Agency acquirers are turning to integrated in the face of profitable digital specialist shortfall
Digital assets are at the top of all acquirers’ lists. Digital is what acquirers need to invest in to continue to build profitable, future-proofed services that deliver the growth services clients are looking for.
However, for many acquirers, defining what digital could really do for them and their clients poses a real challenge, often resulting in a lack of clarity around acquisition target parameters.
For acquirers to be successful in finding the right target and effectively integrating post-merger, they must consider how digital services dovetail with their current offer, and how they can utilise the new capability to enhance their current offer and add value for clients. Acquirers need digital services and they are relying on the leadership of the business they are buying to guide them through how digital can expand their existing services, take them into new markets and enhance the value proposition for clients.
Management consultancies and digital assets
This is particularly true given the number of atypical buyers and new market entrants to the marcoms space. The likes of Accenture and IBM iX are converging on marcoms talent, understanding the need to acquire digital talent to add value for clients and own more of the vertical, ultimately owning more of the client budget, but it is yet to be proven how successfully the management consultancies and other new buyers can integrate the assets and generate the ROI on premiums paid.
At SI Partners, we have worked on a number of acquisition mandates and found that there are a large number of executional agencies, but a scarcity of agencies of scale that are both profitable and have a strategic element embedded in their offer. Commonly, positioning is perfect and turnover might be high, giving the appearance of a suitable target on the face of it, but on closer inspection, low margins coupled with a labour-intensive product squeezes profitability past the point of viability for the acquirer.
Acquirers want to de-risk
For an asset to be desirable it has to have the right combination of digital capability, plus headcount, whilst maintaining a profit level in line with the acquirers existing business. Distressed assets will, of course, never be a desirable target. Acquirers are looking to de-risk. Where the required combination of offer, talent and profitability does not exist, the risk is too high.
Digital is a highly competitive space with pinched client budgets and a sizeable executional component demanding a large amount of man power. In markets, such as Singapore, where labour is expensive, this can be a real challenge for digital agencies, and increasingly difficult for those who aren’t engaged at a more strategic level to be profitable.
Networks are coming in over the top, offering clients the strategic digital services and outsourcing the labour intensive executional portion. What is in high demand is digital agencies of scale and talent with a strategic component to the offering that can add value for brands and drive profitability for the agency.
Focus on the value add
Digital agencies looking to be acquired must now focus on developing the value add of their offering; building something unique, supporting the client in a credible and strategic way, have a well-developed leadership team that motivates and inspires and is able to attract and retain talent.
So, with this scarcity of highly desirable, low-risk digital assets, some of the major acquirers are turning to integrated agencies to provide the digital capability they are seeking. Perhaps looking at other disciplines offering a digitally-led solution but supported by a competency with a high level of retainer business, creating more predictable revenue streams, and therefore becoming a less risky asset.
Add strategic components to de-risk digital
The question is: will the market experience a wave of acquisitive activity in the integrated space because sourcing de-risked pure digital assets poses to great a challenge? Or will digital agencies begin to develop their offering to include strategic components that naturally de-risk?
Alyssiah Tsui is a Director at SI Partners, a global M&A and consultancy firm and a regular columnist for The Drum. She leads the firms’ APAC M&A and consultancy practice, advising creative and technology businesses on growth and commercial improvement and connecting clients with global investors and partners.