Expect more agency acquisitions as consultancies battle to keep up with each other

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.

One of the big stories in the marcomms industry over the past few years has been the rise of the consultancies – PwC, Accenture, Deloitte, Ernst & Young, Grant Thornton, McKinsey et al – as major players in the mergers and acquisition (M&A) space.

Naturally, much of the focus has been on Accenture’s Interactive division, which has been the most acquisitive. Notable deals include its 2016 swoop on Karmarama, one of the last UK indies of any size, Irish shop Rothco in 2018 and New York creative powerhouse Droga5 last month.

In all, Accenture Interactive has acquired more than 30 agencies over the past four years. Interestingly, these have been in every conceivable discipline – full-creative, design, web build, search, SEO, branded content, CRM, production, data, media…on every continent apart from Africa.

It looks, then, that Accenture is extremely serious about being a big player in marcomms as well as professional services and consulting. But what of its own rivals? Well, most of them have been busy too, if not in the same high-profile way as Accenture Interactive. As yet, they're not spending anything like as much.

Last year marketing consultancy R3 found that Accenture, Deloitte, IBM, KPMG and McKinsey had between them spent more than $1.2bn hoovering up marcomms agencies in 2017. By contrast, the big five marcomms holding groups (Publicis, WPP, IPG, Ominicom and Dentsu) spent $1.8bn on M&A over the same period – just half what they’d spent in 2016. It’s fair to say that as the holding companies have struggled with the disruption wreaked on the marcomms industry over the past five years, it’s been the consultants who’ve kept M&A activity buoyant since 2015.

But while KMPG spent $14m in 2017, IBM, $28m and Deloitte $144m, Accenture Interactive eclipsed all of them by spending just over $1bn on M&A throughout 2017 (that's twice as much as either WPP or Dentsu). In fact, that same year, the firm announced a $1.8bn war chest for M&A in the marcomms space, signalling an aggressive intent to steal a march on its competitors. The others will need to act quickly, and spend heavily, if they are to catch up.

There is, however, a structural reason why Accenture can be far more prolific than its peers. That is due to the fact it is listed and can therefore issue shares to raise cash. Many of its contemporaries are partnerships, which means partners of the firm effectively pay for the acquisition between them. So, if a target agency has multiple geographic locations – eg London, New York, Singapore – then the partners in each of those jurisdictions will have to stump up their share of the acquisition cost. This gets particularly tricky if it’s the UK consultancy that wants to make the purchase as it fulfils a specific need for the UK arm and not for the others.

Deloitte Digital's acquisition this week of online marketing agency Pervorm offers us the ideal opportunity to re-examine the state of play with the other consulting giants.

Pervorm, founded in 2010, is an online agency with offices in Amsterdam and Vietnam, whose specialisms include digital marketing, in-house consultancy and analytics. This latest acquisition gives Deloitte a foothold in the media space and strengthens its search, social and programmatic advertising offer.

Although the sum that changed hands has not thus far been disclosed, it’s reasonable to assume that the founders would have been happy with the money they received, since the consulting giants see the value of digitally and creatively-focussed marketing shops (one of the reasons for this we’ll examine later).

After Accenture, Deloitte has been the most acquisitive, buying up agencies like San Francisco’s Heat, the Swedish creative shop Acne (whose clients include Ikea), Market Gravity (a 'proposition design' business based in south London), the cloud services firm CloudinIT (clients include Amazon and Salesforce) and design agency Brandfirst. But in the last year or so, Deloitte has been quiet, and the Pervorm acquisition may signal a renewed interest in catching up with Accenture.

We’re also seeing lesser known, but seriously sizable consultancies move into the space, such as ICF. This is a 5,500 staff, $1.4bn market cap consultancy that own the marcomms outfit formerly known as Olson. We at Green Square advised We Are Vista on its sale to ICF last year and the whole ICF marketing services side has subsequently been rebranded ICF Next, boasting specific capabilities in creative engagement, insight and analytics, loyalty, communications and technology. This gives it fleet of foot to face clients in the way that suits the clients best.

