Ben Tolley, Partner at Clarity talks with Darren on advertising industry mergers and acquisitions and the increased activity of consulting firms in this category. And we discuss not just the challenges but also the benefits to advertisers when creativity and management strategy comes together in the resulting entities and the possibility that soon it may be a holding company that is acquired.
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Transcription:
Darren:
Welcome to Managing Marketing and today I am sitting down and having a chat with Ben Tolley, who is a partner at Clarity, probably one of the big shakers and movers in the advertising industry at the moment because of some significant deals that have gone on, so welcome, Ben.
Ben:
Yeah, good to be here, thank you for having me.
Darren:
Thank you for making the time. There’s been some great headlines in the past 12 months with the industry looking at mergers and acquisitions and that is core business, isn’t it of Clarity.
Ben:
Yes that’s right. We specialise in advising mid-market companies, so companies valued up to a couple of hundred million dollars on mergers and acquisitions mainly focused around advising people on selling businesses and the agency land is kind of a very big part of what we focus on. We’re technology and media focused as a firm and there is a lot of activity in the agency space.
Darren:
Just to put it into context for people, I’ll just mention it was Adam and Eve being acquired by DDB in the UK and the Monkeys being acquired by Accenture here, would probably be the two high profile acquisitions deals that Clarity were involved in for the advertising industry. I’m sure there’s more, but just to put that into context.
Ben:
Yeah, we’ve worked on the buy side as well with people like Dentsu and Havas acquiring the agency businesses in the UK, we are a UK HQed business, and our US partners (interesting for this conversation) advised on the sale of Resource Emirati into IBM interactive experience which is a very similar type of rationale in a way to the Monkeys-Accenture transaction.
Darren:
So let’s talk about that because I know you did an interview recently in the UK where you were talking about the culture between the traditional consulting firms in advertising. Twenty years ago, in advertising I was approached by a consulting firm to come and work for them and I said ‘no’ because I just didn’t see me personally fitting into that culture.
What’s happened in say the last ten to twenty years that makes consulting firms seriously look at agencies as a business opportunity where there won’t be a culture problem?
Ben:
Yeah, that’s a big question. I think in regards to the commentary around the culture clash, it does feel a little bit to me like the James Bond DB5 with the little switch on the dashboard with the smoke that comes out the back. It is a bit of a smoke screen and that is not to say that there is nothing in it but I obviously have enormous respect for people like Martin Sorrel.
And Mark Reeves came out saying a very similar type of thing the other day so these are super smart accomplished people and there is something in it that is worth talking about.
The first thing when you hear people reacting to deals like The Monkeys and Karmarama as well and Accenture and they talk about culture, I think the first thing is to step back and think about is what am I not hearing?
These are very very bright people, Martin Sorrel and Mark Reeves, and they are saying, ‘a bit of a culture clash–I can see that being a problem there’, so what they are not saying is that the service offering that they are able to deliver in combination is unattractive.
Darren:
Or perhaps is superior to what’s already in the market.
Ben:
Exactly, so that’s the first thing on it, these are very smart guys and this is the most negative plausible thing that they can come up with.
Darren:
I think they do it because it goes, Ben, to the core of what agencies do which is they see themselves purely as an engine of creativity for whatever that means okay. I have always had a problem even when I worked in the creative department, I had a problem with being called the creatives, because creativity is a human trait not just that of a select few. I think it is because it goes to the core of that.
I will just share with you, I had four young teams. If someone was walking around the office they would have seen eight people playing hackisack, doing the quiz in the newspaper, just playing on surfing the internet and a couple of times people said to me why aren’t your teams working and I said well they are, because that is not defining traditional business as work. If it was an accounting firm or a consulting firm, that’s not what people perceive as being work.
Ben:
Yeah, I guess it is what do you do while you are thinking, so in a creative agency business that may be table football or table tennis or an unplugged electric guitar and then traditionally in the consultancy world that is a Newton’s cradle isn’t it. At the end of the day, what are they all doing. They are all thinking.
Darren:
Except that there is a problem. The problem that the advertising industry has had is the way they bill for that time because they are hopeless at keeping time; my lawyer bills in 6-minute increments, my accountant bills in 15-minute increments.
You hear about consulting firms where people are held to account for their billable hours and yet I know my art director used to come and get my time sheets at the end of the month to try and work out what he’d been doing for the last 30 days. It’s a totally different culture as far as the discipline of business, isn’t it?
And don’t get me wrong I’m not saying that your point before was wrong I just want to explore the reason why this is held up as the big hurdle that has to be overcome.
Ben:
Yeah and I think there is something in the point around culture but nobody said when WPP bought TNS, these are a bunch of qualitative research guys who kind of wear suits and you know are very like nerdy and date. How’s that possibly going to work because you are an advertising group and you have all these creatives sort of sitting around playing guitar dreaming up big consumer marketing ideas.
