Agency giants can continue renaissance with more agile deal-making

Advertising thrives on confidence. Client confidence to spend, creative confidence to innovate, talent confidence to commit, investor confidence to finance.

This is because advertising is a bet on the future.

As we start the second quarter of 2021, a year after the worst of lockdown, we are seeing ever more bets being placed on this future.

Venture capital companies are bidding aggressively for advertising businesses. Private equity firms are actively seeking scale-up opportunities and undervalued players. Adtech is back in fashion for IPOs. The new upstart digital holding groups are snapping up digital-first companies. 

This vibrancy is attracting many of the brightest and smartest people in our sector, we really are seeing the emergence of a new entrepreneurialism, branching out from the once safe haven of the incumbent holding company.

Despite privacy changes to Apple's Identifier for Advertisers (IDFA), the imminent demise of the third-party cookie and the power of the big three tech behemoths, the rate of venture capital and private equity investment continues to accelerate.

Even the incumbent holding company narrative seems to be shifting, after several years of internal focus on seemingly endless internal, deckchair-shifting debates about agency models, number of brands, country P&Ls and so forth.

The share prices of WPP and Publicis Groupe have increased by more than 50% and 90% respectively in the last six months.

This may be down to mundane factors such as cost control, the circling of predators, or a genuine belief in future growth but, whatever the reason, it does show a new confidence not seen for a while. 

What is clear is that whether you adhere to Arthur Sadoun’s audacious announcement that the Publicis transformation is complete or follow Mark Read’s view that transformation is never complete, we can see that the simplistic binary analysis of "incumbent bad, challenger good" is not serving our sector well.

A diverse ecosystem is good for the ad industry

Our industry benefits from a complementary blend of players, both incumbent and privately funded entrepreneurs. No one group can be masters of everything. Smart clients are building an ecosystem of providers and internal capabilities around themselves, designed to solve their very specific challenges.

In this world, the incumbent marketing service groups have capabilities that are often complementary to the private, venture-capital-backed businesses, where both can benefit.

The latest holding company results do give some clues as to where this inter-dependence is working – areas such as media, PR and healthcare, all of which are benefitting from growth.

Media divisions, despite constant speculation about their imminent demise, have been remarkably robust. Their ability to scale new technology quickly, working with smaller, earlier-stage businesses, has allowed them to transform at speed. They are masterful fast followers, and to an investor this is a good thing – all the upside with none of the risk.

The much-lauded Trade Desk (TTD) could not have scaled at anything like the pace it did without agencies consolidating spends into its demand-side platform.

This is true of many of the adtech players. The challenge remains as to how the holding company gains its share of value from this, over and above a typical media-buying agreement, when TTD is valued at around 30 times revenue.

Could a holding company have built an equivalent to The Trade Desk and benefitted from a similar multiple?

According to Crunchbase, the first round of seed funding for TTD was $2.5m (£1.8m), shortly followed by a second round for $5m.

In fact, prior to IPO, TTD had raised only $258m. Put that alongside an acquisition such as Epsilon at $4.4bn by Publicis Groupe and even taking into account the differences in accounting treatments, it looks like pocket money.

But for every tech success such as TTD there are nine failures. The cost of funding one success is 10 times the investment in a single venture. That’s not pocket money.

Holding companies, unlike VCs, are not built for such a risk profile. They are scaling machines rather than risk machines.

The strategy of spotting emergent marketing trends, and acquiring or partnering one of the innovative private companies in the space to scale it, still makes a great deal of sense and can create value for the holding company, early-stage business and client alike if a more creative approach is taken to the partnership.

Holding companies can benefit by partnering newer agile players

The highly conservative and risk adverse pharmaceuticals sector has recently shown what can be achieved with bold partnerships in a time of accelerated change.

AstraZeneca and Pfizer chose to partner smaller, agile, new technology leaders to crack the vaccine challenge at scale. GSK and Sanofi, previously leaders in vaccine development, relied on incumbent approaches and both failed to deliver the expected solution.

In this world, a holding company’s choice of innovative partnerships and effective acquisition will determine pace of growth. As will the speed of divestment from low growth and increasingly low margin areas of business.

This demands a mindset shift, not dissimilar to that of AstraZeneca and Pfizer. This is the antithesis of consolidation, internal focus and reliance on incumbency. In short, it is a confident, external, growth mindset. 

However, over the past three years, holding company acquisitions have declined in number and often focused on bigger, already scaled companies with the enormous capital outlay and integration challenges that they bring.

Time is now short. Acquisition costs are going up as new contenders seek to buy innovative marketing businesses; VCs, PEs and new digital groups are inflating prices. Soon special purpose acquisition companies (SPACs), already big in the US and growing fast in Europe, will add to the competition.

The likes of S4 Capital and You & Mr Jones are starting to show that they can break the scaling challenge.

Now is time for a renaissance in deal type from holding companies.

Shared venture models, minority investments in smaller ventures, new partnerships with entrepreneurs and so forth would be a much more effective approach to managing risk and driving real transformational growth.

The recent identity partnership, announced last week, between The Trade Desk and Publicis Groupe is a good example of this more lateral thinking. 

Without such an approach, the private investment funds and new digital groups will continue to outbid the holding companies, the cost of pursuing major acquisitions will increase and the holding companies will risk moving from fast, effective scaling machines to ever-diminishing slow developers.

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Iain Jacob is chair of UKOM and Cinema First and a former EMEA chief executive of Publicis Media.