Close-Up: Live Issue - MCBD partners reap rewards of Cossette deal

The total purchase price could rise to £27 million if the agency achieves a set of growth targets. Noel Bussey investigates.

Ignore the inevitable chorus of rehearsed arguments to the contrary but, when a group of advertising people come together to create a start-up, they must surely be planning to line their pockets one day by selling out to a holding company or floating.

Of course, the creative and managerial freedom that start-ups provide also offers significant encouragement to those contemplating setting up their own company. Yet it would be naive indeed to believe the chance of a potentially massive payoff is far from the thoughts of ad agency founders.

Since the beginning of the year, 12 people from three such agencies have had their start-up dreams realised. In February, Creston snapped up Delaney Lund Knox Warren & Partners. Lord Bell's Chime Communications acquired VCCP in July and, last week, Cossette Communications Group, a Canadian company, acquired 51 per cent of Miles Calcraft Briginshaw Duffy for an initial payment of £7.8 million, a figure that could increase to more than £27 million if certain targets are met (see box).

A sum this size would definitely mean a massive payday for the four main shareholders if they achieve the targets they have been set. Jeremy Miles owns 20 per cent of the company and Helen Calcraft has 18 per cent, while Paul Briginshaw and Malcolm Duffy each own 17 per cent. The remaining 28 per cent is shared between eight other staff members at board level.

"There is a counterbalance to the deal," Miles explains. "It is based on a future prediction and it's an uncapped cash deal. This means we could possibly exceed the £27 million if we win three massive clients. However, it also means, of course, that if we lose three clients we can fall below that target."

Many in the industry believe that hitting the earn-out target is a gargantuan task that may be too much for the agency to achieve. Not because the company is incapable of producing strong work or winning new clients - the quartet seem to be well liked and thoroughly respected by their peers and winning Debenhams and Travelocity was good for the books - but because the targets are exceptionally high.

When VCCP was acquired by Chime for £30 million, many people thought the same - the price was a little high and, because it was based on a long-term earn-out, the founding partners would have to work extremely hard to meet their targets. However, Ian Priest, one of the founding partners at VCCP, believes the deal he and his partners clinched with Chime is much more attainable than the one MCBD has struck with Cossette.

"We are definitely not looking for growth of that size with our acquisition," Priest says. "Our business plan looks to increase the business by about 10 per cent a year. Growth needs to be evolutionary at a sustainable pace. You can't set the targets too high because you can burn out chasing them. Also, if it's driven too much by money, then the work and client relationships can begin to suffer."

However, even in the event that the MCBD partners do miss out on the full £27 million, they will be safe in the knowledge that they will still have the backing of Cossette.

Claude Lessard, the chairman and chief executive of the Canadian company, is adamant about this. "We'd still back them if they didn't reach these targets and the numbers weren't so good," he says. "This deal is the perfect mirror of the intentions of both parties. It ties us both in for a long time and we are both very confident about each other's commitment to the deal."

Miles also insists that the huge amount of money the partners could make is not the driving force behind the deal, and that the predictions for growth were already part of the company's business plan before the deal was done.

He adds that this plan has been accelerated by the acquisition because the deal ensures the managing partners remain at the agency. "We are not going to be doing anything to ensure we hit that target," Miles says. "This is not a big-money deal. If it were, we would have structured a 100 per cent deal with a three-year earn-out. The deal now ties us all into the agency for at least another six years."

Miles adds the deal also means staff can be reassured that they are safe in their jobs and their company is not likely to be merged with another agency. This is something that Mark Lund, a founding partner of DLKW, says was one of the most important factors he took into consideration when agreeing the sale of his agency in February. "Being nervous of mergers can change the whole dynamic of the agency. Ensuring the happiness of your staff is clever and enlightened self-interest and you ignore it at your peril," he says.

While the MCBD partners will have to wait some considerable time to see what they finally get out of the deal, what does it offer Cossette and the agency itself?

As with the acquisitions of VCCP and DLKW, an important factor in the MCBD deal was that the agency would keep its independence and not be swallowed up by a massive global network. However, it will still benefit from the extra reach a holding company can offer. This is something that Miles has already begun to work on - Cossette already owns the UK PR company Band & Brown and the brand consultancy Identica.

"There's no inter-company deal per se, but we have had conversations with the other companies to work out how we can work together as a team," Miles says. "We want to pitch together in the future."

Cossette is actively encouraging all the companies in the group to work together as the holding company moves towards realising its own master plan of setting up a global network.

With 15 companies in Canada offering different communication services, ranging from advertising and PR to promotions and event management, Cossette is becoming too big for its domestic market and is expanding globally.

Bob Willott, the editor of Marketing Services Financial Intelligence, explains: "Cossette is a conservative company with a very strong balance sheet. It has made three UK acquisitions in two years, which reflects Cossette's need to compensate for the fall in margins in Canada."

The company already owns Cossette New York and considers the MCBD acquisition in the UK to be a significant building block.

"Cossette has an enormous strength in Canada and a good agency in New York but there are advantages and disadvantages to setting up a network," Lund says. "Working against it is the fact that most networks were set up years ago and contain hundreds of companies. However, working in its favour is a change in attitude - the understanding that a strong network can be set up with just a handful of strong agencies in the right areas. Bartle Bogle Hegarty has done this very well."

This idea forms the main basis of the Cossette ideology and was at the forefront of its plans when it began to look around for an agency in the UK. "You don't need to have 25 different offices in 25 different countries to win business globally," Lessard says. "I think we are pretty much where we need to be right now. We may well make a few smaller investments but I don't foresee us making any more acquisitions of this size."

At just six years old, MCBD could be said to be riding the peak of its growth phase at the moment. However, the founding partners seem confident that they can spur on further growth over the next six years. The investment of a holding company that has strong ideas about where it wants to go will hopefully assist this expansion.


- In the first part of the deal, finalised on 31 August, the Canadian company Cossette took a 51 per cent share of the agency for £7.8 million in cash.

- Cossette has the option of taking a further 24 per cent of the shares after three years, increasing its ownership to 75 per cent. Two years later, it has the right to take the final 25 per cent.

- The acquisition price of the remaining 24 and 25 per cent equity portions is being based on future financial performance targets using a formula agreed by the two companies.

- The total purchase price, estimated using current financial projections of future growth and profitability, could be as much as £27 million.

- The four partners need to more than double the size of the business within the allotted five years to make the full £27 million.