Agency and marketing services companies have evolved significantly in the past three decades from a mixture of independent regional firms and global networks to a leading roster of holding companies, consulting firms, large regional and private equity-backed independents, talent agencies, and emerging technology firms. All are vying to profit from expanding brand marketing budgets by pitching value-added capabilities across traditional, digital, and experiential marketing channels. Furthermore, marketing agencies are now using a variety of methods to tell a client’s story, mixing research, strategy, and brand culture with customer experience while engaging with a customer in real-time. Brands increasingly need insight into how human behavior directly impacts purchasing decisions. In today’s digital marketing world, the M&A environment for marketing services companies continues to be vibrant.
As a founder and entrepreneur of a marketing services company, your creative eye keeps you constantly innovating in unique ways to make your clients’ brands recognizable. However, as a business owner who has contributed years of sweat and toil into building your company, the fast pace of innovation, the need to have a broad suite of services, and the requirement to be global, have made business increasingly competitive. As such, it is not surprising that the industry continues to consolidate at an ever-increasing pace. The good news is that for entrepreneurial founders who offer differentiated services, there are available opportunities to explore liquidity and merger scenarios at historically high-valuation multiples.
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Agency M&A Is on the Uptick as Non-Traditional U.S. Buyers Lead the Charge; Strategic Interest Heightened
According to recent industry reports, 2017 was a very active year for agency M&A, with consultants, private equity firms, and other non-traditional buyers taking the lion’s share of assets—for a total of 100 agency related deals worth approximately $4.6B in total sales. While Dentsu and WPP made an impressive eight of the 100 deals, consultants like Capgemini and Accenture made the majority of investments in the space. Further, 2017 numbers hint that about half of all acquirers came from outside traditional marketing services groups, and specialist digital agencies were the most sought-after acquisitions with 163 transactions announced. Globally, there were more than 1,000 M&A deals in the marketing services sector.
Moreover, a heightened focus on optimizing marketing spend and utilizing innovative tactics has created opportunities for innovative groups to get a seat at the table with leading CMOs to assist in their campaigns. As a result, we see heightened strategic interest across agency firms that have deep-rooted service offerings in content development and experiential and brand activation as well as e-Commerce strategy and enablement.
1. Content Development. As new innovative distribution channels like Facebook and YouTube have gained momentum, marketers are increasingly looking for unique ways to combine brand messaging within captivating content. Several content agencies and viral video specialists have been increasingly sought out by large brands. Stun Creative in Los Angeles, for example, has put its content production capabilities to work on behalf of large brands such as the NFL, Dove, and Princess Cruises.
2. Experiential and Brand Activation. Millennials and believers in the YOLO movement have increased the amount of discretionary spend on experiences like music festivals, sports events, and large gatherings. This change in behavior has left brands scrambling to create innovative opportunities to connect with new consumers and drive activation. Experiential specialists have combined unique experiences, brand activation, and promotional activities into events like the Coachella Music Festival, which boasts a huge following with about 125,000 participants; the Sundance Film Festival, which averages about 72,000 attendees; and SXSW Festivals, which hosts about 170,000 participants. As an example, HP, Acura, AT&T, Stella Artois, Dell, and Chase Sapphire all had experiential marketing activities at these events, all of which were managed by outside specialists such as Infinity Marketing and Giant Spoon.
3. eCommerce Strategy and Enablement. Many large agencies have struggled to meet their clients’ demands across creative and strategic capabilities to enhance their e-Commerce efforts throughout the entire customer experience and back-end software fulfillment. Many acquirers have been looking to increase their capabilities via M&A, often straddling the system integrator segment by acquiring capabilities across SAP Hybris, Magento, and Shopify to bring an array of expertise to client projects.
4. Research and Marketing. Insight-driven businesses are rapidly becoming the powerhouses in today’s data-centric economy, and companies that can most accurately track consumer preferences and engagement have proven to be attractive acquisition targets for larger agencies. We recently advised Kelton Global, a trusted partner to Fortune 100 companies and iconic brands, on its sale to LRW, a leading research and data analytics company. Founded in 2003 by Tom Bernthal and Gareth Schweitzer, Kelton grew from a two-person office to a global consultancy with a national footprint that is often called upon to address critical customer, brand, and product needs. Kelton uses its communications, innovation, and branding expertise to help global businesses chart new paths for growth. Notable clients like Google, Uber, Pfizer, Nike, Facebook, Harley-Davidson, and Target, to name a few, often hire Kelton to solve their companies’ most difficult challenges. LRW sought Kelton to significantly enhance its insights, design, and innovation capabilities.
