Beyond agency acquisition: the insiders’ post-sale views – a roundtable discussion with Green Square and The Drum

1st February 2018

‘Mergers and acquisitions’ is a term which numerous business owners will be familiar with. Although the majority of agency owners are adept with the concept of building an agency and ultimately finding a home for it to realise its full value and potential, little is reported on what happens post-acquisition or on internal learnings from the process.

To investigate this further, Tony Walford, Barry Dudley and Andrew Moss from media and marketing mergers and acquisitions (M&A) advisers Green Square, which specialises in agency sale and acquisition, held a roundtable discussion at The Ivy to hear from the agency owners that have experienced it first-hand.

Jon Wilkins, chairman of Karmarama, part of Accenture Interactive, Richard Armstrong, chief executive officer (CEO) and founder of Kameleon, Ollie Bishop, founder of Roast and creative agency Kitty (previously founder of Steak), Jennie Talman, co-founder of Just:: Health, now part of Havas, Jamie Allan and Steve Sowden, joint CEO’s of Intermarketing and Jon Priest, CEO of Future Thinking, shared their stories.

What motivated your decision to sell in the first place?

Jon Priest says that for him growth was the most important factor: “Looking back on it, it was more about changing our capital structure so we could grow. We also wanted to take some money off the table as part of this process, and in the end private equity (PE) acquired 60% and management retained 40%.

“We were a single site with 80 people and, without investment, we couldn’t build strategically to grow it any further at that time. The choices were to run it as a lifestyle business, sell it or do a PE deal to grow through acquisition, which is what we have been doing. It was principally about capitalising and getting the funding to grow – we couldn’t grow any more ourselves so we needed some assistance.”

Future Thinking became PE backed, but what about the businesses that already were? Jon Wilkins from Karmarama, part of Accenture Interactive, explains: “Before I joined, Karmarama wanted to be more digitally centred and had ambitious growth plans. The thinking was that PE was great because you get an injection of capital and can hire more people. The market was moving quickly and the plan was to scale up the parts of the business that were of interest, such as mobile and data, to really substantiate the offer. Without PE, I don’t think we could have done it.”

“That’s exactly what we originally said,” Sowden agrees, referring to Intermarketing’s change of view on PE backed entities for its exit. “We originally decided there wasn’t a chance of going into it, but then as we went through the process we said OK, let’s have a look at PE backed acquirers because we knew it was a very real choice.

“Our fundamental learning from PE was that you need to be clear on what you need the investment for and be quite tight on what purposes it serves,” Wilkins continues. “As long as you maintain an open dialogue with your PE backers, and everyone is clear on what the goal is, you stand more chance of success.”

Jon Priest describes PE firms as investors, not owners: “You go into it with your eyes open. From day one they are looking for exit scenarios, and any investment in growth is supported as long as there is an exit. We got through some structural and other things which we didn’t think were important at the time, but of course they are.”

Sowden explains: “We were a second-generation management buyout. The business is 30 years’ old and we bought it six years ago but used bank debt rather than PE investment. The agency hadn’t dipped in its predecessor’s hands, but it also hadn’t thrived, so when we took it on we wanted to do the things we always thought that other businesses should do. We got some advice and structured the agency to run more efficiently and part of that business was to look at who the next MBO team were going to be. ‘Pass it on’ was continually in our heads. As the business grew we built a great team including two candidates that would have been part of a third MBO. The issue was the valuation we were reaching meant doing another MBO would have put too much pressure on the business and wouldn’t allow us to continue our plan to grow into new geographies.

Jamie Allan from Intermarketing, elaborates: “We got to the point where we had opened in Amsterdam and Sydney and were looking at the American market. We needed an acquirer with experience in the US. We also had a plan B in our back pocket. If we didn’t find the right acquirer that could give us what we wanted we would start to build our own network of agencies in order to deliver what our clients needed. That was a good negotiation point because we weren’t in a position where we had to sell, plus we had access to funding.”

“The British culture always has an element of ‘you build it to sell it’,” says Ollie Bishop, about PE backed digital agency, Steak. “From a moral perspective that may be a bit dubious, but for a lot of people that build agencies at the start, that is the motivation. What was important to me when I sold Steak was that there were a good 20 people in the agency that at least made six figures out of the sale of our company. Up to this point many of them couldn’t afford to buy a house in London, so this was a great opportunity for them.”

