Rob Reid, Advertising M&A - DMX Dublin 2016

BUILDING AN AGENCY OF THE FUTURE
DMX Dublin, 2016

D MX D ublin, 2016 | adver tis ingmanda.com
International M&A consultancy
Founded 15 years ago & HQ in London
Specialising in the digital & creative sectors
Advising on growth & exit strategies and finding partners

Seek Out Market Intelligence
Understand The New Battlefields
Focus On The Key Building Blocks
Immerse In Tech & Startup Culture
Try Alternative Business Models
Know The Buyers & Valuation Methods

Market Intelligence
Understanding The Marketplace

Global vs Local Perspective
★ Total global advertising expenditure predicted to grow at 4.7% in 2016
★ In line with economic growth expectations and boosted by the quadrennial events
★ ‘Mature’ markets still contributing more to growth than ‘rising’ markets (US, China, UK)
★ European growth is sluggish at 2.9%
★ And that’s propped up by the UK at 5.5%
★ Ireland is predicted to be the second highest growth market this year at 7.9%

Ad Spend By Country
44%
17%
11%
6%
6%
4%
3%
3%
3% 3%
2014
USA
China
Japan
Germany
UK
Brazil
France
South Korea
Australia
Canada
44%
19%
10%
6%
6%
4%
3%
3%
3% 2%
2017
USA
China
Japan
UK
Germany
Brazil
France
South Korea
Australia
Canada

Ad Spend Growth By Region
4 4.2
2.6
-6
4.1
12.7
4.7 4.5
2.9
1.6
4.7
13.6
-10
-5
0
5
10
15
GLOBAL NORTH AMERICA WESTERN EUROPE C&EE ASIA PACIFIC LATIN AMERICA
2015 2016

Digital Is Driving The Growth
★ Digital is predicted to be 26.5% of the global total
★ No 1 ad spend in 10 markets and in top 3 categories in nearly all markets
★ Principle media used (based on spend) in UK, Canada and Australia
★ 18% growth in digital predicted in Ireland this year
★ So digital is driving nearly all global growth as a channel but also advances in tech
★ US will join this list in 2018 when digital is predicted to overtake TV

Global Spend % Share By Medium
TELEVISION
NEWSPAPERS
MAGAZINES
RADIO
CINEMA
OUTDOOR
DIGITAL
TELEVISION
NEWSPAPERS
MAGAZINES
RADIO
CINEMA
OUTDOOR
DIGITAL
2015 2016
42.0
12.8
6.9
6.5
0.5
7.0
24.3
41.3
11.96.5
6.4
0.5
6.9
26.5

And Mobile Is The Enabler
★ Mobile is the big story in digital
★ Last year it accounted for 25% of total digital spend in the US (eMarketer)
★ Predicted to rise to $65 billion by 2019
★ That will be nearly 70% of total digital
★ Close to 29% of total media
★ Mobile growth in Ireland is predicted at 162% this year - over 50% of total digital spend

“UK first country in world with 50% ad spend on digital media”

Ad Spend Growth By Medium (US$m)

New Battlefields
Get To Know These Trends

Battlefield – Customer Experience
★ CX is becoming a critical area
★ Marketing has grown from brand to market share to ‘end to end customer experience’
★ Cross-functionally aligning all touch points – online and offline
★ Design thinking is increasingly important everywhere
★ CJ and UX are paramount to digital success
★ Experiential is re-born with mobile, social, content, location (MoSoCoLo)
★ Data analytics & insights should drive all activity
‘By 2020, the
customer will manage
85% of its
relationship with an
enterprise without
interacting
with a human’
Gartner

Battlefield – Platforms
★ IP and Platforms are becoming key agency differentiators
★ Convergence between Marcoms, Tech & SaaS
★ Challenge is building the right agency stack
★ 20% growth in programmatic last year but also analytics, social, mobile publishing etc.
★ Yet still to be properly enhanced by marrying data and creative insights
★ OOH grew 14% driven by tech and advances in targeting and accountability

Battlefield – Mobile
★ Mobile is the key driver – central or at the least integrated
★ A lot of the digital change that needs to happen in organisations is now mobile first
★ Social is in the fabric of everything – driven by mobile
★ Voracious appetite for content
★ 22% growth in online video in 2015

Building Blocks To Maximise Value
‘The Magnificent 7’

If you want to create real value
If you want to motivate your best players
If you want your agency to win & keep business
If you want to make more profit to build something better
If you want to maximise the value you’ve created & sell someday
You need to build into your agency

1. BUSINESS MODEL
★ Robust, scalable & sustainable (RSS)
2. QUALITY CLIENTS
★ At least 75% of GP (Gross Profit or Margin) from international clients
★ No client more than 25% of GP
★ Min. 3 clients who have between 10-25% GP each
★ No client of less than 5% GP
Agency Growth - The Magnificent 7

3. FINANCIAL SMARTS
★ Net Op Profit (OP) of c. 20% of GP
★ Payroll of no more than 60% of GP
★ EBIT per head of least €20k pp
★ FTE productivity of least €125k pp
★ Exec shareholders should take market rate remuneration
★ Net Current Assets to be equivalent to at least 3 months operating expenses
★ Track record for all above for at least 2 full years

4. SIZE & GROWTH
★ Target 20% growth pa at gross (35% on the bottom line)
★ Min. 10% of GP investment in strong & focused new biz strategy
★ Assign owner + dedicated agency resource / budget to new biz!
5. OWNERS & LEADERS
★ Active owners / managers
★ Strong ‘second tier’ leadership team who meet regularly with real responsibility
★ Incentivised and ‘share optioned’ second tier
★ Clear roles, responsibilities & assessments

