Richard Draycott, managing director of The Drum Network, talks to Donna Granato and Rob Dickson of R&D Venture Partners, who assure us that, no matter the circumstances, every good agency can sell itself.
Richard Draycott, The Drum Network [DN]: How would you describe the level of agency M&A activity in the US so far in 2016?
Donna Granato [DG]: During the first half of 2016, M&A activities in the agency and marketing services vertical in North America have been extremely robust. Also, and not coincidentally, there has been a huge amount of M&A activity in the martech vertical.
Technology continues to be the major force disrupting the industry and driving acquisition activity. As traditional buyers add niche digital, data and technology enabled plays to their offerings, new entrants begin to test out the marketing vertical.
Startup agencies are continuing to crack the code on data management, content creation, client journey mapping and efficient media buying. A substantial, but fragmented marketplace has developed, which in turn has driven both ad-holding company acquisition activity (Publicis’ purchase of Sapient was the most profound example in 2015) and also the phenomenon of new entrants to the marketing vertical, particularly consultants and tech entrants such as Accenture and IBM.
Large marketing tech deals substantiate where the M&A market is going. For instance, Salesforce acquisition Demandware (a cloud-based provider of e-commerce service) has moved to a broader integrated offering.
DN: What have been the most interesting deals completed this year?
Rob Dickson [RD]: The most interesting deals from our perspective in 2016 are IBM’s acquisition of Resource Ammirati (e-commerce) and Bluewolf (Salesforce consulting and implementation), Deloitte’s acquisition of Heat (digital) and Cap Gemini’s acquisition of Fahrenheit 212 (innovation).
Consultancies are becoming major competitors to traditional marketing services companies by acquiring digital companies. Consultancies provide executional expertise and address the knock that they only provide strategy. The challenge agencies face is their concentration on advertising, which is increasingly a single tool in an overall customer journey.
As marketing is increasingly dominated by, and integrated into, a digital ecosystem, social media, data analytics, e-commerce and tech players are the natural consolidators of an end to end customer journey.
Also, as marketing cloud platforms increasingly dominate the marketing mix, there is a need for clients to retain consultants to assist them in the implementation of complex marketing technology. This is a natural role for the Accentures and IBMs of the world.
DN: What is the key driver for agency acquisitions? Is it to bolt on new services, build client portfolio, quickly increase staffing resource or simply to consolidate market position?
RD: The key priorities for buyers, especially the public company holding companies, are opportunities that drive growth and margin expansion. These can be found in investing in high growth geographies or adding specialized, niche capabilities that help to retain and attract new clients, or consolidating relationships with major existing clients.
DN: Are there any groups who are particularly acquisitive at the moment?
DG: Strategic buyers such as advertising holding companies and consultancies continue to dominate acquisitions in the agency space.
Dentsu has been the really big mover in North America with the recent acquisitions of such companies as Merkle (data and performance marketing), Gyro (B2B), Cardinal Path (digital analytics) and Grip (digital content). Dentsu has been seeking to expand rapidly outside of Japan since its acquisition of media powerhouse Aegis in March 2013.
The other large ad holding companies have all been acquisitive in 2016 in North America (some having been much more acquisitive — or quieter — in prior years). WPP has continued to be active in digital acquisitions including through Grey’s acquisition of ArcTouch (mobile app development), IPG has returned to activity with its acquisitions of The Brooklyn Bros (content) and ReviveHealth (healthcare), while Omnicom has remained relatively quiet, announcing few, small to mid-sized transactions this year.
The acquisitions by the largest players tend now to be in niche plays filling out their offerings or those of one of their networks. They have tended instead to look to other higher growth markets to fuel top line growth.
With respect to the non-traditional large holding company buyers, the most interesting to emerge has been kyu — which was founded by Hakuhodo of Japan in 2014. In 2016, kyu took a minority stake in high profile design firm Ideo — this follows its acquisition of Sid Lee (digital and design) and Digital Kitchen (content production). kyu has a design sensibility, in the words of its chief executive Michael Birkin, and it likes companies that “make things”.
DN: Who are the interesting new acquirers in the US that agencies looking to be acquired should consider raising their profile with?
DG: Lake Capital — following its acquisition of Engine Group in July of 2014 — has a stated mission of building an agency-services holding company, while Vision 7, following its acquisition by Blue Focus in December 2014 has plans to further penetrate the North American market.
DN: What are the key challenges facing independent agencies at the moment?
RD: As the business has increasingly moved to a project basis from AOR, it has made longer term strategic planning for smaller agencies very difficult.
Procurement is also squeezing fees and payment terms, making it more difficult for companies, particularly those with lots of production flowing through their business, to manage cash flow.
Lastly, good talent is scarce and expensive, particularly in a market with a significant tech presence.
DN: What do you think 2017 will hold for US agencies?
DG: It holds much the of the same. The US economy is strong and stable relative to other economies, large strategic investors have strong corporate balance sheets and there is an increasing investment desire from non-US players to invest in the US. The marketplace continues to be fragmented and the need for consolidation will continue to drive M&A activity.
Based in New York and Toronto, R&D Venture Partners is an entrepreneurial strategic M&A advisory firm. They specialize in Mergers & Acquisitions and serve as strategic advisors for small to mid-size markets in the marketing services and related consulting and technology space.