Jennie Talman from Just:: Health, now part of Havas, says: “For us, it was two things that determined the time to sell. Our clients are all in the pharmaceutical industry and it was shortly after we founded the agency when we first started talking to Green Square. When we started out there was a real appetite for clients to work with the boutique, independent agencies as boutique agencies are more creative, so it was a great time to launch the company.

“But the way the pharmaceutical industry is going now, you have to be global and now 80% of our company is global work. Although most of it we do with our teams based in London, a key requirement for a client is the agency they deal with must have a global footprint. When we go in to pitch we have to demonstrate this capability, so the primary decision to sell was geographical for us.”

Talman continues: “The second reason was that it just felt a bit lonely. My business partner and I wanted to work with other senior people, to carry on learning and be challenged. That’s been the real benefit for us. We’re now working in the new Havas King’s Cross building and there are 18 marketing services agencies located there. Collaboration between agencies is strongly encouraged and as a result the thinking and the ideas we are bringing to our clients are truly differentiated. And professionally I feel challenged and energised.”

Richard Armstrong explains that the reason Kameleon sold was to do with growing capabilities: “We wanted to create further value, which we couldn’t do unless we further developed our offer. Our positioning needed to evolve, and we were missing some skillsets, so our key acquirer criteria was one that could bring us the complimentary capabilities we didn’t have, such as data, media, analytics and search. We figured if we could access these, we could then expand our client operations and subsequently step towards different geographies. By following this strategy we could increase growth, realise proper value and do the things we want to do. So we went hunting for the stuff we didn’t have enough knowledge in to grow organically – and found all of that and more in Be Heard Group, our acquirer.”

“The weird thing is you do all of this selling for a reason, and then two months down the line, you find there are other benefits you’d never thought of,” Sowden concludes.

What is the most positive thing the acquirers have bought to your business?

Sowden instigates the discussion by highlighting the importance of autonomy: “Intermarketing’s acquirer, Advantage Smollan, stayed true to its word and left us alone. For the first six months post-sale it’s really important not to change the company. This is a fear when going through the process – everyone was asking ‘are our jobs safe?’ and people need to settle in. You then start to think ‘Ahh, maybe it’s not just about all the things that we think are good about our business’, there are new avenues to explore.”

Allen from Intermarketing adds: “While we will need permission to do certain things, our acquirer is looking to us to build the strategy for European growth – organically and via acquisition – and assist our move into the US. Asia will follow. We couldn’t have done this so quickly or as easily on our own. They have an infrastructure we can leverage and their promise of support was key to our choice.”

“Having a PE owner has been a good thing,” notes Priest. “They professionalised us, they gave us a lot of knowledge (particularly around finance) and they gave us access to debt equity and capital market finance. However, PE can be bad at respecting the way agencies operate and corporate culture – they will walk all over it if things go badly. The deal is nearly always structured in such a way that they have the majority of voting rights, but they don’t really know what the impact of exercising those rights on an agency will be unless they get better at communication. Just stomping in and making unpopular decisions is not the way to deal with agency folk. I welcome them taking an interest and taking in knowledge. Even though we have lots of products, we still need people to demonstrate excellent service before the client will purchase.”

“When engaging with PE you need a partner who is seasoned in people businesses,” revealed Wilkins. “We found that getting impartial advice to support you and the investor to say, ‘this is the market dynamic’ or, ‘it doesn’t really work like that’, through non-executive or consultancy help, was vital. Prior to our sale to Accenture, Green Square did a brilliant job of explaining the ecosystem of Karmarama to our PE backers. The good thing that came out of that process was they started to ask our opinion because they then understood we were the only ones that knew how the company worked.”

He adds: “The reality, for everyone around this table, is that we’re entrepreneurial. The deal we did with Accenture obviously changed a bunch of things, but we also applied our tactical spirit to make sure it works for everyone. I think Accenture sees that entrepreneurial side to us, which is invaluable to its business, because we come up with different ideas and see routes around problems.”

Future Thinking’s Priest reiterates that PE owners are exit strategy focused: “They want to make money. We don’t know all the answers and if we need answers then we will ask them for their view, but they are in a business that works in a different way.”

Jennie Talman shifts the focus to the benefit of relationships: “For us, being part of something larger and being able to walk into pitches with the comfort of knowing we had global delivery capability was key. As pharma companies procurement teams continue to consolidate their rosters with the networks, being an independent healthcare agency is no longer really an option unless you do something very unique. Suddenly, we could get to the top table and Havas has brought us work. It took a while for this to properly get going, but being part of the group has been incredibly beneficial. Plus, of course, having different operational and delivery expertise available to us within Havas has been very helpful.”

