If you’re thinking of selling your agency or looking for investment, perhaps the most important thing to understand is that not all buyers are created equal.
It’s no longer the case that only a few global networks might be interested in an acquisition in the marcoms or martech/adtech sectors. There is a range of different types of buyer, each with its own approach, thinking and philosophy: why are we buying, how are we buying and what are we aiming to achieve by buying?
Given that a worrying number of acquisitions still fail to be genuinely successful in the longer term, finding the right investor or partner has never been more important. Understanding who the different buyers are, and what they want from a seller, could mean the difference between colossal market share and ignominious failure.
The established networks
In the main the big established networks (Omnicom, left) are no longer looking for bulk and to plant flags like they did in the 80s and 90s; rather they’re looking for skill sets, clients and collaborative-enhancing deals and these are still to be found in established markets like London, Paris and New York as well as in newer markets.
They’re also looking to invest in something forever: not to buy and flip it on, and not to buy and have it sit on its own. They’re essentially making a bet on what’s been coming through the ranks for a number of years with demonstrable goodwill and sustainable potential for profitable growth. It might not be spectacular, but it should be comfortable and high-quality.
They buy using earn-outs because they always have done and because their stock-market and investors understand it – it’s The Model. Trying to do anything else just isn’t going to happen. And it’s always based on profit, not revenues.
The hybrid networks
These are the incomplete networks – they’ve got most of the footprint and breadth of service they need, but could be missing one vital part or, more likely, are mainly limited to one market or one core specialism.
Some of it could be down to geography and a client-driven need for an international presence, or it can involve capabilities and geography like Project Worldwide, which is both looking to expand geographically and into complementary capabilities to its experiential legacy. Then you’ve got many of the Asian networks: as well as geographical challenges, there is the point that a business like Cheil is ad-focused and one such as Blue Focus is PR-focused and their acquisition strategies reflect their ambition to build beyond these core strengths, as we’ve seen reflected in their recent deals.
There are other businesses that fall into this ‘boutique network’ model: Karmarama, Instinctif Partners, We are Social and Merkle are examples of businesses that do a certain type of thing extremely well on a reasonably international scale but where there continues to be an appetite to build for additional geography and skillsets.
Those businesses will still acquire using earn-outs because that’s the most tested model, but the philosophy is fundamentally different – it’s a growth play, about broadening out the business. They’re looking beyond organic growth into pastures new.
Next, also looking to pastures new, are the publishers, the media houses, the tech players, the data groups and other new entrants.
None of them are hardwired to be earn-out acquirers. St. Ives’ deals have all included earn-outs, but as a publisher it wouldn’t be the natural model – traditionally it would usually buy a title on some sort of cash-flow/revenue model. But they are sensitive to the way marcoms agency acquisitions work so are happy to flex the way they do things. However the earn-out structures where they apply in the marcoms space tend to be shorter, because integration is key: 12-24 months rather than three to five years. That also means they tend to buy 100 per cent of the equity rather than just taking a piece of the pie.
The classic way for an agency to join a tech business, for example, essentially involves it being plugged into the clients of the tech business as a new sales channel. This requires immediate integration and doesn’t usually allow for an earnout deal structure.
The world of management consultancy is fairly brutal and the people are assets. If you’re talking to a big managing consulting firm, its brand trumps yours and you have to respect that. Playing in the managing consulting world means a different kind of conversation and a different kind of day rate; you either lose your brand entirely as happened to Financial Dynamics (bought by FTI Consulting) or become part of a specialist such as Deloitte Digital (left) where the agency becomes a specialist team in the consultancy’s office. It has access to talented people, new clients and the entire infrastructure, but it’s become part of something much bigger. That can, of course, also lead to a cultural clash on occasion as processes can be extremely different.
Of course, the consultancies also have specific audiences: CEOs, CFOs, CMOs and CIOs/CTOs. Agencies talking to those people (and all of them; not just one or two) are more likely to interest the PWCs and KPMGs of the world, keen to cross-sell their other consulting services.
Private equity (PE)
This is a complete contrast to the networks: PE houses are sellers and resellers, buying businesses solely to sell them and make a profit. That means they try to buy them as cheaply as possible and engineer their exit for as much value as possible. They can be very supportive of growth, but after three to five years they are looking to go somewhere else. It can be a great step along the way but it isn’t the end game.
PE investors are often best suited to agencies where some but not all of the shareholders want to realise value now, for example where a founder partner wants to retire or to derisk. PE is also useful for ambitious groups that want to grow by acquisition and need funds to do this.
PE houses are not as commercial as strategic trade buyers, because obviously the networks know the industry inside out and even data businesses, publishers and consultants mostly ‘get it’ in the way that sometimes PEs might not. Because there are no PE buyers that solely invest in this market, they can struggle with the nuances of not only the marcoms sector, but the subsectors within it. So if selling to them, be prepared to answer some ‘obvious’ questions.
Furthermore, in a private equity-backed acquisition the role of chairman comes into sharp focus. Buyers will often want a new chairman – someone who is sympathetic to them. Not a stooge, but someone who understands the needs of the financial return to the PE house’s own investors.
Their two key measures are normally the rate of return on investments and the multiple achieved on exiting those investments. If they’re not delivering those consistently, investors don’t come back; and if their existing investors don’t come back, they can’t attract new ones.
So the chairman has got to understand the dynamics in the PE world and be able to articulate them back to the agency; effectively he or she becomes a sort of professional mediator and consensus builder. That means understanding the agency business inside and out – its dynamics and pressure points – but also constantly translating in both directions.
The right chairman makes an enormous difference. If you take him or her out of the mix, then you’ve suddenly got finance people talking to creative people and finance people talking to data people, and it just doesn’t work.
Valuation is another key issue: the business is being bought for a price based on historical figures, not future profits as is the case with an earn-out. In addition, businesses looking for PE investment have all the power to negotiate all the terms in the deals; whereas going into an existing arrangement (i.e. being acquired by a PE-backed group) means owners have to accept what’s already there because everyone’s already signed up to it. So that could cause quite a lot of issues as well. And, of course, it’s worth bearing in mind that a PE deal actually means two deals – the exit as well as the investment.
This type of investment may therefore apply more to risk-takers, though over-hyping the agency’s potential can obviously lead to problems down the line.
Finding the best fit for M&A is about culture and chemistry. Deals done just for the money will, no question, go wrong. Acquirers are very sensitive to that – they want to create additional value in the companies they acquire. So if you can be clear on where the value lies and how that ties into the philosophy behind the purchase, buyers will build you a deal to support it.