campaignlive.co.uk, Friday, 25 November 2005 12:00AM
Big is no longer beautiful, at least as far as some clients are concerned. British Airways, Omo, Heineken and Coca-Cola have all recently picked the likes of Bartle Bogle Hegarty, StrawberryFrog and Wieden & Kennedy over the industry's biggest network agencies.
Investors seem similarly convinced and with marketing services enjoying relatively strong growth, new mini-holding companies - listed companies building marketing services groups by making strategic acquisitions - are making their presence felt.
WCRS has just bought itself out of Havas, acquired two PR companies and renamed itself Engine in a move that is widely seen as the precursor to an initial public offering. This year, Creston bought Delaney Lund Knox Warren & Partners, Chime snapped up VCCP and Cossette acquired Miles Calcraft Briginshaw Duffy. The few remaining independent ad agencies get almost weekly phone calls from prospective buyers.
The buy-and-build model is nothing new - Sir Martin Sorrell built WPP in the same way. The difference this time is that the new groups are buying medium-sized advertising agencies and matching them with other small independent businesses. The aim is to have offices in a smaller number of key markets and to encourage group businesses to work together.
MDC Partners owns a variety of mainly US-based companies, including the creative agency Crispin Porter & Bogusky. Its chairman, president and chief executive, Miles S Nadal, says clients are increasingly unhappy with "institutionalised mediocrity" and no longer care whether a network has hundreds of offices. "The rate of change is accelerating. Clients realise that staying with a big network is actually high-risk because it is harder for the big companies to change with the changing world of media," he says.
It's not all good news, however. MDC, for example, blamed high corporate expenses for its reported $1.6 million loss for the third quarter of 2005, despite achieving revenue growth of 45 per cent on the previous year.
There are other question-marks. Most of the new networks offer earnouts to businesses they acquire (with the exception of MDC and Media Square), but Lorna Tilbian, a senior analyst at Numis Securities, says these pose a potential danger. "It encourages chief executives to over-deliver in the short term and puts pressure on the business to come up with cash out of the rest of the group to pay the earnout," she says. In a cyclical market, where some areas might be doing better than others, this could mean that the cash to reward good performance has to come out of less successful businesses.
The market will change much over the next few years - some of the new networks will merge, others will be taken over by rivals and investor appetite for these kinds of business will not last forever. But, for now at least, here are some of the main players.
The lowdown: Creston entered the world of advertising with a bang this year when it bought Delaney Lund Knox Warren & Partners in February with a mix of cash and shares - DLKW is now its biggest shareholder. The company also operates in research and PR and employs 467 staff.
Key people: Don Elgie, chief executive.
Group companies: DLKW, CML Research, EMO Group, Marketing Sciences Group, Nelson Bostock Communications, Red Door Communications, The Real Adventure.
Clients include: Vauxhall, The AA, COI, Diageo, Vodafone, Audi, BMW, Bacardi.
Turnover (year to March 2005): £35.9 million.
Operating profit (year to March 2005): £3.67 million.
USP: Elgie says return on investment for clients is "the only thing that concerns us".
Why sell to them? According to Elgie, selling to Creston is more like buying in than selling out. "As part of any deal, vendors become shareholders in Creston," he says. "That means our interests are the same - 35 per cent of all our shareholders actually sit on the operating board."
Future growth: Creston is appointing a synergy director to encourage more clients to work with more than one company in the group (12 clients already do this). Organic growth was 15 per cent in the past financial year, about three times the market average.
Acquisition strategy: Although 25 per cent of group income comes from overseas, Creston is currently UK-based. International expansion is definitely on the cards. "We are looking at a six- or seven-country model," Elgie says. "It won't be the same countries for every discipline, but we will be in the main markets in Europe and the US, plus a hub in Asia." Strategy and digital are two other areas to watch.
The lowdown: Chime was formed in 1989 and floated five years later. It bought HHCL in 1997, but was forced to sell 49 per cent of the agency to WPP in 2003. Despite the recent acquisition of VCCP, nearly two-thirds of Chime's 750 staff work in PR.
Key people: Lord Bell, chairman; Chris Satterthwaite, group chief executive.
Group companies: VCCP, Rare, SFW, Pure Media, Gasoline, Teamspirit, TTA PR/Creative, Bell Pottinger, De Facto, Good Relations, Harvard, Insight Marketing, MMK, Ozone, Resonate, Sunesis, Traffic Advertising, Opinion Leader Research, The Smart Company.
Clients include: Dyson, Coca-Cola, Hyundai, O2, Vauxhall, MFI, Emirates, McDonald's, Vodafone.
Turnover (2004): £95.7 million.
Operating profit (2004): £7.2 million.
USP: Satterthwaite says Chime is not always ad-led. "Although we've just bought VCCP, they have a very egalitarian view of communications. Our view is that all comms are equal."
Why sell to them? Chime doesn't interfere with the companies it buys. "We are building our advertising group around VCCP rather than asking VCCP to change," Satterthwaite says.
