Butterfly's eight-strong team will work out of E3's new London studios under the E3 brand, focusing primarily on entertainment, games, film and publishing clients.
The move follows the acquisition by E3 of online PR and publishing company Wildfire Communications for a six-figure sum at the end of last year.
E3 is also in talks with several key figures to join the board to help drive its London plans. However, the agency still plans to maintain its Bristol headquarters.
Stuart Avery, joint managing director of E3, said: "The Butterfly and Wildfire acquisitions will allow us to tap into new opportunities across a variety of different sectors, as well as offer a whole host of experience and skills to our existing clients.
"We plan to accelerate E3 London's growth and will look to bolster our online advertising and marketing capabilities from this base."
Former Butterfly executive Bill Galloway will act as creative director for E3's London operation, supported by art director Anthony Webster. They will report to E3's executive creative director Wesley Hogg in Bristol.
As part of the acquisition, E3 becomes the retained creative agency for Dimension Data, the former owners of Butterfly Effect.
The agency will work alongside the technology giant on existing client work and new business pitches.
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