisition talks with Uber’s Eats division on and off for about a year, as reported by TechCrunch. Discussions with Uber broke down over a variety of concerns, including antitrust concerns and expected regulatory scrutiny.

GrubMarket makes move for two health oriented food businesses

American e-commerce food delivery service GrubMarket made two acquisitions in 2020 which are aligned with the health and lifestyle interests of the younger, wealthy coastal generations in the USA. In January, it acquired Farm House Foods, a subscription-based e-commerce organic and local produce ordering and delivery service for consumers and farmers in Northern California. Later, in April, GrubMarket acquired Boston Organics, which operates an e-commerce organic produce and grocery ordering/delivery service for customers in the Boston area. Terms of these deals were not disclosed.

Source: WSJ⁽¹⁾, Bloomberg⁽²⁾

Media, Social & Gaming

Deal volume low, EBITDA multiples healthy

Although representing a comparatively smaller share of deals, the Media, Social Gaming segment has seen very strong valuations, with median EBITDA multiples climbing from 7.6x in 1H2016 to a continuous 15x for the past 24 months. Transaction volumes however stabilised at a lower 79 deals.

Gaming targets win interest from financial and strategic buyers

Prior to the COVID-19 outbreak, gaming M&A was already seeing increasing activity, signalling maturity in the market. This has continued apace, presumably driven in part by the lockdown period in 1H2020.

In January, Swedish videogame developer Stillfront acquired Californian mobile video game developer Storm8 for $300 million. As the company develops mobile videogames, casual and puzzle games, with a focus on females aged 25 to 45, this will complement the middle-age male audience of Stillfront.

A few months later, American asset management firm Macarthur acquired Jagex for $530 million. Jagex was previously owned by Shanghai Hongtou Network Technology, part of Chinese games firm Fukong Interactive Entertainment, and is one of the UK’s largest video game developers and publishers. It is known for its flagship game franchise Runescape - the world’s biggest multiplayer online role playing game, with over 280 million player accounts created and more than $1 billion revenue generated in its lifetime.

Online content libraries come in handy for digital content producers and creators

Given how much time people have been spending on their phones and other devices, internet content platforms have garnered more interest. In May, Facebook acquired Giphy, an online library for GIFs that enables users to search, create and share animated images with others online and on mobile devices. Facebook is looking to dominate most of the ways in which we use social media, be it on Facebook, Instagram and WhatsApp. It says it will invest in additional tech development for Giphy and build out new relationships for it on both the content side and the endpoint developer side. 

Time at home helps streaming targets

Fox Corporation acquired Tubi, an advertising based streaming service, for $440 million, gaining 20,000 movies and shows, as well as 25 million users. Fox said the acquisition would immediately expand its DTC audience and capabilities.

Agencies & Service Providers

Deal volume recovering from 2019 low

Acquisitions targeting agencies and service providers were less rife in 1H2020, with only 67 deals compared to 83 last reporting period. The trailing 30-month median revenue multiple remains at a comfortable 1.7x while the 30-month trailing median EBITDA multiple continued to drop, reaching 8.5x - a low multiple in comparison to the 13.8x reached in 2H2017. However, it is important to note that the peak EBITDA multiples observed throughout 2017 and 2018 were caused by a few individual deals with very high disclosed EBITDA multiples (over 20x) which skewed the overall trailing median figure.

This subsector covers transactions targeting digital agencies, marketing agencies, e-commerce agencies, consultancies and managed services providers.

Dentsu starts 2020 strong, then puts M&A activity on pause

Normally highly acquisitive throughout the year and having made 23 acquisitions in the past 30 months, Dentsu did not continue with its corporate development moves after the outbreak. In January, it acquired two American agencies: E-Nor, a marketing optimization agency and Digital Pi, a marketing automation consulting services and SaaS firm. The next month, it acquired Media Storm - a provider of digital and traditional marketing services and analytics - from TZP.

More interest for third party Amazon players

In April, Thrasio, an acquirer of Amazon third party private label businesses, closed a $110 million financing round at a post-money valuation of $780 million. The round included participation from Peak6, RiverPark Ventures, WTI and Upper90.

Thrasio was founded in 2018. Its gross revenue has since surged from zero to over $200 million.

The company finds ‘top-reviewed, bestselling’ essential everyday products on Amazon, and buys the brands. These businesses are often ‘mom-and-pop shop’ Amazon sellers whose business has grown faster than expected, eventually selling to Thrasio for upwards of $1 million.

The company has acquired 43 businesses in all-cash transactions and integrated them onto its proprietary operating platform. It then works to optimise them through branding and search, for example.

Digital Commerce Software

Deal activity on the rise

This segment is seeing phenomenal growth, with 123 deals inked in 1H2020 - the highest transaction volume on record. On the valuation side, more deal opportunities mean slightly more competitive pricing of targets. The trailing 30-month revenue multiple remained at a high 3.3x, while the EBITDA multiple dropped slightly to 12.4x.

Queue-it receives strategic investment

In March, Danish company Queue-it announced it had received a strategic investment from GRO Capital. Queue-it provides customer service automation and queueing SaaS that enables business in the private, public and education sectors to place visitors in a virtual waiting room during peak online traffic.

Interestingly, while virtual queueing and ticketing software was billed to crash given the lack of live events, these have survived and even grown as brands still require their agile software to manage peak-time traffic on their online solutions. For instance, the live event industry has turned to online streaming to broadcast events, which also requires queuing and audience management.

Canopy covets further Amazon seller add-ons

Canopy Management is a full-service marketing agency that is the force behind many of the most successful brands on Amazon. In May, the company acquired PPC Scope, which provides digital advertising and optimisation, software PPC marketing and analytics capabilities for Amazon sponsored products. The firm also announced the hiring of a team of new employees who will focus on expanding the PPC Scope platform. New advances will broaden support for all Amazon ad types and optimise existing strategies to accommodate recent and future changes to the Amazon seller's market.

Conclusion

Prior to the coronavirus outbreak, the Digital Commerce sector was already in a very positive situation. Our last report highlighted that e-commerce and digital marketing had truly merged into one maturing, consolidating sector, driven by the hegemony of Amazon, B2B e-commerce and the advent of the platform age.

The year 2020 has generated an additional boost for most digital commerce segments - e-commerce, CRM, customer service, gaming and marketplaces/platforms - for software and service providers alike. We expect this boost to last for the next 18 to 24 months, with some of the following developments:

• The shift from brick-and-mortar to online retail will continue further apace, as all players - including less traditionally "digital" ones like public sector and educational institutions - continue to invest in digital platforms and various transactional solutions. 
• Key trends such as social media commerce, marketplace business, mobile commerce and DTC will continue to gain momentum, eventually becoming the norm.
• As brands and retailers do not have the time to build their digital capabilities from scratch (or simply catch up with the digital economy), they will continue to buy time and consumer access through M&A. 
• Alongside strategic buyers, growth investors - whether private equity or venture capital firms - will concentrate on digital commerce targets which promise a bright future, while they also grapple with fewer investment alternatives more generally. This will keep multiples high.

Meanwhile, over the next 6 to 12 months, we will witness how much intercontinental deal-making occurs, and how much M&A activity will be restricted to more regional playing fields.