Future growth: Organic growth is a big focus for Chime, but more from developing new revenue streams and products than from cross-fertilisation of accounts.
Acquisition strategy: "There are global opportunities for us in the same way as there are for BBH, without needing to have an agency in every major city," Satterthwaite says. Chime owns agencies in Dubai, Munich and Boston. The group is also keen to invest further in digital.
The lowdown: Media Square focuses on retail marketing and below the line. This month, it completed the acquisition of the marketing arm of Huntsworth for £63 million, which almost tripled the size of the group to 1,700 staff.
Key people: Jeremy Middleton, chief executive.
Group companies: Ai London, Banc, Catalyst Marketing, Citigate, Clark McKay & Walpole, Coutts, Dynamo Marketing Services, Finex, Fourninety, Holmes and Marchant, HS Advertising, IAS, Incepta, Karen Earl Sponsorship, Marketplace, Red Mandarin, Silver Bullet Group, Symbian Print Intelligence, Tangozebra, The Gate Worldwide, Theatre Brand Experience.
Clients include: Barclays, COI, Expedia, Camelot, Prudential, Samsung, John Lewis, Axa, Cadbury, GNER.
Turnover (2004): £19.5 million (forecast £200 million post-Huntsworth acquisition).
Operating profit: (2004) £1.4 million.
USP: According to Middleton, the group's "entrepreneurial spirit" makes it stand out.
Why sell to them? The opportunity to maintain independence post-sale. "We give financial support but we don't tell people what to do," Middleton says.
Future growth: Media Square doesn't want any organic growth, Middleton says. "We have just completed a large acquisition that has significantly changed the character of the business. We are now looking to maintain revenues at their current level for the next one to two years."
Acquisition strategy Having just bought Huntsworth, Media Square is unlikely to invest in anything big for at least the next 12 months. Longer-term, Middleton says it will add businesses by discipline and philosophy, though the UK will remain its focus for the next five years.
The lowdown: Cello launched on the Alternative Investment Market in November 2004, having acquired The Leith Agency, Target and Insight. Direct marketing, research and brand development are now the platforms through which the 400-strong group operates.
Key people: Kevin Steeds, executive chairman; Mark Scott, chief executive.
Group companies: Insight Research, Leapfrog Research, RS Consulting, Leith, The Value Engineers, Target Direct, Navigator Response Advertising.
Clients include: GSK, Irn-Bru, HP, T-Mobile, Carling, Hotpoint, Unilever, Diageo, BP, Britvic.
Turnover (six months to June 2005): £20.9 million.
Operating profit (six months to June 2005): £1.17 million.
USP: Data and research remain Cello's primary areas of focus. Scott says: "The whole marketing services sector is growing but accountability is the bit that is growing the fastest."
Why sell to them? Scott says people are the most important part of an acquisition. "We obviously have basic criteria for acquisitions, but sometimes you have to say 'forget the numbers for a second and let's look at the people'," he says. Each of the three business strands has an operating board with representation from each group company.
Future growth: Cross-selling is a real priority for Cello, although Scott admits there's not a lot of it going on yet.
Acquisition strategy: Any new businesses will have to fit into the three-platform structure, Scott says. "We need 200 to 250 people in DM and we don't yet have a London operation," he adds. "It would be great to double our revenues over the next 12 months. The only problem is that there aren't many good companies around."
The lowdown: Since listing on the Canadian stock market in 1999, Cossette has expanded both its services and geographic reach, with acquisitions in North America and Europe bringing staff numbers up to 1,500.
Key people: Claude Lessard, chairman and chief executive.
Group companies: Cossette Communication-Marketing, Cossette Post, Cossette Post Interactive, Cossette Media, Cossette B2B, Miles Calcraft Briginshaw Duffy (51 per cent), Nucleus, Blitz, Grapheme, Identica, Optimum PR, Band & Brown, PainePR, Fusion, Fjord Interactive Marketing, Altius Sport Marketing, Thinking Sports, Koo Creative, Alias Urban Marketing, Impact Research, Ricochet.
Clients include: Coca-Cola, General Motors of Canada, McDonald's, COI, Debenhams, Metropolitan Police.
Gross income (turnover unavailable) (2004): £77.5 million.
Net earnings (operating profit unavailable) (2004): £7 million.
USP: Cossette says it offers "convergent communication" - which means that its companies work together on campaigns.
Why sell to them? "Business units benefit from a high level of autonomy," Lessard says. "In a way, they get the best of both worlds - margin to manoeuvre and grow their business, and new resources in several markets."
Future growth: Cossette says it expects "a challenging business environment from an organic standpoint" for 2006. It does expect to see growth from new business.
Acquisition strategy: The group has made a number of high-profile acquisitions in recent years - including MCBD - and Lessard says that future acquisitions are now likely to become "a little more opportunistic". "We always look for partners with a superior creative product, good cultural fit and complementary services," he says.
This article was first published on campaignlive.co.uk