Someone might buy a global holding company but it won't be a management consultancy
A view from Julie Langley

Someone might buy a global holding company but it won't be a management consultancy

If anyone is going to buy one of the big ad groups, it's more likely to be a private equity firm, rather than a management consultancy.

While Sir Martin Sorrell continues to play down the threat posed by the management consultants, increasingly they are going after the same clients and competing over the same M&A targets as the holding companies and other more traditional acquirers.

The acquisition of Karmarama was a tipping point, a move into more creative territory that signalled that Accenture Interactive and the like were a real threat to adland.

One year on, other similar acquisitions have only served to increase the pressure on the holding companies.

Moreover, we know that Accenture (at the very least) has a sizeable war chest set aside for acquisitions in the marketing sector which poses the question: Rather than gradually adding to their portfolios, would it not just make sense for one of the consultancies to make a dramatic land grab?

The top three management consultancies by revenue (IBM, Deloitte and Accenture) all generate (significantly) higher revenues than the largest holding companies, factoring in all of the services they offer.

Also, the revenues for the consultancies’ marketing focused business units are on an upwards trajectory; by comparison WPP (for example) has been forced to revise down its full year earnings forecast in response to a slowdown in Q2.  

Jérôme Bodin, an analyst at investment bank Natixis, caused something of a commotion recently when he suggested that one of the consultancies could credibly acquire a WPP or similar.

After all, the short-term prognosis for the ad holding groups isn’t healthy: their business model where multiple siloed operating companies compete for business is increasingly looking like a legacy approach and their revenue growth (at least in H1 this year) is stalling.

So in the face of these mounting pressures, surely Bodin is on to something?

While there’s no disputing that the holding companies need to take a long hard look at how they do things, we think there’s little chance of the scenario Bodin predicts.

Here are five reasons why it would make little sense for a consultancy to make such a move:  

It’s not all strategic

Much of what WPP or Publicis Groupe do would not be attractive to a company like Accenture. The assets that would be of value are mainly the digital agencies that sit within the networks; the traditional media buying divisions on the other hand would not be a strategic fit.

WPP is the most acquisitive of the holding companies; it has completed close to 150 deals since 2014. By comparison the whole of Accenture, the most acquisitive of the consultancies, made just close to 40 acquisitions over the same period.

The holding companies engage in this level of M&A for three key reasons – to expand their networks into additional geographies, drive top line growth and bring in needed skills.

The consultancies on the other hand are much more likely to be focused purely on acquiring very specific digital, creative and other skills that they need to, in their words, "build a new breed of agency".

It’s not good value for money

Just because an asset has become cheaper doesn’t make it a bargain M&A target - even with the recent drops in share prices. No consultancy would do a deal where a large part of what they are acquiring is non-strategic.

Think about it, if you are buying something where say only 30% of that business is of strategic value, then that’s an expensive, wasteful approach to M&A.    

As yet only three of the consultancies (Accenture Interactive, Deloitte Digital and IBM iX) have established marketing-specific operations and their revenues and staffing numbers do not yet compare with the global holdcos.

To place that in context, there are over 400 businesses across the WPP network; these cover 112 countries and there are around 133,000 employees (not including their minority investments which bring the headcount to around 200,000).

Accenture Interactive, the largest of the consultancies’ marketing-specific divisions has roughly 13% (18,000) of the number of employees of WPP.

Despite them having fewer staff, these business units are typically generating better revenues per head. Taking on thousands of new employees who won’t generate the same level of revenue per head simply isn’t good for business.

It’s not a safe bet

Media buying is being disrupted at pace and it’s difficult to know exactly what the landscape will look like by the end of the decade.

The holdcos are in the eye of this particular storm and with issues of transparency and fraud coming to the fore, things can only get worse.

We heard Martin Cass, the chief executive of MDC Media Partners and Assembly (and ex-Carat), pulling no punches when he told a rapt audience at Advertising Week in the US recently that the media agencies and adtech players needed to clean up their acts.

Which is to say that the consultancies don’t like risk and they aren’t opportunistic in their approach to M&A; they are only interested in buying growth and capabilities that are strategic to them.

As such, buying business units that neither sit well in their portfolio, nor are guaranteed to even exist in ten years’ time, is too great a gamble.  

It’s not the right cultural fit

The main cultural difference between the consultancies and the holdcos is the former don’t want to buy competing businesses, while the holdcos have few qualms in doing so – quite the contrary.

A scenario in which there is limited cooperation across geographies and capabilities is entirely at odds with the vertical and collaborative structure of a management consultancy that actively seeks to develop synergies.

That said, while it’s nothing new, Dentsu, WPP and others continue to talk about reorganising to break down the silos so that they can offer clients the best possible proposition. It seems to work, well sort of.

Publicis talks about itself as a "connecting company", "transforming its business model and its organisational structure to put its clients at the centre and to facilitate access to all its services in a fluid, modular way". The future will tell whether or not this approach works out.

The management consultancies already talk to CMOs

The management consultancies see the future of technology spend coming from the CMO, which is one of the main reasons they’re moving into the sector.

Because the consultancies offer the strategic advice and technical capabilities required to address digital transformation for their clients, they already have strong direct relationships with the CMO and other members of the C-Suite.

In other words they don’t need to buy a holding company to get that access. While adland looks on enviously at the influence that the consultancies have across the C-suite, many now recognise the value in offering a more consultative approach themselves.

In another scenario, a consolidation play between networks is not inconceivable; after all, that’s what Publicis Groupe and Omnicom was all about.

Nor is it impossible that one of the global holdcos might become an acquisition target sooner rather than later. However, an acquisition would be much more likely to come from private equity than from a consultancy.

Private equity has been busy buying in the sector over the last couple of years and their motivations are very different to those of the consultancies.

PE houses are driven mainly by the financial returns, whereas the consultancies look for strategic fit above all else.

And falling share prices will certainly pique PE interest as that gives a better chance of higher returns when they exit.

So despite the dramatic headlines about Accenture making a play for Publicis or WPP, we believe it would make much more sense for the consultancies to continue their current M&A strategy; that is plugging the gaps in their provision with individual businesses as required, picking and choosing the individual skill sets they need. 

Julie Langley is a partner at Results International, an international adviser on M&A and fundraising

 

Topics