Is Merger a Four-Letter Word?
By Mike Carlton
The Man to Know
Harry Paster is legendary. For almost 50 years he was the American Association of Advertising Agencies’ expert on agency mergers. No one was more knowledgeable about the subject than Harry.
He was there at the birth of the holding companies. And he facilitated their growth. Just as important, he mid-wifed hundreds of privately held agency mergers and acquisitions. He was the go-to person for anything dealing with the issue. A plaque on his office wall given to him by members was inscribed with the simple line, “Call Harry, he’ll know.”
Harry had a simple and wise saying about agency mergers that he was fond of repeating. It went like this;
“Take two Fifty Million Dollar agencies and put them together and in three years you’ll have one Fifty Million Dollar agency.”
The Urge to Merge
After a lull during the past few years, it looks like agency merger and acquisition may be heating up again. While it is unlikely that we will again see a period of M&A activity quite like the ‘80s and ‘90s, conditions conducive to agency mergers appear to be upon us, or are at least on the horizon.
This is not just with the holding companies. In fact, it appears as if interest is growing most in the combining of smaller owner-managed agencies. Let’s take a look at some of the issues that are driving this merger and acquisition interest.
The most common drivers of M&A among owner-managed agencies are:
1. Exit Strategy
Obviously, at some time the owner of every organization needs to exit. Sometimes this is carefully planned. But all too often the exit is driven by events out of the owner’s control.
In any event, being acquired is a clear way out. And can be faster and cleaner than an internal sale to existing employees.
2. Business Misfortune
The tough times of the past few years have left many agencies in very fragile condition. Client shrinkage, and outright client loss, threatens the viability of countless agencies. Lots are hanging on, but just barely. Yet most have some valuable and marketable strengths.
In this environment, combining those strengths with another agency can make a lot of sense. And assure the future for everyone involved.
3. Improving Market Capabilities
With clients looking for more holistic market communications solutions, bringing complementary talents and capabilities together in a one-stop shop has some potential market power. This may be one of the most positive reasons for merging.
Unfortunately, carefully calculated mergers of this type are probably less common than ones motivated by exit strategy or business misfortune.
4. It’s All About Money
There can be times when an agency is worth more to its owner as a sale than it is to operate. That’s just a fact of life in our free-enterprise system. These events can be driven by a unique situation relating to a key client or key staff member. Or sometimes by things as unrelated to the core of the business as real estate or tax issues.
In any event, while these kinds of deals may have major immediate financial importance, it is not uncommon for them to be disadvantageous to the clients and agency staff.
5. The Grass is Greener
It is human nature to think that someone else’s business will be easier to run than your own. So, a lot of owner-managed agency M&A activity is rooted in this belief.
But like the real world, problems are a whole lot more challenging close-up than they look from a distance. Thus, these kinds of combinations can easily become disappointing.
6. The Growth Imperative
Sometimes the need for growth can become paramount. This can be driven by financial expectations - bankers, investors or the owners. Or it can be driven by psychological needs of the agency principals.
Whatever the reason, growth for growth’s sake alone brings into question a whole range of issues about the benefits to clients and staff.
If a merger or acquisition is on your radar screen, the following thoughts are worth considering.
There are lots of reasons for merging. But there are also lots of reasons for not doing so. The fundamental issues are:
1. What are the outcomes you desire?
2. Will merging deliver those outcomes?
3. What do you have to do to assure that those outcomes are achieved?
A Case History
Some time ago there were two strong agencies located in a secondary advertising market. They both had proud histories and were on their second or third generation of internally grown owner-managers. Neither had a majority owner. Both were about the same size. Both had excellent reputations. Both were considered excellent places to work. Both were profitable. And, the owner-managers knew and liked each other.
Each had different but complementary strengths. One was primarily a consumer retail agency. It had a few high profile local and regional clients. The other agency’s business portfolio was highly diversified. It was strong on corporate and b to b advertising. It had free standing PR, sales promotion and studio units. Its clients were mostly national, with some international.
Over dinner at a 4As Annual Meeting the leaders of these agencies envisioned the marketing power these two could have together. Together they could do better work. Together they could have the scale needed for national credibility. Together they could provide a more complete package of services to clients. Together they could become an even more attractive place for top talent. And together they could make a difference in the national advertising community.
Harry Paster was called in. There were no client conflicts. Only minimal capability overlaps. The financials of both were clean and strong. And the leaders of both agencies were energized for the market challenge ahead. Harry called it a “marriage made in heaven.”
The Importance of Culture
But while the accountants and lawyers were doing their thing, nobody bothered to look at the cultures of the two agencies. One had a very collegial management style. Its leadership group was highly entrepreneurial. It was run like a true old-time partnership. Opinions were expressed freely and openly.
The other agency had a very directive top-down management style. While there was no majority owner, everyone deferred to the CEO. His paternalism was pervasive. Management meetings were calm and predictable. Dissent was unusual. The partners were compliant. They were good stewards.
This cultural mix was a disaster.
Within a year all but one of the leaders of the entrepreneurial agency left. They just didn’t fit in. Rather quickly, the capabilities they built withered. The energy they provided disappeared. So did their can-do attitude.
