Watch out Sir Martin, the consultants are coming to buy you… or are they?

Partners at Green Square, Corporate Finance Advisors to the media and marketing sector, cast their eyes over the latest industry deals and look ahead to the next tranche of acquisitions.

Sir Martin Sorrell's WPP has been mooted as an acquisition target for Accenture, but is that realistic?

A very interesting analyst report was published recently that could – if its predictions come to be – have profound repercussions for the marketing services industry.

Surprisingly, the report by French investment bank Natixis created very few ripples outside the marketing press – but what it says is dynamite.

Jerome Bodin, author of the report, believes holding mega-groups Publicis and WPP are takeover targets and that Accenture, the consultancy giant, 'looks a credible buyer'. The attitudes of creatives at the firms owned by these groups, already under siege from their increasingly powerful rivals in data analytics, at being owned by management consultants can only be imagined.

What Bodin said last week chimes with something my colleagues at Green Square and I have been saying for some time – that the marcomms industry is increasingly vulnerable to incursion by the big consulting outfit. Accenture has been prolific in marcomms acquisitions of late but, whilst its competitive set has been very active on the digital side, and made the odd foray into the marcomms world, the likes of EY, Deloitte, McKinsey, KMPG, Bain and Boston have yet to step up to the table in terms of acquiring significant marketing expertise.

I think there is much in what Bodin says, but I do disagree with him on other points. First, let’s look at some background.

The marcomms industry has changed enormously in the past decade, change mostly bought about by shrinking marketing budgets; the need for greater accountability (especially by the global brands); and by digital disruption. A lot of the services the big agencies used to make decent margins on – media buying, production, research, strategic planning – have become more and more automated, commoditised or are under attack from newcomers.

The industry’s answer to this has historically been consolidation – the groups snapping up the largest remaining indie agencies and by merging with, or buying, other groups, as Dentsu did with Aegis and Publicis and Omnicom attempted in 2014. Although that ill-fated merger demonstrated that consolidation was not necessarily the answer to the industry’s challenges, it has certainly not gone away.

One of the problems is that the industry faces a number of structural challenges in the same way that the music biz did in the early 2000’s and the old holding group model that worked so well for the past three decades may no longer be the best way to navigate the future.

Part of the problem is that while the big groups can supply the consistency and scale that global clients demand, they are also seen in some quarters as slow to react, unnecessarily complex and, at a time when accountability is everything, rather opaque…”How much of my money”, a client might ask, “is going on maintaining your company infrastructure, paying for senior managers, buildings and subsidising other clients?”

One of the things the consulting firms are extremely good at is convincing clients that they can add value to their business – so why can’t they do the same for their marketing budgets? Given they already provide insights and research to clients, it makes perfect sense to bolt on marketing services too. If you’re advising a corporate board on management strategy, why not brand strategy as well?

Until now, if a management consultant had said to a global CEO “Now, let’s talk about your brand campaigns”, the CEO would have probably burst out laughing. However, in Accenture acquiring Karmarama in the UK, The Monkeys in Australia and Wire Stone in New York among others, it now has credibility in this arena as it pushes to be able to provide consultancy services across all aspects of corporate requirements.

This is why Bodin suggested at the end of September two likely scenarios are: a consulting or IT services company buys an ad agency group, or two ad groups merge as Publicis Groupe and Omnicom tried to do in 2014. He feels a significant acquisition of a global marcoms group by a consulting firm is most likely, with the usual suspects mentioned heavily in the frame as buyers. He doesn’t foresee tech players such as Google or Oracle stepping in, although I think IBM might be possible. After all, it has tried to move from largely a computer hardware manufacturer to a big-thinking IT strategy consultant and has made investments in digital marketing. It has also suffered five years – yes, five years! – of losses that it needs to reverse and potentially change its strategy.

All of the five big agency groups, WPP, Publicis Groupe, Omnicom, Interpublic and Dentsu, could be targets, according to Bodin.

"Accenture is a credible buyer," he said. "In view of its size (£67.5bn) market capitalisation), it could acquire and easily integrate Publicis (£11.7bn) or WPP (£17.5bn).”

He noted shares in Publicis have fallen 11% this year, and WPP’s by 22% and are each trading near "all-time lows" on a multiple of around 11 times earnings, while Accenture’s shares are on a multiple of 20 times earnings.

He said the "main advantage" for a company such as Accenture would be to buy digital agencies such as Publicis Groupe’s SapientRazorfish and WPP’s AKQA and Xaxis – many of which have been acquired at "high multiples" of upwards of 14 times earnings and could now be bought at "a much lower price". My personal view is neither Publicis or WPP are likely to part with these prize assets, which are now integrated into the networks, unless there was huge shareholder pressure or an enormously large premium was offered.