The reality is that groups like WPP or any other—- that don’t have a homogenous culture, maybe they have some values that sit at the core, we can all debate that, I think, cash.
Darren:
Revenue, one of my concerns about holding companies is that everyone talks about revenue and no one talks about margin and profit and I think as long as you are making money you are okay.
Ben:
I am sure WPP are very very, very focused on cash generation above all else with an ex account at the helm there, but the reality is if you dig into those hundreds of operating units they have.
Darren:
They will all have their own culture.
Ben:
Some of them are very creative and some of them are you know pretty suitie and part of the challenge for the organisation is not stifling the individual cultures but finding a way to bring them together and to collaborate for the benefit of the clients.
Darren:
As you said bringing a creative unit together with a deeply analytical and a problem solving unit is such a great idea.
Ben:
It’s a great combination and I think specifically as regards Accenture and their experience in this area, they acquired Fuels, the service design business which originally started out as a European HQ business but it is pretty strong over here now as well. They acquired that business and have grown it multiple times over and I would say that fundamentally that’s a very creatively driven business. I wouldn’t describe it in any way as a consulting business.
Darren:
It’s a psychologically-driven designed business, because when you look at things like retail design it’s all about understanding human beings and their behaviour but then how to apply the discipline of design to actually enhance and manage that experience.
Ben:
Yeah, exactly.
Darren:
Look, that’s a great example and it is probably why the holding companies like WPP have been out buying the more analytical companies. The trouble is the weight in the holding companies is all about creativity, the monies made in media and they are buying these analytical companies that I think they often struggle with finding ways to make it pay.
Ben:
Yeah.
Darren:
Whereas one of the things that you have to say about consulting firms is that they’ve never struggled with making money, have they?
Ben:
Yeah, and I guess the more you are able to provide an end to end service covering all aspects of creative ideation through to building the technology , advising on the technology, building it, deploying it, running it for a client , all the way through to promoting its use in creative ideation and marketing around that, you have a chance of offering something that’s unique or close to unique in the market.
If you’ve got a proposition that’s unique then that ought to improve your ability to price and not be stuck in a commoditised game where everyone can offer broadly a similar thing and there is a bit of a race around the bottom of the pricing on it and so I guess that’s part of the game.
Darren:
One of the things that was pointed out to me recently is that agencies and consulting firms have very similar ways of billing, don’t they? Basically, most of them charge on resource hours.
Ben:
I think classic consulting firms, yes. I don’t honestly know the detail around the model for some of the more kind of technology driven systems billing, but I suspect it’s not quite so hours based always.
Darren:
No because they actually work on getting kickbacks and rebates and commissions from the actual technology vendors.
Ben:
Yeah, there’s a reselling component, obviously.
Darren:
I had a meeting recently with a consulting firm and they said to me you should get into the kickbacks and commissions and I go, we don’t actually work that way and they go, you’ll never make any money.
Ben:
I guess that’s the consultancy world parallel to the media agency world.
Darren:
Exactly, pretend you are providing totally independent advice in the interest of the client when in actual fact it is driven by how much money you are going to get paid if the deal gets done. That’s an area that you guys work in, isn’t it, it’s related to value because in a way things like commissions and that are about the value of the deal.
Ben:
Exactly, our model, we’re in line with the industry that we operate in which is predominantly based around outcomes with transactions and values achieved and so on, so it is heavily skewed to a value based model of charging, and yeah, I haven’t completed a time sheet in you know twenty years or something like that, long may that continue.
Darren:
In a way, it makes sense doesn’t it because it is all about the value created, the value that someone pays to acquire or buy another company represents their business, so for you to provide the facilitation or the brokerage of that is represented in that fee.
Ben:
Look, typically people, clients don’t want to pay on a non-contingent, non-success basis, they don’t want to pay a whole lot for the services of people like us but they are willing to pay for an outcome, so that’s how it works.
They are pretty short conversations but occasionally you do get clients who say, ‘I just don’t get it, I have a time-based charging model in my business and I can’t see how this equates to a sensible kind of return on your time’, but of course it’s risk weighted in our case, it’s a risk weighted return on time effectively.
Darren:
Of course we’ve struggled with that one as well, we work on a fixed fee basis not related to the number of hours it’s going to take, and there’s times it takes a lot more time than we’ve allowed and other times it takes a bit less time but it is interesting from a procurement point of view, they always go “well what’s your hourly rate” and we go well there is no hourly rate because it’s a fee for this project.
I am just wondering in something as intrinsically value creating as marketing and advertising, why it’s defaulted, do you have any thoughts on why you think they’ve defaulted to an hourly base, which is the same way as the way we buy tradesman, accountants and some lawyers? Mind you, I did have a SC that was costing about 1500 an hour, but anyway.
