The 'perfect storm' shaping the M&A market and what this means for agency owners
Over the last decade, the M&A landscape has changed dramatically. A decade ago the market was dominated by “financial buyers” - AIM-listed, PE-backed and debt-leveraged consolidators that were focussed on the acquisition of profit. Strategy was not the main deal driver, rather, the idea that a higher multiple could be applied to a larger group is what motivated consolidation. However, this approach to growth assumed that the acquired business continued to thrive and contributed to a more successful group of companies. Unfortunately, many acquired businesses failed to continue their growth trajectory once subsumed by consolidators, likely due to a limited strategic rationale behind the merger.
During the global financial crisis, many of these businesses failed, and the ones that did survive, did so by reinventing themselves. The big marcoms groups were largely inactive during this period, perhaps due to an unwillingness to compete in an over-heated market and, in some cases, perhaps due to saturation within their own business following highly acquisitive periods in the late 90’s and early 2000’s. IPG, for example, actually spent this period selling off many of the businesses that it had bought in the previous decade.
In recent years, the global marcoms groups have come back into the M&A market in force, with a need to modernise and digitise their networks and to inject a new generation of entrepreneurial management. But they are not alone.
Today's perfect storm
As well as marcoms buyers, a number of different industries are now competing to acquire marcoms agencies, and the common thread that is driving this is digital. Not just digital marketing, but all those skills that agencies are developing which help brands to communicate, engage and do business with their customers in an online world. The result is a ‘perfect storm’ for M&A in the sector.
Smaller marcoms groups are taking advantage of a disruptive market and low interest rates to grow through acquisition, whilst the global groups are racing to be the biggest and the most digital. Boundaries around traditional disciplines are breaking down. Agencies of all types are remodelling themselves and buying in broader capabilities to maximise client revenues.
The skills gap created by technological developments has led the large marcoms groups to begin buying businesses to bolt on or merge with their existing agencies. This desire to “fix and fill” is a recurring theme in marcoms M&A. The big agencies do not have the same capacity for innovation that independents do, and they have more difficulty retaining top talent, so they are always looking to ‘buy in’ new, modern capabilities and entrepreneurial management.
There is a cyclical trend towards integration as the lines between disciplines get blurred, which in today’s market has resulted in traditional skills coming into demand again alongside the demand for digital. Shopper marketing, DM, PR, B2B skills are all suddenly back in vogue. Clients want more consumer touchpoints and measurable results, so agencies are broadening their capabilities to protect their share of their clients’ marketing budgets.
We are also seeing a trend towards demand for “thinking, rather than doing”. Buyers are looking for consultancy-type services. While these might be less scalable, they tend to be higher margin and less prone to becoming commoditised. And margin is very important to most buyers in this space. When we take a business to market, often the first question we are asked is ‘what’s the revenue per head?’ with anything below $160k considered relatively unsophisticated.
Tech buyers are seeking creative and user experience skills. The big US marketing services companies and software and solutions providers need more creative capabilities or more client friendly entry points for their services. Similarly, the big management consultancies, who are helping brands to navigate the new digital world, are naturally looking to the digital agency world for the skill sets they need to acquire.
Asian marcoms groups, following the example set by Dentsu, are starting to look West for expansion. Hakuhodo, Cheil and BlueFocus have already started buying here, but there are many others in the region that have serious ambitions for Western expansion. These groups are interested in new geographies delivering scale and a Western approach to servicing global brands, so their interest is not limited to digital.
Also entering the fray are talent agencies. They recognise that in a world increasingly revolving around content, combining the talent they represent with modern marcoms skills is a powerful proposition for brands. Likewise, media owners are bringing marcoms skills in-house to create branded content and interactions, as they find themselves having to reinvent their business models and find new ways to allow brands to access their audiences.
On the investment side, Private Equity has been quick to recognise that there are opportunities in a disruptive market and no shortage of exit options. So while they still look for scalable businesses with some kind of tech or IP, they are far less reluctant than they used to be about investing in talent-based businesses.
So what does all this mean for agency owners?
The most notable impact of all of this activity is that prices are increasing. There’s a lot of competition for the best assets and that is driving up multiples to levels significantly higher than the long term average. Some buyers are also prepared to take bigger risks and pay more up front to beat others to the best assets.
The shortage of available assets is also making buyers rethink their selection criteria. They’re sometimes less concerned about financial metrics and more focused on solving their strategic need. As a result, we are seeing agencies being bought much earlier in their lifecycle than usual, where growth can be accelerated by early integration with a partner agency.
We are also seeing different approaches to deal-making. For example, some buyers are willing to take minority stakes where there is a desire to deliver the synergies of partnership whilst retaining independence. SI Partners recently advised the shareholders of Hirschen Group – one of Germany’s largest independents – on the sale of a minority stake to WPP’s J. Walter Thompson. The deal gives Hirschen access to global infrastructure and clients whilst retaining operational control and ownership.
Along with the new influx of Private Equity-backed buyers comes the return of cash/share splits. As these mini-groups grow through acquisition ahead of their own sale or IPO, they are using their own equity to part-fund acquisitions and tie acquired business owners to their future exit event.
The heat in the market and the range of strategic and deal options available is giving agency owners a greater level of choice than they have ever seen before. Navigating these options and understanding the risks and benefits of each can be a daunting task. Deal discussions can also become a major distraction for the management team, which can impact the performance of the business. Seeking expert advice is essential. As well as sorting the wheat from the chaff, a good adviser will control the process, translate corporate finance into language that shareholders can understand and ensure that all variables that impact on value, risk, commitment and culture are considered.
But above all, we encourage our clients to focus on growing their business rather than selling it. Acquirers are looking for ambition and energy, a committed management team with a clear vision; and a high quality, contemporary offer.
These are the qualities that translate into a successful deal outcome.