And with an ever-expanding universe of digital advertising channels and improved measurement tools across traditional channels, brands and marketers have been able to increase the accuracy of their return on investment and focus on optimizing their marketing dollars. The increased ability to measure direct impact across both digital and traditional channels has led many firms to review their agency relationships and refocus efforts. Some high-profile examples of these reviews include Procter & Gamble, Ford, and Unilever, which have reduced spending with certain large agency partners to eliminate ineffective marketing spend.
Innovate and Expand Offerings or Risk Losing Clients and Brand Partners
Since the Great Recession of 2008-2009, many companies have searched for several innovative ways to improve their cross-sell through differentiated services lines while trying to adapt to the rapid rise of increased digital spend. This unique confluence of events has led many groups to expand their focus on marketing services to broaden cross-sale opportunities across the C-suite. For example, Deloitte, PwC, and Accenture have completed more than 240 deals over the past five years with the goal of leveraging their embedded financial and operational footholds into the marketing budgets of some of their clients.
In addition to these groups, select talent agencies and technology firms have sought to bolt on marketing service offerings to differentiate themselves by creating exclusive advertising opportunities or leveraging unique capabilities beyond their core offerings. This includes Endeavour’s investments in Red Interactive, Chaotic Moon, and other select businesses. While these groups have differing strategic priorities, their marketing services investments are all linked by a common theme: keeping these firms relevant and indispensable to their core clients and major brand partners.
Key Value Drivers
While overall valuations have continued to rise with the improved dealmaking climate, Intrepid has seen marketing services deals directly benefit from increased attention beyond the traditional holding company acquirer set. This diversity of potential buyers provides a variety of opportunities to potential entrepreneurs and partnerships that want to maintain individuality but benefit from a broader strategic platform.
Some key drivers of valuation and structure include:
1. Revenue Diversification and Client Longevity. Client and revenue diversification are key drivers for the value of marketing services businesses, with added value when clients maintain preferred vendor status, have been a long-term retained service provider, and show potential for locked in multi-period retainer business.
2. Proprietary Processes. Given the human capital nature of marketing services businesses, it is critical to highlight any proprietary processes, technology, or unique capabilities that enhance the company’s ability to gain leverage with scale.
3. Team Retention. Potential acquirers will be keen to understand the team dynamics as well as who drives revenue and manages key client relationships. Enhanced value will be given to companies with a strong, dedicated team that has distributed key relationships and management of accounts across the organization.
Unite to Succeed
One of the hallmark trends of early M&A in the sector has been a cookie-cutter approach to dealmaking which is beginning to change. With the growth of new potential acquirers, alternative structures and long-term opportunities for management have emerged in a bid to attract owners to join potential marketing services consolidators. Many strategic acquirers have also begun to change the legacy tradition of having similar “sister” agencies compete against one another for the same business. By removing internal competition and moving toward shared success models, some acquirers have begun to build strategically aligned entities focused on the success of the whole and providing clients with the best of breed capabilities.
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One example of a new entrant utilizing this strategy is Advantage Solutions, a business solutions provider to manufacturers and retailers, via its acquisition of Amp Agency, whose goal is to connect people and brands in meaningful ways. As such, the “old” deal structure of half- to two-thirds cash up front with an earnout based solely on an acquired business’ EBITDA may be a thing of the past. As acquirers seek to have acquired companies integrate into their systems and be partners rather than compete with their sister companies, backend payouts will be driven by the success of the total enterprise. We will likely see the issuance of stock and “profits’ interest” payouts to be more prevalent in future dealmaking.
Acquire Capabilities to Stay Relevant
Given current trends across the broad advertising sector and emergence of new pockets of acquirers, Intrepid remains bullish on the outlook for leading marketing services firms. Changing trends in content delivery, the blending of advertising with content production, and rapidly evolving consumer purchasing behavior will demand that marketing services providers continue to innovate or acquire the capabilities that will keep them relevant to major brand clients. We believe that marketing services will remain a vibrant sector given the focus on new marketing channel opportunities for brands and the increasing need for innovative and verifiable ROI on advertising spend—these capabilities will need to be bought, not built.