Ben:
Yeah, I don’t know why it sort of evolved in that way. Certainly, you get patches of availability of opportunity to charge on a value-based model.
I am thinking for instance when paid search was the next new thing there was a lot of talk and I guess in performance media generally there was a lot of talk around moving from overheads to cost of sale in terms of how your client perceived the costs. Unlocking budgets that are inherently limited because you’re pursuing a gross margin outcome and the more the merrier sort of thing.
Darren:
Yeah, the more you earned the more you got paid.
Ben:
Yeah, exactly, so I guess if what you’re selling is not a unique proposition and there’s not really fundamentally any IP that sits behind it that makes you uniquely placed to deliver it and you’re fundamentally bundling skills of a bunch of people and selling that as a combined service offering.
Then for someone next to you who’s able to do the same thing and people like that are kind of available in the market, the market is always going to push you back to making a return on the time of the people you’ve got because it is a competitive ….
Darren:
It’s commoditisation
Ben:
Yeah, yeah exactly.
Darren:
If you can’t differentiate or distinguish yourself from your competitors. We obviously meet with a lot of agencies and they all go oh yes, we are unique, we are different and it reminds me of that scene from ‘The Life of Brian ‘you are all different, we are all different shouts the crowd.
They really do struggle to find a way of being distinctive and I think even being distinctive is more achievable than being different. It is very hard when you are an advertising agency to be different because ultimately at the end of the day, what you are doing is creating advertising.
Ben:
Ultimately, they are all services businesses, there is a lot of knowhow and IP that sits behind but fundamentally they are services businesses. The interesting discussion around culture is that I think there would be a much bigger culture clash between a product business coming into acquire an agency verses a slightly more, I always forget which is left side and right side but you know what I mean.
Darren:
Well manufacturing versus services businesses. We notice that with our clients that are consumer package goods and services companies. Consumer packaged goods, while they say it is customer centric it is actually driven by the big factory out the back producing millions of items that need to be sold.
Whereas services are about actually interfacing directly with customers and delivering a service or experience and the fundamental difference between those two because the experience of a product, is I buy the product and experience is using the product afterwards. Services is about constant interaction between the two.
Ben:
Yeah.
Darren:
Mind you I have a lot of CMO’s disagree with me on that, by the way. They think it is the same no matter what.
Ben:
The thing around the FMCG world, for instance in the product side, it’s far more focused around distribution. Create the product and it’s all about channels to market and it is not fundamentally around return on people’s time; it’s a service model and that’s why it sits so differently with agency type businesses. If you saw a software product business coming into the agency space, then I think you would look at that and go crikey you know that really does feel.
Darren:
Like if Microsoft went to buy an agency.
Ben:
Yeah, but it depends where it sits.
Darren:
Microsoft is quite services driven now rather than software product, aren’t they? In fact, I think most software companies have moved into software as a service.
Ben:
A good test on this stuff, particularly in the tech world, is how much are you spending on R&D and what’s the size of your development team and then how many people are involved in customer facing kind of delivery on an ongoing basis, not building the tech product but customer services?
We get a lot of people coming to us with businesses they perceive to be Tech businesses, actually when you look under the bonnet the proportion of customer services to development says it is not a tech business. Like Microsoft it is a SAS product.
Darren:
Just to change to topic, you wrote and I am not sure whether you were serious or facetious.
Ben:
Probably facetious.
Darren:
Well let’s find out. In five years you could see the possibility of one of the big consulting firms possibly buying a holding company outright and that reaction of wow, that’s a great prediction but then I started looking at the relative size of some of the consulting firms compared to the holding companies because in advertising you are inclined to think that Interpublic and WPP are massive businesses but in actual fact they are relatively dwarfed by some of these consulting firms, aren’t they?
Ben:
Yes, that’s right. We put out a research piece out once a year on mergers and acquisitions in the advertising marketing services world and a few years ago, two or three years ago our kind of theme for the year was specifically around that point, and the title of the piece was when not if.
It looked at exactly that, we had a bar chart that did market capitalisation or enterprise value of these various businesses going from the Accenture’s and IMB’s and so on of this world, down to the agency groups and the reality is that they are dwarfed in size.
Certainly, as a firm we’re in the business of making deals happen and one of the things you learn to look for quite early on is, you’ve got to kind of connect demand and buyers and sellers. There is a broking function there but you also got to connect, ability to execute and kind of liquidity, so you look at that dynamic with these huge companies and it’s going to happen that way around.
If it happens and these industries do seem to be converging, the buyers are going to be the big tech groups and the sellers are going to be the institutions who sit there in the marketing services world. I wasn’t actually being factious, I absolutely believe it, but who knows when it will happen.
