Wednesday 26 July 2017

John McGee: Ad agency owners may be tempted to cash in chips

'There's a number of reasons why M&A activity in the global advertising industry, including Ireland, will continue to gain momentum over the next few years. Chief among these is the never-ending quest to deliver strong growth to shareholders.' Stock photo: Reuters
'There's a number of reasons why M&A activity in the global advertising industry, including Ireland, will continue to gain momentum over the next few years. Chief among these is the never-ending quest to deliver strong growth to shareholders.' Stock photo: Reuters

John McGee

By the end of 2020 the Irish advertising industry will have changed beyond recognition. In fact, it is entirely conceivable that many Irish creative and media agency chief executives are looking at all their options right now as they contemplate a possible sale or merger of their businesses over the next three years.

I would even go as far as saying, with a fair degree of certainty, that several of the top Irish creative and media agencies will change hands over the next three years. But of course, few if any at all, will admit it.

With over 60 creative and media agencies of various sizes servicing the €1bn Irish advertising market and a raft of other, mainly digitally-focused businesses operating in areas like search and social, it seems highly unlikely that such a small market can sustain these different agencies.

In the good old pre-digital days, small owner-managed agencies could get by easily enough servicing their clients by knocking out creative for TV, radio, print and possibly some below-the-line work. The same was true for the many media-buying agencies, most of which are now consolidated into large trading groups, some of which are owned by larger international networks.

Merger and acquisition (M&A) activity in adland, however, has had a chequered history in recent years, largely because the international networks and agency groups already have a strong footprint in Ireland, having established themselves here in the 1980s and early 1990s.

In recent years, much of the M&A focus of the international groups like WPP, Publicis and Dentsu shifted to emerging markets in Asia and South America, with an emphasis on acquiring independent digital agencies. Ireland, however, was largely off the radar and the market was deemed to be too small.

Now, however, it is expected to spring into life again over the coming months and years. Last year, there was the merger of digital agencies Brando and Huskies, then earlier this year eightytwenty became part of Ogilvy & Mather Ireland. Coming up next could be a possible the merger between Owens DDB and Firstcom which is rumoured to be coming close to agreement.

There's a number of reasons why M&A activity in the global advertising industry, including Ireland, will continue to gain momentum over the next few years. Chief among these is the never-ending quest to deliver strong growth to shareholders. While organic growth amongst the large agency groups has been sluggish over the past two years, many of them are under pressure to use their cash resources to fund growth.

While interest rates are expected to increase over the next few years, the fact is they are still at historic lows and this makes it a lot cheaper to fund M&A deals. In addition, the relatively high share prices which most of the marketing communications firms are trading off, allows them to raise cheap capital and the pay lofty multiples for their targets.

But there are other reasons why the M&A marketplace looks set to take off and some of them must do with the existential crisis in which the industry now finds itself.

Depending on who you talk to, the existing agency model is no longer fit for purpose, is unwieldy and no longer capable of meeting the increasingly complex needs of clients. Indeed, this is a theme that has emerged over the last 12 months or so as some of the largest advertisers like P&G and Unilever have made it known that the advertising industry has made itself far too complex for its own good.

Clients are losing patience with the slow pace of change within adland. Already suspicious about certain practices within the industry, they are also slashing back on the number of agencies they deal with, often by half, and looking to make their advertising a lot more effective with a lot less money. And what's more, they are achieving this. Which leads back to the question why couldn't their agencies have done this in the first place?

Meanwhile, the advertising landscape has become a lot more competitive as parvenu players like Accenture, Deloitte, IBM iX and PwC Digital make a bold play for their own piece of turf. And they are succeeding by shaking up the ancien regime by positioning themselves further up the value chain and often beyond the clutches of procurement departments. And they too have made themselves formidable players in the M&A space by snapping up traditional agencies all over the world. It may only be a matter of time before they turn their sights on Irish agencies, where they already have a sizeable presence.

One could forgive any Irish agency ceo for feeling a tad nervous about all of this and what it means for the future of their agencies and themselves as owners of the business. Having survived the worst advertising recession in living memory between 2007-2013, the current upturn in the economy may only last a few more years. If they don't have the stomach or the resources to get through the next downturn, now is the time to consider cashing in their chips.

Sunday Indo Business

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