When it comes to digital, Dentsu seems to be putting its money where its mouth is
Everyone loves a challenger brand – and in the world of global agency networks, there’s no doubt that Dentsu Aegis Network is one to watch.
We’ve written about Dentsu Aegis many times in The Drum over the past three or four years. After years of being a slumbering giant focussed on its domestic market in Japan, Dentsu – that country’s biggest and oldest ad agency – signalled its ambition and intent to become a global player with a daring $5bn swoop for media group Aegis in 2012.
It took more than a year for the deal to go through, but ever since, the newly christened Dentsu Aegis Network (now with a base in London as well as on its home turf) has been creeping up on its bigger, more established rivals such as WPP, Publicis, Omnicom and IPG.
Just last week, Dentsu Aegis signed a $1.5bn (including debt) agreement to acquire a majority stake in Merkle, a global data and performance marketing agency.
Merkle, which in the US is a major CRM, digital and search player, has long harboured ambitions to become a global agency; the injection of Dentsu muscle and cash should accelerate Merkle’s ability to grow in this direction. The deal is slated to be completed by September 30, 2016.
“US-based Merkle has grown rapidly from its heritage in data and technology, combining a deep understanding of first-party data, sophisticated analytical capabilities, and comprehensive digital media capabilities,” Dentsu said in a statement last week.
Described as “a true pioneer of ‘people-based marketing’,” Merkle is the largest independent shop of its type and is regarded Stateside as one of the few providers that can deliver data-driven, technology-enabled marketing solutions to big corporations and blue-chips. These kind of clients are increasingly demanding improved customer engagement and maximised return on marketing investment.
Merkle, which offers a wide range of services including data and analytics, marketing technology, digital agency services and consulting, is well-placed to deliver these services to potential clients. This is one reason why Dentsu must have been attracted by the prospect of investing in the agency.
The second reason why it shelled out $2bn was Merkle’s numbers. The company earned $436m in revenues in 2015, an increase of 14 per cent on 2014 – good growth in the current climate, and there’s sure to be more in the pipeline as the agency is operating in one of the fastest-growing areas in all of marcomms.
Strategically, too, the investment makes good sense. Dentsu Aegis’s strategy is to become a 100 per cent “digital economy business” by 2020 (yes, 100 per cent, a target which even digitally focussed networks like Publicis haven’t set themselves, as far as I’m aware) and the addition of Merkle will accelerate this ambition as well as significantly enhance its global operations. And of course, it strengthens Dentsu’s presence in the still-important American market.
An acquired party that’s also happy is another good sign. David Williams, Merkle’s chairman and CEO, believes the fit is a good one.
He told the media last week: “As we considered a new investment partner, we sought a fit that would complement our vision, escalate our brand, and provide growth opportunities for our people, while also valuing Merkle’s unique strengths and culture.
“Becoming a part of Dentsu Aegis Network further strengthens our position and allows us to accelerate our goal of being a world-class global performance marketing agency.”
One of the things we’ve always considered important when a potential buyer is eyeing up an acquisition is how well it fits in with, or complements, your existing offer.
Last month I wrote in these pages about Verizon’s acquisition of (most of) the Yahoo empire, and noted that many of Yahoo’s problems were not down to making bad acquisitions – in fact, most of the purchases made by Marissa Meyer and her predecessors were pretty good ones – but not knowing how to make the most of them, and making them fit into the company’s structure and strategy.
As the old saying goes: “It’s not what you buy, but what you do with what you buy that counts."
Merkle’s offerings are a good match with Dentsu Aegis’ existing capabilities in media, performance, content, and brand commerce.
It also possesses some useful capabilities that Dentsu doesn’t currently have, most importantly, lots of data and its own technology platforms – both very attractive assets in an increasingly data-driven age.
Merkle specialises in analysis of first-party (ie customer) data and has developed bespoke tech, as well as acquiring plenty of expertise, over the years. It has around 3,400 employees, including about 1,500 tech specialist and no fewer than 500 data analysts (because having data is all very well, but pointless if no one can make sense of what the numbers are telling us).
While Dentsu is strong in 'traditional' advertising, media planning and buying and PR, its CRM offer is weaker than its rivals’ and Merkle’s strengths in analytics, data and tech will boost Dentsu’s overall offer to clients – on a global scale to boot.
Merkle will become a new Dentsu Group global network brand. “Through collaboration with [our] other companies and global platform companies, it will work to create synergies to further develop and provide value-added services,” Dentsu said in a statement.
As far as I understand, Merkle has around 650 clients (many of them big global companies), and has access to more than 150 marketing databases; it also manages more than 3.7bn first-party data records.
It’ll be interesting to see how Dentsu integrates Merkle with another one of its acquisitions, mobile media buying agency Fetch, which it bought in 2014. At the time of purchase – for £30m – Fetch had 70 employees in offices in San Francisco, Hong Kong and London, and reported annual revenues of £35m. Its current client roster includes blue chips such as Facebook, Uber, Hulu, Expedia, eBay and Hotels.com.
Fetch MD Jo Sutherland, a veteran from Dentsu media agency Vizeum, recently went on record to say that she hoped to persuade Dentsu Aegis clients such as AutoTrader, Diageo, Burger King, Western Union and Lurpak owner Arla Foods to tap into media planning and buying, creative and data services on mobile.
With the acquisition of Merkle, her job of persuasion might have just got a lot easier.
Dentsu Aegis CEO Jerry Buhlmann was upbeat about the future.
“We have long admired the Merkle business, brand and people and are delighted that they are becoming part of our Group, complementing our existing offer to clients and strengthening our competitive advantage at the forefront of the rapidly growing digital economy,” he said last week.
The news of the Merkle investment coincided with the announcement of a slight slowdown in quarterly profits.
In Europe, the Middle East and Africa, the international business for Dentsu delivered organic gross profit growth of 5 per cent for the second quarter of 2016.
It’s been two years since Dentsu Aegis’ quarterly gross profit last grew by less than 10 per cent, since the 6.9 per cent growth it posted in Q2 2014. Last quarter it recorded 10.7 per cent growth, and 16.1 per cent for Q2 2015.
It’s refreshing, then, to see the company investing in new areas and in growing its businesses, rather than be panicked into retrenchment or cost-cutting.
The UK was singled out by Dentsu for performing particularly strongly in EMEA, alongside Italy, Spain, Russia and the Nordics.
Globally, the company posted organic gross profit growth of 9.5 per cent for the second quarter of the year, up on the 5.1 per cent it posted last quarter.
On a constant currency basis, organic gross profit for the first six months of the year grew 9.6 per cent to ¥368.62bn (£2.78bn).
Most significantly, Dentsu Aegis’ gross profit contribution from digital businesses reached 50.1 per cent, halfway towards its aforementioned strategy to become 100 per cent digital by 2020.
Tadashi Ishii, president and CEO, said the company had "performed very well" this year despite "macroeconomic uncertainties in key regions".
He added: "We have continued to outperform the peer group, in organic top-line growth and on an operating margin basis, and we have made further progress in delivering on our medium-term strategic objectives.
"Despite being at the epicentre of a marketing industry which is undergoing significant change, at an increasingly fast pace, [we put in] a strong performance, mainly due to our strategic focus on the digital economy."
That “strategic focus” got a little more focussed this month, and Ishii should have good reasons to be optimistic moving forward.
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector
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