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OPINION31 July 2019

Why private equity loves market research

Financials M&A Opinion

Kantar’s majority stake sale to Bain Capital has grabbed the headlines – Paul Georges-Picot explores private equity’s infatuation with market research.

The latest big news in market research is as big as it gets. WPP sold a 60% majority stake in Kantar to private equity firm Bain Capital, valuing the business at around $4bn.

As a result, most of the big players in the sector are now owned by private equity – PE apparently loves market research.

At first glance that might seem unusual, given that PE investment is usually all about growth. The market research sector overall is nearing the end of a consolidation process that started more than 10 years ago. The relatively strong growth experienced in the early 2000s has slowed during the past five years.

Analysis has shown that industry players rarely generate more than 3% organic growth, and for most companies in market research that is fuelled by emerging markets like Latin America and South East Asia, which account for 16% of the global market.

On the other hand, the developed markets, comprising 84% of the total, generally deliver zero growth. This is not unusual for a sector that reached maturity some years ago.

So why then is there so much M&A activity – and private equity interest – in the sector?

Against this backdrop of limited growth, sector players have stepped up their M&A efforts to expand their regional or business line coverage. The sector has been particularly active in that regard over the past 10 years, as buyers look to emerging markets and to specialists.

Private equity funds have also been attracted by the structurally high free cash flow (FCF) generated by market research. Yes, they want growth, but they also want a strong and regular return on investment. Market research businesses are often well set up to deliver that.

In addition, market research is driven by data assets from a wide range of providers and it can be tricky to determine whose technology is best – so PE investment helps to sort the wheat from the chaff. PE houses might sell to other PE buyers.

Some agencies, such as Nielsen and GfK, focus on panel studies. However, panels are costly to build and maintain and require high fixed costs, which can be a problem when a specific client industry is experiencing a cyclical downturn (e.g. automobile) or structural change (e.g. print media or US department stores).

However, Kantar – like Ipsos – has always specialised in survey-based market research. This has a flexible cost structure, but clients switch agencies more frequently than in panel-based research. As there are also lower barriers to entry, it attracts numerous new entrants so making it a crowded market segment.

It is this latter area therefore, where M&A activity is seen more frequently. When a new challenger comes along, it can make sense for an existing player to simply buy it – the best defence being a good offence.

Going forward, the industry is aiming to deliver faster, cheaper and better research for clients. It is using technology to effectively disrupt traditional, retrospective research methodologies in ways that enable clients to “know more by asking less” (as Kantar boss Eric Salama said last year).

The technology options available to potential investors continue to proliferate as well. On top of a wealth of data options, digital transformation is creating an improved customer experience based on data visualisation, video and data reward/incentives rather than the traditional printed reports and spreadsheets that clients have received in the past.

It is also likely that the consolidation will continue. Market research is challenged by data-centred new entrants focused on automation, but it is a very crowded market (particularly for survey-based research, as mentioned above), which should lead to further M&A over the coming months and years.

As for Kantar, Bain will inevitably sell off some pieces of its new acquisition. Ipsos, in particular, could consider buying some of the Kantar assets as Bain looks to streamline the business and focus on its core activities.

All in all, it’s still likely to be a busy time for market research – and for the PE buyers that find it so appealing.

Paul Georges-Picot is director at global M&A consultancy Results International