“We often see the promise of work being brought by an acquirer, but in reality you still have to make your own luck,” points out Green Square’s Tony Walford. “One thing we always tell our clients is to infiltrate the group you have joined as soon as the deal is closed. Look at the clients they have, understand where your services can be sold in and find the person that can kick that door open for you. This has worked across a number of deals we have done and to great effect in maximising earn-out payments”.

Picking up on acquirers bringing work, Kameleon’s Richard Armstrong discloses that As Be Heard, acquirer of Kameleon’s acquirer, brought them those missing capabilities. He explains: “The hope was that we would actually be able to sell joined-up services alongside sister-agencies within the group. And that is now starting to happen – probably the biggest successes being two significant recent wins for Coca-Cola and Dreams, both pitched and converted with the collaboration with sister businesses. Working with peers within a larger organisation has been a real motivator for me, but at the same time the relatively small, start-up nature of the Be Heard group still leaves a very strong sense of entrepreneurialism – which I guess is further helped by having equity in the listed holding company – you want everyone to collaborate and succeed.”

To which Ollie Bishop responds: “Steak was Dentsu’s first sizable acquisition in the UK. This meant we had a pretty clear run at clients as there was no-one else around to hoover them up. However, once the Aegis deal happened, our world changed quite a bit and we no longer had a clear playing field. Dentsu also paid us less attention. That said, we just got on with it. We worked out what we needed to do to maximise our earn-out and went about doing just that.

“Interestingly for us was how the corporate structure of Steak needed to change as Dentsu’s global offering developed – they wanted to roll Steak USA into their 360i agency during the earn-out period, which they couldn’t do without our consent as part of the deal. Green Square helped us restructure the deal which meant we could lock down the US earn-out element leaving us to focus on the UK. Basically, you just have to be ready for all eventualities.”

“I’m often asked how Accenture’s culture has impacted Karmarama and the question is quite irrelevant,” Wilkins replies. “Aside from PE owners, most acquirers will let the agency get on with it and it’s down to the agency to allow cultural shift to happen when it’s for the better. With Accenture there really is a culture of cultures, like a group of different villages, each with their own culture and it’s working for us.”

“We’re still getting to grips with the cultural side but are very positive,” Allan clarifies, commenting on Intermarketing’s ethos. “We’ve traveled an awful lot since closing the deal only a few months ago – not only to our own offices, but also getting to know people across the US and in South Africa. It’s been pretty enlightening and we’ve started to build strong links with other agencies in the group.”

How did you find the process, and is there anything you would have done differently when informing your team of the change?

Jennie Talman admits that the process was a lot more intense than Just:: Health ever thought it would be: “We met a number of interested parties and, as a US footprint was critical to us, Green Square took us to New York to meet with a PE backed acquirer as well as some senior network agency heads over there. Once we decided which acquirer we wanted to go with, there was then a lot of negotiation around points and the structure of the deal that were very important and we hadn’t even thought about. Whilst Green Square dealt with all this for us, they obviously made sure that the final decision on key issues was ours. I don’t think people realise just how much is involved in a sale process.

“If I did this again I would do a better job at communicating with our senior team about the benefits of the acquisition. It’s not just about financial reward. It’s important to think about what the acquisition will mean for each individual and how it fits with their professional values and goals.”

“My brief to Green Square was I wanted a trade buyer under which I could do an earnout and leave after around three years. I felt that I was done with doing what I was doing and wanted a new challenge,” discloses Jon Priest. When a PE acquirer was put to us during the process that already had a research agency that could be merged into us with me and my team managing the enlarged business, retaining some equity and going on a buy and build strategy, this was that new challenge. So my expectations were completely changed and it’s been a very interesting journey. The process is the process – laborious and you need to ensure you make time to understand everything your advisers are telling you whist not getting distracted from the day to day.”

Intermarketing’s Sowden highlights that the intricacies of the deal were key: “We had a specific issue in having a client that was key to our agency and our deal needed to be structured to accommodate this. The most stressful time came at the eleventh hour. Last minute questions and due diligence delayed closing the deal by six weeks. Having gone through so much to suddenly have this happen was a frustration, but we got it done with Green Square providing guidance, reassurance and confidence. That said, we always had a Plan B!” Read more.