With globally led Consolidations and large technology-driven Competitors emerging, the long-term opportunity for many Small to Medium Service businesses may be MERGER.
Since the mid ‘80s over 388,000 Mergers and Acquisitions have been announced in N. America with a known value of over USD 39Billion. In more recent times we have seen the annual deal volume record eclipsed in 2017, with over 18,600 deals closed. The chart below shows the ebbs and flows in both transaction Volume and Value over a 30year period. (Source: IMAA 2019).
As per the above chart, we are seeing a trend towards lower deal volumes and overall transaction values, as the impact of large-scale consolidations and major new market entrants is affecting the balance across many key service sectors.
This is particularly true of the Media and Entertainment industry and its key Advertising and Marketing Technology sectors.
As the final numbers come in for 2019 and looking ahead to 2020, recently released research from R3 suggests that the sector will never be the same. The global consultancy organizations, private equity groups and technology companies have clearly wrested market momentum from the established Holding Companies. The on-going scramble for First party data is now driving sector deal making.
With the rapidly encroaching maturation of the Advertising industry’s business cycle, we are witnessing real competition from the Consultants, increasing Client demands for operational and financial transparency, together with lower entry barriers and lessened ability for differentiation in today’s digital world – all of which combine to exert more pressure on agency fees and profitability. This has already driven significant consolidation within the sector, perhaps most pointedly demonstrated in the amalgamation of J. Walter Thompson and Wunderman Worldwide to form WundermanThompson.
Given the above, how should small to medium agencies best counter this changing world? One clue maybe evidenced by the following chart, prepared by the IMAA, which depicts the flow of “Merger of Equals” deals over the last 20years and projects upward value trends across 2019 and beyond.
Most small businesses are still led by Entrepreneurs — often categorized as a “Breed Apart” — willing to commit to deeply personal and financial risk on what is a life-long journey. As such that life can be lonely in the extreme. For that reason, seeking out like-minded professionals with shared values and ambitions can certainly help replenish energy — both physical and financial, fuel creativity and bring strategic clarity to the fore.
When it comes to making major business decisions on whether to sell or find a merger partner, my experience over the last 30years, has clearly evidenced that much as entrepreneurs want to control and fix things themselves, in times of change they are often too deeply ensconced in the day-to-day management of their business to handle the task. Rather it makes sense to find a professional advisor who has “walked the walk” and can help them objectively establish a clear Strategic Pathway, while also steering them away from the many pitfalls that cause Mergers to fail.
What is the Advisor’s role?
My belief is that the key is to immerse his or herself into the dynamics of a business and use this immersion to surface real strategic clarity. This ensures that the business owner has made informed and pragmatic choices about Growth, Consolidation and even Exit. Once that pathway is well defined, the Advisor’s mandate must be to establish final deal positioning, the targeting of potential Partners, qualifying interested parties, then negotiating the basic deal and facilitating due diligence and deal closure with accountants and lawyers. Finally add to the process an open-minded perspective and a focused desire to create a WIN-WIN outcome.
What are the keys to a successful Merger?
In my direct experience it is not simply Revenue gain or Cost savings, but rather strategic and cultural “FIT” at a management and operational level. Interestingly a recent quote by Seth Godin described the industry’s fixation with cost saving as the “race to the bottom”. In reality, potential Merger Partners must look for an amalgam of inherent benefits to any deal, including operational efficiencies, complimentary service access, shared corporate ambitions and symbiotic cultural values.
Uncovering these attributes and properly assessing them to establish FIT must be Driven by open and honest discourse and full, unedited disclosure. Pre-deal discussions should not only cover financial and commercial realities, but should also encompass an honest appraisal of Strengths and Weaknesses - people and resources, operational processes and culture, as well as the true personal ambitions of the Parties. This will take a serious time commitment and necessitate visits to each other’s facilities to truly gauge FIT. However, time invested pre-deal can definitely avoid the Integration Pains post deal.
The final stage is getting the deal done and requires the involvement of legal and accounting professionals to re-examine the Trust factors and set Due Diligence parameters, as well as providing financial guidance as to whether a Merger (creating a whole new corporate entity) or an Amalgamation (folding one unit into another) delivers the best outcome for the Parties.
Mergers like other M&A deals, come in all shapes and sizes. Unfortunately, not every merger is a “Merger of Equals”. Often the financially stronger Partner holds a bigger negotiating stick, but providing that each Party has a clear understanding of what they are gaining and/or losing in the deal and where their ultimate upside lies, willing Merger Partners will make it work. Overall a successful merger should be targeted with delivering “New News” to the amalgamated Client base of the Parties. News re expanded services, broader management expertise or wider geographic coverage leading to New Growth for the merged business.
Kevin Astle is the Founder and Managing Partner of MultiVisory International. Having worked on both sides of the Atlantic and on both sides of the Client/Agency desk across North America, he brings an international perspective and deep, multi-sector knowledge and network to his Clients.