6. POSITIONING & PROPOSITION
 Playing in the right parts of the field
★ Positioned to answer today & tomorrow’s issues
★ Compelling proposition
7. MUST HAVE SKILLS
★ Smith & Wesson beats 4 aces
★ FutureCasting trends to stay relevant for tomorrow
★ Aware of convergence of digital, content, mobile, platforms, tech
★ IPs, ‘own revenue’ if possible

Tech & Startup Culture
Impact On Digital Agencies

 Dramatic change in marketing departments coming down the line
 Part trend watcher, part data scientist
 They will ‘get’ technology for the first time
 Integrating with the CTO and CIO
 Agencies will have to align to solve the problems that these guys need solving
 Uncovering the real issues that consumers face as businesses make the digital transition
A New Breed of CMO

 A requirement to solve detailed problems for clients
 Opportunity for digital agencies to move further upstream
 Where in the customer journey they can cut down on friction
 A lot of the time these problems are fixed with a technology solution
 So have the right staff who have these skills built into their DNA
 Prototyping will be at the core of what digital agencies do
Technical Innovation

 Part of an eco system
 Shared employee base
 Back and forth between start ups and agencies
 The work will become faster and more ittirative
 Work with clients to innovate their company’s product and service offerings
 Innovation labs & product incubators
Infused Start Up Culture

Alternative Business Models
Think Beyond Hourly Rates

 Procurement and legal love the phrase!
 Essentially any work that an agency produces is owned by the client
 No contractual provisions for agencies to retain ownership of the IP they create
 Not even room for discussion in 99% of cases
 Not the best business model to be stuck in as we’re in an age of innovation
 The tyranny of the hourly rate
Agency Business Model - ‘Work For Hire’

 Agencies can completely transform business performance with just one idea
 Yet only get rewarded by the number of man hours they can bill
 Not by the amount of business value delivered
 Plus digital is only settling in for a long ride – gradual shift from service to product
 Cannes Lions already has ‘innovation’ and ‘product design’ categories
‘Work For Hire’ - What’s The Problem?

 Sector moving from ‘advertising creativity’ to ‘marketing invention’
 Shift from service to product means new remuneration models are inevitable
 Otherwise little to no innovation
 Impossible if you’re constantly thinking about selling hours
 IP, platforms, licensing, profit share
 Hybid of hourly rate with performance uplift and or mix of the above
Is There A Realistic Alternative?

Buyers & Valuation Models
Global M&A Market

WPP
Publicis
Dentsu Aegis
Omnicom
IPG
Blue Focus
Havas
MDC Partners
CHR Group
Hakuhodo
Communisis
Next Fifteen
STW Comms
Mission Marketing Group
2014
53
23
20
16
12
11
8
6
6
4
4
4 4
Leading Acquirers 2014 vs 2015
WPP
Dentsu
Publicis
Havas
Omnicom
Accenture
Deloitte Touche Tohmatsu
H.I.G. Capital
IPG
Ruder Finn
2015
38
36
21
12
7
6
5
4
4 4

2015 Acquisitions By Region
412
30
119
190
25
7
16
180
North America
South America
UK
Western Europe
Eastern Europe
Middle East
APAC
Africa

2015 Acquisitions By Sector
Full Service Digital
Integrated
Public Relations
Website Design & Build
Mobile
Branding
Direct Marketing
Advertising
101
76
75
61
57
53
47
44
Events & Experiential 43
Creative 42

2013- 2015 ‘Usual Suspects’

A total of 116 deals completed in 2015 with
52% of these being completed in the second
half of the year.
SOURCE: Mergermarket, Capital IQ and Clarity research as at 31 December 2015
Transactions 2008 –2015

Transactions 2008 –2015
WPP continues to dominate M&A
activity by volume, completing 38% of
the deals in 2015, with Dentsu taking
over from Publicis as the second most
active network.
SOURCE: Mergermarket, Capital IQ and Clarity research as at 31 December 2015

Omnicom Leads North America, WPP Dominates Europe

Trading Multiples Close To 8 Year High
Source: Capital IQ and Clarity research as at 31 December 2015

Strategy
Consulting
Technology
Digital
Auditing
Outsourcing
Challengers … Consultancy & Accountancy

Challengers … Private Equity

International independents
Regional networks
Clients
Different skills
And … Significant Others

And Of Course… The Media

Finally… Global ‘Hubs’

‘Real Time Real World’ Valuations
 Agencies are valued with a multiple that reflects 1) ROI and 2) Supply & Demand
 Talent, client relationships, innovation & increasingly technology
 Based on impact over no more than 5 years to the acquirer
 IPs or proprietary platforms - valued on future revenue contribution vs. investment
 Based on last ‘adjusted’ audited year + current year forecast (EBIT) + surplus working capital
 Every acquirer has their own style of valuation / earn out models

M&A Seismic Changes 2016
 Macro economics – Russia / China
 Geo political issues - MENA
 Networks raison d’etre - global clients / growth by acquisitions / need to cut costs
 Management Consultants incursion
 WPP - client agencies / data & programmatic / media partnerships / cost cutting
 Publicis - client centric hubs / Sapient
 Dentsu Aegis - fast tracking growth through M&A
 East to West – Blue Focus, Innocean, Cheil etc.
 Growth of ‘hubs’ – WPP Campus etc.

THANK YOU
rob.reid@advertisingmanda.com

Rob Reid, Advertising M&A - DMX Dublin 2016

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Rob Reid, Advertising M&A - DMX Dublin 2016