Darren:
Well it is interesting because Pivotal Research, Brian Wieser just reported that the holding companies in the US have got virtually zero organic growth at the moment, once you remove acquisition contribution to growth.
And the other thing he points out is their traditional history of acquisition to drive growth in the past has been funded through borrowing, so their debt to equity is out of skew. That makes them unattractive for investment but very attractive for acquisition, doesn’t it?
Ben:
I don’t know whether it makes them attractive for…
Darren:
Well you just pick them up for their debt basically.
Ben:
I think it is fair to say there’s a lot of head scratching going on at the moment at the big agency groups around. We seem to be having a global upswing in terms of GDP growth and traditionally you’d expect that to be reflected and amplified in the marketing services groups and it is not happening. So, there’s a worrying break in the traditional link between one and the other and I don’t think anyone fundamentally understands it.
But we are in unchartered waters when you look at the global economic situation you know we keep thinking surely, we should be having a relatively high inflation because we’ve had interest rates so rock bottom for so long and unemployment’s come down significantly.
And you’d expect to be seeing some price inflation coming through and yet we’ve got a weird dynamic going on that now, so I think ever since the GFC we’ve been living in a very strange world, whether what’s going on in the Markons groups is in some way reflective of that or whether it’s a more a structural thing and a broken model, who knows, but it is certainly giving people a lot of sleepless nights that they are not seeing the growth coming back despite the global economy picking up.
Darren:
No, I was just reflecting locally on the Australian market the STW group which had cross over deals with WPP ended up being acquired for basically their debt. That’s why it becomes a good deal when you are just picking up someone’s debt, and you get all the assets as part of it.
Ben:
Yeah, look I think it is situation specific but normally businesses like the big consultancy groups, normally what they want to buy is healthy, high performing, high growth businesses, and to pay a fair price.
It’s fine if you’re doing it at a relatively modest scale, STW is a reasonable sort of size but particularly within this market, but still for WPP overall, you can afford to take a view on it but you wouldn’t really be wanting to buy one of the big six as a big consulting group if you felt they were in a bit of a debt spiral. That’s taking on quite a big job.
Darren:
Haven’t Havas just sold a significant portion?
Ben:
Yes, to Vivendi
Darren:
So there you go. Maybe the time is getting closer for your prediction to come true.
Ben:
Yeah exactly maybe in a way that’s a case in point. That one is interesting when you talk about culture because that in some ways is the coming together of the consumer content world in an environment where TVC’s are still very very important as a part of the mix.
But in long term decline that’s the coming together as people and saying look, we are all in the business of making content that entertains and engages consumers, and whether that be long from TV programmes or whether that be more marketing driven short form contents, that naturally sits very well together.
Darren:
It’s interesting when William Morris International bought into Droga5 for instance in the US. Okay, I just noticed the time, but if there’s independent agencies out there of a reasonable size (though I did read overnight that there’s rumours that PWC are looking into buying an agency that is only nineteen weeks old–it’s called Thinkabel).
That’s quite interesting, but anyway if there’s agencies out there that are thinking, their exit strategy is to be acquired, what advice would you give to the principals of the agency? What should they be doing apart from contacting you?
Ben:
Do get in touch. Darren has my number, but what’s really really important is to focus on what’s going to be motivating for you as business owners and for your staff and what is going to be perceived as a positive development by clients and I think all of the other kind of good stuff follows.
We are always at pains to tell our clients not to drive their businesses to some sort of M&A agenda. People try that and it normally doesn’t end well. It’s build the business you would love to own forever and if you really believe you are building the business you would love to own then other people are going to feel the same way.
Despite everything I said about culture I do think there’s absolutely something in it, you need to make sure there is going to be a good fit, and that doesn’t mean having a homogenous culture. Some organisations do work that way and others are far more federalised. However, you crack it, but it’s important to pay attention to that bit because otherwise things can come unstuck.
Darren:
I know that businesses, they’ve run it to make the finances look good for acquiring but they actually end up going off the rails because you don’t drive the business by looking at the speedo do you, or you don’t drive the car by looking at the speedo, you look at the road ahead.
Ben:
Exactly, and looking at the fuel tank and making sure you hand it over to the next owner with not a drop of gas in the tank. No, look it’s really important to almost disregard the fact you are in a process and continue to run the business in a kind of long term way.
That’s your hedge against a deal process not producing the outcome because you still own that business right and it’s a very dangerous game to drive down the motorway only leaving a drop in the tank and you know, keeping the revs at a certain level, it’s a dangerous game all of that.
Darren:
Exactly, you haven’t really got your eye on the business; you’ve got it on something completely different. Ben, thanks for your time–great to have a chat. One last question: what was the Monkeys-Accenture deal worth?
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