The "industrial rationale" behind the failed Publicis-Omnicom merger "still applies today" because it would "create an undisputed leader (particularly in consulting and media buying), limit competition and therefore improve the prices of the services offered by advertising agencies", Bodin said in his note.

He said "large-scale M&A" is back on the agenda because of a deterioration in the ad agency sector, noting average organic growth among the big groups slowed to 0.2% in the second quarter of 2017 from 1.5% in the first quarter and 2.9% last year.

"This is a sudden and surprising deceleration as it does not come amid an economic slowdown," Bodin said. "The reason is that some fast-moving consumer goods advertisers (food, beauty products, automotive, etc) have reduced their spending."

He suggested the pressure on agency groups was "part of a longer cycle" as big advertisers have been pushing down on fees for some time. "Against this backdrop, we believe that the advertising agencies might seek tie-ups to reduce competitive intensity and increase their bargaining clout vis-à-vis clients," Bodin wrote.

He went on: "Ad agency executives have often seen consolidation as a means of resolving some of the sector’s problems. This was the rationale behind the Publicis/Omnicom deal. With hindsight, the merger would have probably made it possible to avoid (or at least slow the pace of) the current round of media reviews and therefore the pressure that the agencies are feeling from advertisers."

Bodin believes a hostile takeover is "improbable", because of the importance of retaining staff, "but not impossible". This is an important point – one which I feel Bodin underestimates: with the possible exception of its client book, an agency’s talent is its most valuable asset, and a hostile takeover could drive away the best people… after all, top creative, suits and planners will never be unemployed for long and if they don’t like the look of the new paradigm, they may well vote with their feet. Therefore, I think any takeovers would have to be handled with great care with a very well planned and publicised post-acquisition integration strategy put in place well before deal completion.

He suggested "the human factor is primarily a risk in the creative advertising and consulting segments" and an acquirer "could consider selling some subsidiaries to their managers [or another agency network], notably in creative or PR" where scale matters less. So, he is looking at a significant takeover with an acquirer subsequently disposing of the smaller elements of the group that don’t have the necessary scale.

It’s an interesting analysis, but on that basis I’m not sure that WPP or Publicis are the most credible targets for a takeover. I don’t think Dentsu-Aegis is likely either. I think either Omnicom (about £13.2bn market cap) or IPG (about £6.4bn) are more likely, as they are smaller and a buyout of one of the latter two would put less of a strain on the acquirer’s books. IPG, the smallest of the ‘Big Four’ would for me be the most likely target – I’ve long felt that it’s undervalued in terms of share price and there is quite a lot of value that could potentially be unlocked should it to be broken up.

A consulting firm could make a swoop that could offer IPG shareholders a good premium, retain the agencies it needs (McCann, perhaps, as well as FCB, R/GA and Profero) and sell off the ones it doesn’t. I’m sure buyers could be quite easily found for the likes of brand experience agency Jack Morton, PR giant Weber Shandwick and sports/entertainment specialist Octagon Worldwide.

I don’t think WPP is currently credible as a takeover target because, despite ongoing grumbles about Sir Martin Sorrell’s pay and the share price, it is well-run, has pursued an organic and sustainable growth strategy, has been making efforts to simplify its structure and, critically, as a group greater than the sum of its parts. The same is true of Publicis.

But IPG and Omnicom… that’s a different matter. And it needn’t just be Accenture looking to buy. It’s little remarked on, but as mentioned earlier, PwC, IBM and Deloitte all have big marketing services units (mostly digital-focused) that are all in the top 10 of biggest ad companies in the world. WPP’s biggest rivals are no longer just Publicis or Omnicom, but also IBM IX and Accenture Interactive.

The consultants have thus far preferred to remain in the shadows, buying digitally-focused shops, but 2016’s Karmarama buyout is an even bigger game-changer than it seemed at the time. Last year two other significant deals happened – Deloitte bought US full-service agency Heat (and has publicly stated its ambitions to buy another agency this year); and IBM bought Ohio-based Resource/Ammirati.

I suspect that while a full-blown acquisition of WPP or Publicis is NOT on the cards, one of IPG is a distinct possibility; and the hoovering-up of the remaining large independents is almost a dead cert (providing one of the holding companies doesn’t get there first).

Of course, there is another possibility, one Jerome Bodin didn’t mention – that of co-operation and collaboration. But that’s a subject for another blog post.

Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector

Tony Walford

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