Synergies are not enough for a successful agency acquisition
What does ‘strategic fit’ mean for an agency acquirer?
If we want to create shareholder value through M&A the acquirer has to create higher returns than the premium paid for the target company, that much is obvious. Beyond the simple financial rationale for investing in a good business an acquirer and the target will often talk about the ‘strategic fit’ between the two organisations, leading to an analogy better communicated as 2 + 2 = 5.
There’s an important distinction to make here between ‘strategic fit’ and simple ‘synergies’. For the learned amongst you, synergy is derived from the Greek works ‘sun’ and ‘ergon’ meaning ‘to work together’ and there may be synergies between the organisations that would lend themselves to be able to work effectively and productively together for mutual gain. Strategic fit on the other hand implies a more forward looking and possibly game changing benefits for both businesses.
Splitting hairs here? Not really. The greater the strategic fit for a buyer the higher the multiple of profits a business is likely to achieve at sale. A targets attractiveness is often down to how strategically valuable they are to the acquirer which equates to maximum shareholder returns. Furthermore, the greater the fit the greater the chance that the target will be able to leverage the opportunities and therefore maximise their earn out potential.
So what are the drivers for a buyer?
Shareholder Pressure
This is especially relevant for a plc that has investors who want to grow their shareholder value. The networks and others will need to show a deal where their own traded multiple is greater than the business they acquire
New Sectors
The acquirer may need to enter a new sector to achieve their growth ambitions, or they may want to further extend one of their own to increase market penetration. Other reasons include reducing their exposure to sectors that may have seasonality or that get hit harder in a recession e.g. housing, financial services
New Services
Through an acquisition they may be able to extend what they can offer to their existing client base, improving the stickiness of the relationship and increasing revenues. It may be that the acquirer wants to leverage the new skills that fast growing independents have, where perhaps the acquirers skills are coming under increased margin pressure.
Geography
Clients are increasingly global in nature and the target may possess client concentrations in geographies that make sense for their own client base. Alternatively, the BRIC (or should this now be BIC?) countries that a target may possess could be attractive for further growth
IP
More relevant for technology players but you may possess something that they want, a model that breaks the conventions, some innovation that allows them to play smarter and more competitively.
Whatever the rationale it’s worth looking very hard at what strategic benefits there are for both parties going into a deal. It’s not always the acquirer with the biggest cheque that offer the most opportunity, the suitor with greatest strategic fit could offer the biggest opportunity to exploit growth through resources, client access and geography, meaning you’re much likely to hit your targets and achieve maximum returns from a deal.
Milestone are non-exec advisors to agencies in the marcoms sector, specialising in board advisory, growth consultancy and preparing for exit. Miles can be contacted at miles@milestoneadvisory.co.uk