The past two months have seen Bain Capital overcome numerous obstacles and cast aside sceptics to complete an unprecedented deal to buy ADK, Japan’s third-largest advertising agency. Transforming the company is likely to prove more difficult. Bain seems clear on where the opportunities lie, but the finer details will take time to establish.
To understand what the future looks like for ADK, it’s important to understand both companies’ reasons for pursuing the deal. ADK sees privatisation as a chance to gain the freedom it lacked under its alliance with WPP. What it plans to do with its newfound liberty is not yet well defined, and representatives from the company declined to comment for this article. But it has pointed to three broad aims.
The first is to become “digital first”—no small task for a company that has essentially been TV-first throughout its 61-year history. In its most recent statement, Shinichi Ueno, president and CEO, also expressed a desire “to truly become a consumer activation company”. A third priority is to become a credible player internationally.
Bain Capital appears to share these interests. Speaking to Campaign on 8 December, Bain Capital managing director David Gross-Loh, who played a lead role in the deal, said Bain initially became interested in ADK through its screening of companies that have “untapped growth potential”, supported by insight from Morgan Stanley.
“This was an interesting segment,” he said of the Japanese advertising industry. “It’s a few years behind the US in terms of digital penetration, and we thought we can help bring this company forward…we have resources and assets that can help accelerate that process.”
Attracted by animation
However, Bain Capital is also attracted to a part of the business that WPP wrote off as a folly. Gross-Loh said ADK’s investments in animation made the company particularly appealing. ADK is a joint-rights owner of Doraemon among other properties, alongside Fujiko Production, Shogakkan, Sinei Douga and TV Asahi.
“ADK has had a number of unique areas in the context of the advertising business that were developed over the years,” Gross-Loh said. “They’re very strong in direct response marketing, but another way they are different is in their use of animation as an advertising tool.
“You see increasing levels of animation used in ads globally and through this they gained access to a number of animation titles. We want to explore different ways to monetise those. It’s not a standalone content business but it could transition to that model. They could have a business model of content as a business, something like Sanrio’s Hello Kitty model. We think that’s an un-realised opportunity for the company.”
Gross-Loh added that ADK’s relatively small scale could allow it to “leapfrog existing players” in the digital marketing field in Japan now that it’s able to make investments that may require several years to deliver a return, and is free from historical restraints. He referred not only to the relationship with WPP but “an unattractive digital media buying relationship with Dentsu, which has now ended”. He said ADK should be able to advance rapidly in programmatic media buying because it’s “smaller and more nimble than Dentsu and Hakuhodo”.
In October, CLSA analysis speculated that if Bain Capital’s bid proved successful, the firm might look to combine operations with Macromill, a Japanese digital marketing research company that it owns, to proliferate a more transparent operating model in Japan. Gross-Loh said Macromill had proved useful as a means of understanding ADK’s business in the context of the Japanese market, but dismissed the possibility of fusing the two companies together, saying that Macromill needs to remain independent in order to be effective.
Media agnosticism, faith in leaders
At the same time, Gross-Loh believes ADK does have a role to play in making Japanese advertising more transparent, largely because as a smaller player, it doesn’t have the same incentive to protect the current system as Dentsu and Hakuhodo do. “There’s still a push aspect to the market,” he noted. “Pushing TV as the prevalent media as opposed to looking at where the best use of advertising dollars is. ADK is the most nimble and independent of the big players…They haven’t had all the arrows in their quiver but if you equip them with those tools they can become the leader in driving a more open and transparent model that is customer-oriented rather than trying to preserve existing industry structures.”
Gross-Loh said the focus over the next several years will be “building deeper capabilities” for ADK with a view to making the company public again “with a better growth story”. He said Asia offers more realistic expansion potential for ADK than the US and Europe.
“That is the game plan here,” he said. “When [re-listing the company] might occur is hard to say. It may take time to build—four or five years” and will be determined by the progress made. He did not comment on the possibility of changing ADK's management. Bain Capital often installs its own management, and sometimes external leaders, in the companies it buys, but it has previously expressed faith in ADK's leadership.
While Bain Capital’s move on ADK surprised many in the industry, it may not be a one-off. “I think you are going to see some more M&A activity in advertising,” Gross-Loh said. “Part of it is the pressure [the industry] faces but also the opportunities. It sits at the convergence of a number of different areas—digital, analytics, big data and media—it’s in there touching all these areas and just as you saw with telecom some years ago, I think you will see consolidation here bringing together firms with end-to-end capabilities.”
He said the pressures advertising companies are facing as a result of consumer packaged goods companies reducing spending was “real but a temporal wave”. He softened his previous assertion that the advertising business model was in crisis. “The powerful long-term force is convergence. That will bring changes in industry structure. ‘Crisis’ may be a bit of a strong word. I think there’s more opportunity than risk for advertising companies, but they have to define their strategy and think about how to build business in a new digital environment.”