Although merger and acquisition activity in the Irish advertising industry has been thin on the ground in recent years, this is likely to pick up over the next 12 months as the big agency groups now view Ireland as an emerging market that offers opportunities once again, writes Rob Reid.
The last seven or eight years have been tough on Irish agencies. Most CEOs will put their hands up and admit to an over serviced market, under pressure margins and shortage of digital leadership. There are success stories of course but in general it feels like the industry has had a ‘lost decade’.
Ironically this same period coincided with intense global growth in most ‘developed’ countries including rapid consolidation and the ascent of digital agencies. In fact Ireland is one of the missing markets that really stands out – although change is very much in the air now with recent reports from IAB and Carat pointing to a fast growth trajectory.
Digital is the real story but even general advertising spend is predicted to grow by 7.5% in 2016 which would put Ireland at the top of European growth projections. Obviously the perspective is that the Irish market is coming off a very low base – a result of local economic woes but also the severe industry recession across Europe’s periphery markets.
However the timing is interesting. Not least in the context of a post-Brexit corporate world that is likely to place more emphasis and value on a deeper EU presence. In tandem there will be a marked increase in consolidation as Irish agencies realise that ‘being part of something bigger’ is a necessity to move further upstream. Brexit and local consolidation are likely to generate renewed interest from the international networks and other potential acquirers in 2017. Indeed, we are already getting clear signals from the global buyers that Ireland is being viewed as an emerging market once again.
It gets even more interesting when you consider the wave of Dublin agencies that are representative of the change and thinking that’s sweeping the country at present. A number are already competing and succeeding at an international level – briefs that don’t land lightly and require strategic clarity and strong creative execution. Add to the mix a client trend towards independents and it means these agencies have a very bright future if they can handle the international opportunity acutely.
This is really good news as Irish agencies have traditionally found it challenging to think bigger and look beyond the domestic market. I‘ve always found that odd as we have such an enviable geographical location, an international outlook and of course we are inherently great storytellers with a stronger creative heritage than most. Ireland should have had a lot more success up to this point in the digital and creative sectors.
The wider industry is also becoming increasingly international so agencies from across the world have no choice but to adapt and consolidate in order to operate more effectively in a global marketplace. On one side, clients are looking for cross border business solutions that inevitably require agency rosters to be reevaluated. On the other side, agencies need to take a more global perspective on culture, trends and insights. This is all underpinned by a reality that the competitive set is increasingly global and of course good work always deserves an international platform.
Dublin agencies also have a relatively unique opportunity to leverage the local tech and startup ecosystem that exists in the city. There is no reason why Dublin can’t emulate what’s happening in San Francisco where there is a shared employee base with the same talent pool regularly traveling back and forth between digital agencies and startups. There are a number of quick wins to living and breathing startup culture – not least that the work becomes collaborative, iterative and faster. And it’s this approach that will eventually give smaller agencies the platform to get in front of a new breed of CMO who is part trend watcher, part data scientist and truly ‘gets’ technology for the first time.
Innovation in general will continue to be a huge catalyst for change in the industry. Think about the major transformational business issues that clients need solving today. A lot of the time – if not always – these problems require a digital solution so agencies with the right staff and skills built into their DNA will start to land the big ‘today and tomorrow’ briefs. There is no doubt that digital agencies will move further up the value chain once they are innovating on clients’ product and service offerings.
There is also a disruptive force at play in the global M&A space – primarily driven by a blurring of definition between marcoms, tech and media. Two groups now dominate most acquisitions. Firstly the six large ‘advertising networks’ are still responsible for over 60% + globally. Within this, WPP continue to dominate by volume completing 34 global deals in 2015 but interestingly Dentsu took over from Publicis as the second most active network with 22 acquisitions.
However, the emergence of the ‘management consultants’ as the second group and their incursion into the agency space is having the most dramatic impact on the industry and indeed agency valuations. Ireland will follow suit here with a number of M&A transactions practically inevitable over the next 12 months.
There are a number of significant others beyond the traditional groups and the management consultancies. Not least clients who are building out their own in-house agencies, private equity groups such as Engine in the UK, traditional media companies like New York Times that has been on an acquisition spree this year and of course the tech behemoths such as Facebook and Google who are always looking to acquire agencies whenever they spot a skills gap.
Another game changer has been the continuation of APAC groups building out into Europe and the United States. These ‘east to west’ acquisitions have been driven by a handful of regional holding companies – Dentsu, Hakuhodo, Innocean and Blue Focus. All of these businesses now have a remit to invest ‘west’ and have the balance sheets to make it happen.
Strategic acquirers value agencies with a multiple of EBIT that reflects both ROI and supply and demand. The multiple is influenced by talent, client relationships, innovation and increasingly technology – all within the context of the direct impact to the acquirer over no more than five years. Adtech and martech companies are nearly always driven by IP or proprietary platforms that are valued on future revenue contribution versus investment.
There are a number of specific global trends that have become the backbone to most M&A activity over the last 12 months. Of course digital is now the established driver of ad spend and therefore agency profitability and associated M&A transactions. It leads global growth projections with a forecasted 29% of market share and $161bn ad spend by 2017. Then there are the 12 digitally mature markets where spend is above 50% of total ad spend. UK, Canada and Australia are the largest of these markets with the US projected to join this year or next.
Within digital, growth has been primarily powered by mobile, video, user experience and performance media. Data and insights should now be driving everything – particularly transactional. Social is increasingly falling under mobile and video but needs to be embedded across the board. We are also seeing the rebirth of experiential – especially through a digital lens of mobile, social, content and measurement. And finally on media, we expect to see the second phase of intense programmatic growth with an estimated 20% climb this year globally on the back of agencies finally marrying data with creative insights.
It must be said that a lot of the positive points I have made in this article are set against an increasingly uncertain geopolitical and global economical background. There are early hints of how Brexit might unfold for the agency industry – not least Martin Sorrell’s comments before 23rd June but also WPP’s activity in Scotland and mainland Europe since the leave vote. Add the slowdown in China, ongoing turmoil in the Middle East, the west’s relationship with Russia and there is a possibility that we could be in for a bumpy ride over the coming years.
All things considered, we still anticipate that global M&A in the agency sector will remain robust. India and LATM will be the highest growth markets over the next 12 months but there is also plenty of opportunity coming down the line for Irish agencies. Here’s to a much brighter decade ahead!
Rob Reid is Managing Director of Advertising M&A for APAC, MENA and Ireland
First published in Irish Marketing Journal (IMJ Agency Issue 2016)© to order back issues please call 016611660