In the wake of the $540m WPP/AKQA deal, Hamish Pringle asks what other agencies need to do to sell for similar multiples
Hamish Pringle, former director general of the Institute of Practitioners in Advertising and now a strategic advisor to 23red, runs the rule over WPP's $540m (£348m) purchase of digital agency AKQA.
WPP’s purchase of AKQA, and the likely acquisition of LBi by Omnicom, puts both holding companies back on more equal digital terms with Publicis Groupe, whose purchases of Digitas for $1.3bn in 2007, and Razorfish for $530m in 2009, had opened up a temporary stretch of clear water. These deals also confirm that the major holding companies struggle to innovate from within. History shows they have to acquire new agencies specialising in emerging media technologies rather than grow their own through their operating company agencies or via central funding. For example 2010 start-up and ‘digital hybrid’ True Worldwide had four blue-chip founders and huge firepower from sponsor WPP, but has yet to set the world alight.
This long-established and continuing process of buying in innovation is good news for agency entrepreneurs and there are signs that the timescales are shortening. Omnicom resorted to buying five-year-old Adam & Eve to give DDB London a transfusion of fresh blood. These deals followed in the well-trodden footsteps of the likes of Still Price Court Twivy D’Souza and Lintas, Rainey Kelly Campbell Roalfe and Y&R, and Delaney Lund Knox Warren and Lowe. And this creative agency patterns is already being repeated in the digital arena with Kitcatt Nohr Alexander Shaw and Digitas, and Publicis Dialog and Chemistry Communications.
These agency acquisitions are well-known to be fraught with difficulty and so often once-valuable brands and their managements soon disappear. Having achieved success as an owner-driver and had it rewarded with a life-changing sum of money, is it any wonder that motivation lowers? When once you were the boss but are now reporting quarterly to group finance and complying with central procurement, is it surprising that energy levels drop? And isn’t it just human nature for the professional managers of the other agencies in the group to be passive resistors when it comes to collaboration which might enhance the earn-outs of the newbies? So it’ll be fascinating to compare and contrast the fortunes of AKQA and LBi. My bet is that over the next five years one of them will be subsumed within another agency brand in their respective group.
What these big acquisitions signify for the marketplace is that the digital ‘window’ has pretty much closed after about ten years. Those agency entrepreneurs who had the foresight and skills to exploit the internet as an advertising and marketing communications medium have done very well. A decade ago the word ‘digital’ was distinctive and the capability to deliver marcoms online rare. Now it’s a commonplace word and the skillset is a hygiene factor for any agency wanting to stay in business. However the beauty of our industry is that relentless technological progress means there’s always a new media window opening. This is great news for start-up entrepreneurs who benefit from a clean sheet of paper and can pitch their business in a rising market segment of their choice. Branded content, social media, word-of-mouth, and gaming are all recent hot tickets, with mobile access impacting increasing on all channels.
The challenge for the managements of existing off-the-pace agencies is to find the necessary energy and financial resources to catch up with these new developments. A route that has been used successfully is to set up a subsidiary which sends a clear signal and catches the eye of those intermediaries and clients who are in the market for the new expertise du jour. Archibald Ingall Stretton launched Dais (as in ‘platform’ and aka Digital Archibald Ingall Stretton), Grand Union set up Hubbub, and The Red Brick Road established Ruby. In each case these stand-alone entities were re-integrated in to the main agency once they’d exploited the new sector’s potential and their expertise had become mainstream. One incentive to make the effort is that WPP paid a multiple of 12.8 times for AKQA. Unless an agency has a distinctive positioning, specialist skillset, great work, and top-flight client base, it will always be much harder to sell, and the owners will be lucky to achieve a multiple of 6 even if they do.