Yet these guys weren’t clunks. Each went on to considerable success elsewhere.
That agency is gone. It died a slow death. Over the years it relentlessly shrank and lost relevance. Finally, one day it declared bankruptcy and closed its doors.
A sad end to once proud agency brands.
The old saying goes that in real estate selection the three most important things are; location, location, location.
The corollary to that is in merging agency capabilities the three most important things are; culture, culture, culture.
Failure to recognize this is probably the leading cause of M&A disappointments.
Cash Flow vs. Capabilities
On another dimension, in every merger there is a continuum between maximizing immediate cash flow at one extreme to rapidly integrating professional capabilities at the other. It is difficult to do both simultaneously. So, it is important for the participants to agree where on this continuum they want the merged agency to be.
Failure to do so is another path to disillusionment.
Eyes Wide Open
Yet just because there are many pitfalls on the road to a successful combination, that is no reason not to consider M&A. In fact, enlightened leadership almost demands that agency owner-managers be constantly looking at M&A opportunities that serve the best interests of the clients, the staff, and themselves.
At the same time, M&A can be heady stuff. The euphoria of an M&A journey cannot be permitted to blind you to any of the challenges.
The goal, quite simply, is to determine in a carefully reasoned way the outcomes you want to achieve, and then what is necessary to assure those outcomes are realized.
First Things First
Everything should start with the desired outcomes. But too often, they aren’t fully thought out before accounting and legal work begins. That’s a mistake. It can be like getting the cart before the horse. For once the accounting and legal work begins it can take on a life of its own.
Your responsibility is to make sure you are doing the right things. The responsibility of the accountants and lawyers is to make sure you do things right.
Confusing the two can cause big trouble.
Some Questions to Ask Yourself
In many respects merger and acquisition activity is an exciting diversion from the routine day-to-day life of running an agency. To keep things focused, here are some questions you might ask yourself:
What is the driver?
Why even consider a merger or acquisition? The better you understand the driver, the easier it will be to work through all the details.
What is the outcome you desire?
What do you want the agency to look like and be capable of a few years down the road? The clearer the mental picture and the more accurately it is communicated will make everything go better.
How critical is it to achieve that outcome?
Is the outcome you have in mind key to your agency’s viability? Or is it desirable, but not crucial? A keen sense of that can help in balancing the inevitable trade-offs M&A brings.
Is a merger or acquisition the best way to achieve that outcome?
Is organic growth an option? And if so what are the pros and cons of each approach?
How will the cultures mesh?
What are the leadership and operational values of the two enterprises? How do they differ? What are the key challenges? Would it make sense to bring in an independent management psychologist for a dispassionate evaluation?
What is the branding strategy?
How will the combined enterprise be known? Will the old brands continue? What resources will be needed to make the brand transition? How long will it take for the market place to perceive the brand as you want it?
What is the business plan?
What is the planned balance between cash flow and integration? What are the roles of not just the leaders but the staff also? Who is responsible for what? How quickly will the transition be completed?
What are the diversionary costs?
The time and attention diverted by a merger is huge. This is not only at the management level but all across the staff. The cost of this diversion is usually grossly underestimated.
Is there urgency?
Is it important to act now? Or is it something that can wait? You don’t want to be stampeded into a merger just because it is possible right now.
What will it mean to current clients?
Many clients quietly resent agency mergers. They can view them as disruptive, and not in their best interests. Be sure the clients are truly on board and see benefits from their standpoint.
What will it mean to the leadership team?
Success or failure of a merger rests more with the agency leadership team than with any other group. If they don’t see it as beneficial to them personally, then the road ahead will be bumpy.
What will it mean to the staff?
Mergers often cause major staff disruptions. Agency people know this. And the best talent usually begins packing their parachute as soon as they hear the first rumors. Make sure the ones you value are on board and well protected.
What will it mean to prospective clients?
How will the merger make you more attractive to prospective clients? And how will you make sure that they recognize this change and the benefits to them?
What will it mean to you?
Are the psychic and financial rewards there? And will they more than offset the headaches and sleepless nights that invariably come with a merger?
What are the downsides?
What if it doesn’t work? What if the desired outcomes are not achieved? How will you recover and move on?
How are you doing the deal?
This is the last question. It has that position because you should only consider it after you are comfortable with the answers to the earlier questions. This is not the place to start. But clearly vital to how things end up.
After the Honeymoon
Signing the papers on a merger is not the end; it is just the beginning. Making a merger work is kind of like making a marriage work. It takes lots of continuing effort. On both sides.
And like a solid marriage, a solid merger gains strength as the partners work through the almost inevitable adversity they will face together. Be prepared for the time, attention, commitment and just plain hard work this nurturing will require.
Beating the Odds
Harry Paster once said that three quarters of agency mergers and acquisitions fail to deliver the outcomes desired by their planners. Only one in four pays off.
Those are terrible odds!
The challenge is to overcome those odds and become part of the twenty five percent that can look back on their merger with pride, satisfaction and joy.