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M&A In Advertising: The Lastaki Perspective

Can an aggregation of two/three small players create a multiplier effect? We will only find out when it is attempted

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Advertising, by nature is an acquisitive industry. Globally, acquisitions of independent advertising agencies by large multinational networks are very common. India witnessed a similar trend post the economic liberalization of 90s, wherein leading advertising agencies in the country were acquired by larger agencies with a global footprint. For instance, ULKA became a part of FCB; Mudra is now DDB Mudra and Hindustan Thompson Associates (HTA) was reacquired  by J. Walter Thompson - a WPP agency.

The last decade or so has seen a major shift in acquisitions from traditional agencies to digital advertising agencies. The reasons are self-evident. The world has seen a massive migration towards digital media. It comes as no surprise that the agencies specializing in the digital end of the business, post growth rates that are 3x to 4x higher than their traditional counterpart, thus making them very attractive take-over targets. Furthermore, the larger networks see acquisitions as the fastest way to capture market share and consolidate their hold within this segment.  The acquisitions also allow them access to the best talent in the industry, thereby giving them an edge over their competitors. The advent of digital media has disrupted the M&A landscape on the global scale. However, these disruptions are still to play out within the Indian context.

An Emerging Trend of Unexpected Buyers:  A Global Overview:

Traditionally, smaller/mid-sized advertising agencies were acquired by larger advertising agencies. However, the acquisitions of digital agencies have shown that there is a shift in that pattern, with various non-traditional suitors throwing their hat in the fray. Large players with diverse core competencies have entered the buying space as the integration of technology, data and communication picks up pace. Buyers now range from consulting firms to the Big 4 accounting firms, IT companies and even publishing houses. They are all keen to acquire the new age, cutting-edge advertising and marketing agencies to assist them in expanding rapidly and meaningfully.

For instance, Accenture recently acquired two agencies - one creative and the other specializing in design- to expand its customer experience capabilities in Australia and New Zealand. These acquisitions will enable Accenture Interactive - a digital marketing, customer experience, digital commerce and digital content initiative - to offer a full suite of digital customer transformation services. These acquisitions are amongst many that Accenture has made worldwide to stay current.

While the advent of large accounting firms in the buy space for advertising agencies may have been unthinkable in the past, it has now become accepted practice. PWC, Deloitte and KPMG have also acquired digital media agencies, ad-tech/ marketing-tech and analytics companies.

The rationale behind the acquisitions:

The acquisition of digital agencies allows these large companies to blend the acquired creative and the analytical capabilities with their core competencies, thus optimizing the value they offer to the clients. They can now combine marketing and branding strategies with the business plan.

Furthermore, the acquisitions enable the Big 4 to make sense of the data. This, in turn, allows them valuable insights into consumer behaviour- insights that can be used by the creative teams to modify the brand campaigns in real time to make them relevant and effective. The addition of a digital skill set makes these companies comprehensive solutions providers.

Large IT companies are also keen to develop solutions to compete for the marketing dollars of their customers. Whether it is IT services companies such as Cognizant or Enterprise Software giants such as IBM, Adobe, SalesForce or Oracle, they are all entering the world of brand marketing by acquiring digital agencies.

Similarly, publishers who are positioned between advertisers and the audience, are also looking at ways of adding to their revenue streams. They too gather significant data on behalf of brands and can monetize this through analytics.

Globally, independent ad agencies are welcoming these atypical avenues of collaboration. This not only allows them to gain access to larger clientele, but also offers them access into domain expertise that these large firms have mustered over time.

While the new entrants are becoming a norm in the acquisition game, across the globe, we have yet to see this trend take a foothold within the Indian context. As far as the Indian market is concerned, it is still restricted to larger advertising networks buying the independent agencies.

Changing the rules of the game: The Indian Condition

Launching an agency is an attractive proposition for aspiring entrepreneurs. It requires a low start-up capital, an opportunity to grow in the space and the potential of being acquired by the networks at attractive valuations. The past few years have seen numerous acquisitions of independent agencies of relevant size, thus consolidating the market. While new agencies continue to mushroom all over the country, the appetite of large multinationals networks to acquire has abated. This is caused by a combination of factors:

"    Increased Acquisition Thresholds
"    Difficulty in scaling up for new agencies
"    Clients shying away from another 'me too' agency
"    The impatience of founders as they fear being left out of the acquisition spree

It can be argued that this is normal - the mad land grab to establish presence in the digital space is nearly over. The reasons to acquire are being re-evaluated. This is not to say that the acquisitions of the past were low quality assets; it is just that the bar has now been raised. Ceilings of yesterday are thresholds of today. Revenue size, profit margins, roster of clients are closely scrutinized and the thresholds for these are increasing every year.

Today, only agencies with clear differentiations are being considered for acquisition. The rules of the game are changing. The question is: which independent advertising agencies fit the new expectations of large networks? Not many as one would imagine.

The Scalability Conundrum and the Inevitability of Aggregation:


As mentioned earlier, new agencies need to find their unique selling point or their secret sauce to get noticed and acquire clients. Clients are inundated with 'me too' agencies offering more of the same. Some agencies have achieved significant growth in recent times on the back of superior creatives (such as The Glitch and Social Kinnect), consumer insights (Autumn comes to mind) or the smart use of media (like Grapes Digital). While larger agencies gain from economies of scale, are able to attract good talent and have better brand recall, it is increasingly difficult for smaller agencies to achieve scale and relevance.

The solution lies in consolidation:

Small independent agencies with similar synergies should merge to create a bigger presence. The benefits of such an amalgamation are multi-fold:

"    Client Size and Margins: Small agencies can aim for larger clients and improved margins when they combine to become larger.

"    Operational Capacity: Additionally, founders of these small agencies may have significant ideas for expanding business, but have limited management bandwidth, which may pose a constraint to implement those ideas.

"    Management Capability: After merging with like-minded agencies, the management of the combined entity also expands. Furthermore, attracting superior talent also becomes easier.

"    Acquisition Appeal: A consolidated agency becomes an appealing acquisition target for larger networks.

Challenges and Solutions for Aggregation:

Change rarely comes sans challenges. However, finding the right means to overcome these challenges will help achieve success. For every promoter, establishing and expanding his or her company is like raising a child. The thought of sharing the parenting rights of this child is always a cause for concern. While the business synergies may align, management on both sides may be skeptical on whether the two agencies are a good cultural fit. This remains unknown till it is tried and tested.

A way to address this concern may be to associate with a potential partner and work on common mandates for a fixed period. This will allow for an opportunity to understand the capabilities of the other team as well as your own team's ability to co-work and collaborate. If an agency decides to adopt this plan to merge with another agency, it should restrict the merger to three or at most, four agencies. While merging with more agencies can provide added advantage, it can also become management heavy - a fact that cannot be ignored. With a large management team, the combined entity will lose it agility to adapt quickly and can hinder the overall decision-making process.

Thus, the secret sauce of developing a large, yet agile advertising agency is to identify partner agencies that complement each other in terms of personalities, clients, sector, geographies and services. Can an aggregation of two/three small players create a multiplier effect? We will only find out when it is attempted.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
merger and acquisitions advertising opinion

Dev Raman

The author is Managing Partner, Lastaki Advisors

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Rasika Ketkar

The author is Vice President, Lastaki Advisors

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