Agency M&A Shows No Signs of Slowing

Integration of offline and online marketing services, fueled largely by a growing need to create campaigns for mobile phones and other digital gadgets, will spark continued merger and acquisition activity this year, according to a new report.

In its 13th annual report, “Merger and Acquisition Prospects for Marketing Services and Internet Marketing Firms,” AdMedia Partners finds there is no end in sight to the feeding frenzy.

The last three years have seen a burgeoning market for mergers and acquisitions in which many of the top independent offline and online agencies were acquired,” notes the report. “As the number of quality acquisition targets has shrunk over this time, we are seeing acquirers either scouring the market for hidden gems or aggressively courting top independents.”

For the report, AdMedia surveyed more than 3,200 ad and marketing services executives as well as private equity investors. It says the United States “holds the most growth potential” for M&A activity, but quite a few respondents believed Asia will also be a hotspot for companies to buy or be bought.
In fact, nearly 90 percent of those surveyed said they expect their companies to approach or be approached about an acquisition this year. About half of those respondents said they expect the deals will occur.

The report makes it obvious that traditional agencies, instead of developing their own online, interactive divisions, are more likely to seek out and purchase companies already in the field. Abe Jones, AdMedia’s managing director, told ClickZ Network that the pace of the market is too fast to allow traditional agencies to build their own online practices.

“I think the reason [for all the acquisitions] is speed to market,” said Jones. “If an agency or communication firm a company is working with offline doesn’t have the online capability, the company is likely to go elsewhere for the needed talent. So the existing agency has two alternatives: Do they hire the people, or buy [an existing firm]? It’s a build versus buy type of decision.”

Given the time and uncertainty involved in attempting to build an online practice organically, most agencies aim to acquire. “You’re also buying scale and proven capability,” said Jones.

Randall Rothenberg, Interactive Advertising Bureau president and CEO, agreed.
“It’s all about acquiring capabilities,” he told ClickZ. Rothenberg said mainstream agencies are “belatedly” recognizing the need to have interactive capabilities at their disposal and he said buying existing companies versed in the digital campaigns is “simply logical.”

While the Internet is far from new, many traditional agencies lagged in terms of staying on top of the latest Web marketing techniques. Often, once they designed a client’s Web site, mainstream agencies left it up to the clients to find specialists in online marketing. That’s changing, said Jones.

“I think the definition of online marketing has now expanded and it really now has gone beyond simple Web design to the point where the client will want to have capabilities, such as search engine optimization, under one roof rather than going to an outside vendor,” he said. “Likewise, they may want to have lead generation capabilities. So they are not just looking for a firm to be able do design nice Web sites.”

And AdMedia reports mobile is up next. “As the mobile marketing sector gains traction and increased press attention, expectations are that there will be increased deal activity,” according to the report. “While there have already been intriguing deals in this area, so far the majority have involved technology platforms rather than marketing services.”

AdMedia quotes one of the survey respondents as noting “substantial improvements in multimedia content delivery to mobile handsets [including streamed video]; increasing wireless bandwidth; carrier independence and interactive capabilities of modern handsets are beginning to have a real impact on media planning.” Another predicted that “mobile will grow substantially because it’s still too small given what it has to offer.”

So the future looks bright for companies focused on marketing to mobile, but those working for small companies involved in buzz, viral and guerrilla marketing should also be prepared for suitors. If they’re doing a good job, chances are good they’ll be bought in the near future, according to AdMedia.

“While there is considerable demand for buzz/viral/guerrilla marketing, there is a relatively small supply of attractive potential targets,” says the AdMedia report. “The top prospects have already been gobbled up and the smaller high growth companies are just beginning to achieve critical mass. Tight supply and high demand will create premium valuations for the quality targets left in the market.”

All the M&A activity has done miracles for the valuation of companies specializing in interactive marketing. AdMedia’s survey found the valuation of those businesses increased since last year from seven times earnings before interest and taxes (EBIT) to eight times EBIT.

During the same period, valuations for marketing services firms grew from six to 6.5 times EBIT while the valuation expectations for traditional ad firms remained five times EBIT. The report says the most M&A activity will take place in the fields of search marketing, analytics, mobile marketing and buzz/viral/guerrilla marketing, “closely followed by lead generation and database marketing/CRM.”

Kate Kaye contributed reporting to this story.