Close-Up: Live issue - PAA is on track to get Engine's DM motor ticking
campaignlive.co.uk, Friday, 22 February 2008 12:00AM
Engine's £9m acquisition of PAA will bolster its DM offering, but can the new chiefs be assimilated, Kate Nettleton asks.
Phil Andrews, an unreconstructed businessman and Steve Aldridge, a laissez-faire long-haired creative, have never really seen eye-to-eye.
Yet against the odds, the chalk and cheese founders of Partners Andrews Aldridge have endured one another and managed to run a profitable and creative direct marketing agency for nearly ten years.
Last week, their endeavours paid off, when the Engine Group parted with £9 million in cash, and an equal sum of shares, for a 100 per cent stake in their business and its associate data arm Fuel.
The deal was the largest acquisition in Engine Group's history and PAA will retain its own name, despite being merged with Engine's existing direct agency Personal.
But with PAA on an upward incline, how does a merger with Engine's uninspiring direct offering fit in with the founding partners' ambitious goals for the agency?
When Andrews and Aldridge set up shop back in 1998, as a Partners BDDH-backed venture, they had grandiose plans to redefine and reclaim direct marketing.
"We were the beginning of a new wave of start-ups and we saw the opportunity to put planning as well as creativity at the centre of the agency," Andrews explains.
Since then, they have been steadily developing the agency's offering, setting up Fuel in 2003 with PHD's James Harrison and Accenture's Jonathan Buck and Simon Wall.
The partnership with BDDH provided PAA with extra planning clout, but when BDDH was bought out by Havas in 2003, Andrews and Aldridge felt their revolutionary plans for direct marketing were being stifled. In 2007, they paid £1 million for the 51 per cent stake in the agency that Havas owned.
In spite of their independent status, further expansion last year (with the acquisition of the rival direct marketing agency DS-J) and numerous creative successes, PAA has recently been struggling to compete with other heavyweight direct marketing independents such as Rapier and Kitcatt Nohr Alexander Shaw.
Their decision to join the Engine Group could be interpreted as a well-timed reaction to this. However, Andrews insists it is a move to equip the agency with skillsets to face new obstacles.
"DM has thrown up new challenges. Digital, experiential and even sponsorship have become part of the mix and we need to broaden our capabilities by working with companies within Engine that can provide us and our clients with those expertise," he says.
However, some see the PAA sale as an indication that Andrews and Aldridge's fractious relationship has reached a nadir.
"They are like magnetic poles, you physically can't put them together closely. Selling gives them the avenue to go their own way because they really don't get on," one industry source comments.
But with 35 staff from Personal, taking the new agency to a total of 100, all of whom will be based at Engine's new offices on Great Portland Street, the partners needn't share an office for much longer.
Engine's approach last autumn was the first time the agency has seriously entertained offers, and the past six months have been dedicated to ensuring that the merger runs smoothly.
Given Engine's experience in the field, the merger seems unlikely to fail. Since WCRS bought out Havas' remaining 24.9 per cent share in the group and renamed itself Engine in October 2005, it has been hungrily devouring companies to expand its offering.
In the past three months, the group has spent £25 million on acquisitions. It bought Liquid Communications, which it merged with its strategic brand activation agency, Woo, in December 2007, and took a 60 per cent stake in Digital Public and Republic PR, which it merged with its public affairs specialist AS Bliss to form Mandate in November.
Add to this the acquisition of DC Interact, a digital specialist in design and build, which then merged with its existing digital agencies Eyefall and Meme to form Altogether in 2007, the launch of its Huge music arm and the acquisition of Karen Earl, a sponsorship agency, in 2006, and the group's offering appears to be very robust.
But with all this growth and expansion, Engine had taken its eyes off the direct-marketing ball.
Personal, which joined the group in 2004, had ultimately failed to reach the lofty heights envisaged when it was bought, and attempts to grow the business organically failed to bear fruit, with key WCRS clients such as Sky, Abbey, 118 118 and Churchill lacking the confidence to bestow their below-the-line work on Personal.
Peter Scott, the chief executive of Engine, admits direct marketing was an underdeveloped aspect of the business. "As a group we've moved from being advertising dominated to a broadly based marketing and communications services group, but some areas like DM were underweight."
With DM becoming an increasingly popular channel among clients with tightening purse strings, Scott admits he was facing a crossroads; either accelerate organic growth or make a move to buy. Bringing in PAA and Fuel was a sure-fire way for Scott to achieve a balanced revenue equilibrium.
Also, PAA seems to be a very good cultural match with Engine, with both agencies buying out of Havas within months of each other, evincing a joint distaste for restrictive network culture.
As Aldridge says: "We share the values of a partnership collaboration, placing importance on creativity and treating employees and clients as well as possible."
Jonathan Stead, a founding partner of Rapier, agrees: "For them the added planning strengths would be good. I think the fit is very strong indeed."
With no client conflicts to iron out, and some synergies in PAA and Personal's client lists (they share GlaxoSmithKline and COI), the pairing seems hassle free. But there are bound to be difficulties, and a top-heavy combined management team comprising Andrews as the chief executive, Aldridge as the chairman, two managing partners, and two planning partners, could well lead to the first hiccup.
However, Scott claims he has found the solution by tying in the partners for a three-year period, but with no earn-out agreement.
Scott argues that this ensures both agencies have a shared agenda, shared currency and that those buying into the Engine Group see it as an opportunity to grow. "If people say they want to sell their business, we don't want to buy it. PAA recognises this, they're on a long race and the deal allows them to get to the watering trough, get some refreshment and move on to the next stage of the race."
Both Scott and the PAA boys insist that this "refreshment" by no means included any assurances that Engine would float and their equity would be realised. However, Andrews hints: "We've satisfied ourselves with what the development of the group would be over the next few years, by getting to grips with their plans."
For now Scott plans to accelerate growth: "I wouldn't say we're going to sleep for the rest of the year." And with PAA and Fuel on board, Engine has the added weight to keep its foot firmly to the floor.
1998: PAA is founded as a joint venture between Steve Aldridge, Phil
Andrews and Partners BDDH
2002: Wins Campaign's Direct Agency of the Year
2003: Partners BDDH bought by Havas
2003: Sets up data arm Fuel
2004: Havas sells its stake back to the agency's management
2007: PAA acquires rival direct marketing agency DS-J
2008: Engine Group buys 100 per cent stake of PAA and Fuel
This article was first published on campaignlive.co.uk
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