rob reid, advertising m&a - dmx dublin 2016

BUILDING AN AGENCY OF THE FUTURE

DMX Dublin, 2016

D M X D u b l i n , 2 0 1 6 | a d v e r t i s i n g m a n d a . c o m

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

11.9 6.5

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

Essentially any work that an agency produces is owned by its client

No contractual provisions for agencies to retain ownership of some of the IP they create

Not even room for discussion!

‘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’

today.


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 [email protected]