Is Merger a Four-Letter Word?
By Mike Carlton
The Man to Know
Harry Paster is legendary. For almost 50 years he was the American Association of Advertising Agencies’ expert on agency mergers. No one was more knowledgeable about the subject than Harry.
He was there at the birth of the holding companies. And he facilitated their growth. Just as important, he mid-wifed hundreds of privately held agency mergers and acquisitions. He was the go-to person for anything dealing with the issue. A plaque on his office wall given to him by members was inscribed with the simple line, “Call Harry, he’ll know.”
Harry had a simple and wise saying about agency mergers that he was fond of repeating. It went like this;
“Take two Fifty Million Dollar agencies and put them together and in three years you’ll have one Fifty Million Dollar agency.”
The Urge to Merge
After a lull during the past few years, it looks like agency merger and acquisition may be heating up again. While it is unlikely that we will again see a period of M&A activity quite like the ‘80s and ‘90s, conditions conducive to agency mergers appear to be upon us, or are at least on the horizon.
This is not just with the holding companies. In fact, it appears as if interest is growing most in the combining of smaller owner-managed agencies. Let’s take a look at some of the issues that are driving this merger and acquisition interest.
The most common drivers of M&A among owner-managed agencies are:
1. Exit Strategy
In any event, being acquired is a clear way out. And can be faster and cleaner than an internal sale to existing employees.
2. Business Misfortune
In this environment, combining those strengths with another agency can make a lot of sense. And assure the future for everyone involved.
3. Improving Market Capabilities
Unfortunately, carefully calculated mergers of this type are probably less common than ones motivated by exit strategy or business misfortune.
4. It’s All About Money
In any event, while these kinds of deals may have major immediate financial importance, it is not uncommon for them to be disadvantageous to the clients and agency staff.
5. The Grass is Greener
But like the real world, problems are a whole lot more challenging close-up than they look from a distance. Thus, these kinds of combinations can easily become disappointing.
6. The Growth Imperative
Whatever the reason, growth for growth’s sake alone brings into question a whole range of issues about the benefits to clients and staff.
If a merger or acquisition is on your radar screen, the following thoughts are worth considering.
There are lots of reasons for merging. But there are also lots of reasons for not doing so. The fundamental issues are:
1. What are the outcomes you desire?
2. Will merging deliver those outcomes?
3. What do you have to do to assure that those outcomes are achieved?
A Case History
Some time ago there were two strong agencies located in a secondary advertising market. They both had proud histories and were on their second or third generation of internally grown owner-managers. Neither had a majority owner. Both were about the same size. Both had excellent reputations. Both were considered excellent places to work. Both were profitable. And, the owner-managers knew and liked each other.
Each had different but complementary strengths. One was primarily a consumer retail agency. It had a few high profile local and regional clients. The other agency’s business portfolio was highly diversified. It was strong on corporate and b to b advertising. It had free standing PR, sales promotion and studio units. Its clients were mostly national, with some international.
Over dinner at a 4As Annual Meeting the leaders of these agencies envisioned the marketing power these two could have together. Together they could do better work. Together they could have the scale needed for national credibility. Together they could provide a more complete package of services to clients. Together they could become an even more attractive place for top talent. And together they could make a difference in the national advertising community.
Harry Paster was called in. There were no client conflicts. Only minimal capability overlaps. The financials of both were clean and strong. And the leaders of both agencies were energized for the market challenge ahead. Harry called it a “marriage made in heaven.”
The Importance of Culture
But while the accountants and lawyers were doing their thing, nobody bothered to look at the cultures of the two agencies. One had a very collegial management style. Its leadership group was highly entrepreneurial. It was run like a true old-time partnership. Opinions were expressed freely and openly.
The other agency had a very directive top-down management style. While there was no majority owner, everyone deferred to the CEO. His paternalism was pervasive. Management meetings were calm and predictable. Dissent was unusual. The partners were compliant. They were good stewards.
This cultural mix was a disaster.
Within a year all but one of the leaders of the entrepreneurial agency left. They just didn’t fit in. Rather quickly, the capabilities they built withered. The energy they provided disappeared. So did their can-do attitude.
Yet these guys weren’t clunks. Each went on to considerable success elsewhere.
That agency is gone. It died a slow death. Over the years it relentlessly shrank and lost relevance. Finally, one day it declared bankruptcy and closed its doors.
A sad end to once proud agency brands.
The old saying goes that in real estate selection the three most important things are; location, location, location.
The corollary to that is in merging agency capabilities the three most important things are; culture, culture, culture.
Failure to recognize this is probably the leading cause of M&A disappointments.
Cash Flow vs. Capabilities
On another dimension, in every merger there is a continuum between maximizing immediate cash flow at one extreme to rapidly integrating professional capabilities at the other. It is difficult to do both simultaneously. So, it is important for the participants to agree where on this continuum they want the merged agency to be.
Failure to do so is another path to disillusionment.
Eyes Wide Open
Yet just because there are many pitfalls on the road to a successful combination, that is no reason not to consider M&A. In fact, enlightened leadership almost demands that agency owner-managers be constantly looking at M&A opportunities that serve the best interests of the clients, the staff, and themselves.
At the same time, M&A can be heady stuff. The euphoria of an M&A journey cannot be permitted to blind you to any of the challenges.
The goal, quite simply, is to determine in a carefully reasoned way the outcomes you want to achieve, and then what is necessary to assure those outcomes are realized.
First Things First
Everything should start with the desired outcomes. But too often, they aren’t fully thought out before accounting and legal work begins. That’s a mistake. It can be like getting the cart before the horse. For once the accounting and legal work begins it can take on a life of its own.
Your responsibility is to make sure you are doing the right things. The responsibility of the accountants and lawyers is to make sure you do things right.
Confusing the two can cause big trouble.
Some Questions to Ask Yourself
In many respects merger and acquisition activity is an exciting diversion from the routine day-to-day life of running an agency. To keep things focused, here are some questions you might ask yourself:
What is the driver?
What is the outcome you desire?
How critical is it to achieve that outcome?
Is a merger or acquisition the best way to achieve that outcome?
How will the cultures mesh?
What is the branding strategy?
What is the business plan?
What are the diversionary costs?
Is there urgency?
What will it mean to current clients?
What will it mean to the leadership team?
What will it mean to the staff?
What will it mean to prospective clients?
What will it mean to you?
What are the downsides?
How are you doing the deal?
After the Honeymoon
Signing the papers on a merger is not the end; it is just the beginning. Making a merger work is kind of like making a marriage work. It takes lots of continuing effort. On both sides.
And like a solid marriage, a solid merger gains strength as the partners work through the almost inevitable adversity they will face together. Be prepared for the time, attention, commitment and just plain hard work this nurturing will require.
Beating the Odds
Harry Paster once said that three quarters of agency mergers and acquisitions fail to deliver the outcomes desired by their planners. Only one in four pays off.
Those are terrible odds!
The challenge is to overcome those odds and become part of the twenty five percent that can look back on their merger with pride, satisfaction and joy.