So, why are the consultants – big and small – moving into marcomms? The answer is simple – all businesses need to grow, and extending the range of services they can offer clients (including advertising, marketing, strategy and ancilliaries) gives them access to new service lines into which they can utilise their expertise and footprint. They have a great deal in their favour, such as existing client relationships in many cases; experience of operating at both global and local levels; understanding of both strategic disciplines and their importance; big budgets, currently much larger than the under-pressure holding groups can provide and large headcounts. Accenture has over 400,000 employees globally which, supplemented by creative talent from the agencies they acquire, means it can offer clients quick and effective end-to-end service.

Consultancies also have a reputation as cost-savers and problem solvers, whereas traditional marketing agencies are seen as cost drivers, which is a huge structural problem they need to solve (although agency chiefs quite rightly like to point out that they charge clients a lot less for their services than the consultancies do).

This is where it can get tricky for the consultancies: their traditional business relies on known and proven methods and models into which they can plug staff to collect data, provide reports, implement systems etc, which can be highly profitable as it is replicable. While some marcomms services such as digital transformation, programmatic, performance marketing can also be mechanised to a degree, creative services by their very nature rely on people to come up with new ideas for campaigns. They need a lot more human interaction and the charge out rates for marcomms staff are likely to be a lot lower than those of the consultancies.

That said, consultancies usually have direct access to “C-suite” personnel client-side, which agencies often don’t. And since the turn of the century, CMOs have increasingly moved into the boardroom as marketing becomes a business-critical component of most large businesses or brands. Marketing is no longer just about TV ads; it’s about interacting with customers and their journeys, protecting brand reputations and values. When you are selling consultancy services at C-suite, it’s not such a stretch to provide marketing and creative strategy as well, and the opportunity could be there to do this at a premium.

It’s often said that the success of disruptive, fast-growing businesses like Uber or Airbnb is down to sound strategic thinking and brilliantly user-friendly customer interfaces, rather than high-impact advertising. Rather than pushing messages at people, marketing has increasingly become a way of solving complex business problems and realising a brand’s strategic thinking.

Quite reasonably, the consultants who’ve always prided themselves on helping clients to solve complex business-critical problems believe they can play a role in shaping these kinds of brands.

Does this mean that the traditional creative ad agency will be a thing of the past? Unlikely, but there will, as Adrian Mills, partner of creative, brand and media at Deloitte Digital told The Drum last year, be a shift in power.

As Mills pointed out, consultancies can’t operate on the low margins that many agencies do these days, but what they are good at is bringing in or outsourcing the stuff they are unable, for whatever reason, to do themselves.

How do the traditional agencies react to this shifting landscape? The big problem that Deloitte, Accenture and the others face is reputational. They have few creative credentials. Which is why the consultancies have shifted from buying agencies purely with expertise in web, mobile development and UX design to full-service creative shops like Heat, Karmarama and Resource/Ammirati (bought by IBM in 2017).

Also, Karmarama aside, the consultancies have been snaffling up young businesses or startups – consultancies tend not to be famed for their entrepreneurial spirit, and hotshops possess these qualities by the bucketload. The challenges for the consulting firms is to keep these acquisitions separate, to nurture that entrepreneurial spirit, rather than subsuming them into the wider acquirer culture.

One thing the ad agencies can do is focus on their creative heritage. Most aspects of marcomms – production, execution, web build, account management, etc – can be commodified to a greater or lesser degree. But creative thinking cannot. And creative talent will always be drawn to an agency environment rather than a management consultancy, even if the latter pays better. If the established agencies can continue to attract the most talented creatives, and trumpet these credentials to existing and prospective clients, they’ll have a future in this newly-competitive environment.

And of course the other thing the WPPs, IPGs and Dentsus of this world can do is set up their own consultancies. This has been tried before (back in 2006, OgilvyOne in the UK set up a short-lived consulting unit called Ogilvy Engage) but it’s more difficult than it sounds – and probably requires bringing in outside talent.

But this, perhaps, is a story for another day…

Tony Walford is a partner at M&A advisory Green Square

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