No room for the evangelists in multifunctional digital networks

Merger and acquisition activity in the digital agency arena is set to continue, but fresh forces will be behind the rapid pace of change

Michael%20Nutley%20NMA%20120x120Over the past few years, M&A, in digital at least, has been dominated by the big networks’ buying expertise in the sector, and by a few groups with aspirations to build networks of their own.

Among the acquirees, it’s been a question of either needing to be bought before the rest of the world catches up with what you have to sell, as was the case with the search specialists, or of ambitious agencies looking to grow faster than their existing means would allow. But all this could be about to change.

At a seminar organised by M&A consultants Results International earlier this month, senior partner Andy Collins outlined the developing situation. He said that there was still a very strong deal flow; he admitted that the firm was as busy now as it was this time last year, but with three more staff. He also pointed out that the nature of the deals in the pipeline was changing. There’s still an appetite among the big groups for acquisitions. In fact, at the same event Nigel Morris, chief executive of Isobar – part of the Aegis Group – said he was convinced Aegis’s strategy of buying agencies and supporting them with the network rather than integrating them was the right approach, and that, if anything, it would be accelerated.

Collins pointed out that while the share prices of the big groups had dipped, the slump had hit the smaller agency groups much harder, making it much more difficult for them to fund purchases. But the real change he highlighted was the increase in the number of private equity firms looking to fund deals. These are happening directly, with PE firms looking to buy agencies, or indirectly with agencies that are already backed by a PE firm that is looking to buy-and-build.

This chimes with something I’ve become aware of in recent months. I’ve spoken to a number of people who are looking to build small, multifunctional networks by acquiring specialist agencies. There are four main factors behind their thinking. The first is that digital communication is becoming more and more important for companies, but many of those companies want a single point of contact for all their digital work.

The second is that small agencies in particular often lack the experience or the people to speak to clients at the higher levels of their organisations. The third is that the interactive world is having a profound influence on non-digital channels, both by introducing digital elements and by making advertisers and marketers start to demand the same levels of accountability from their offline channels as they do from online. The head of the digital arm of an offline agency said to me recently that a key part of his thinking is that at some point the offline and online parts of the agency’s work will simply switch places in terms of their importance.

And the fourth is that there are huge benefits to be delivered from integrating advertising with other aspects of customer communications beyond the point of purchase, particularly for brands that exist online either in part or as a whole.

Airlines are a great example of this. Most airlines do a significant part of their advertising online; they also take their bookings online and handle the bulk of customer service there. Meanwhile, there’s all the back-end data to be processed, not only to make sure passengers are on the planes they’re supposed to be on, but to make sure those planes fly as economically as possible.

An airline could employ different agencies to carry out all these tasks, but the real benefits come from integrating them so that all the systems work together to provide a unified front-end that interfaces seamlessly with the operational functions of the back-end. How many agencies or agency groups are there at the moment that can do all that? What this suggests is that integration will continue to drive M&A activity over the coming months, particularly among the smaller digital agencies. But it also suggests a change in the type of people who will be running those agencies.

The first stage of the development of digital agencies was driven by evangelists, people who saw the power of interactive media in a Damascene moment and variously quit their jobs and mortgaged their homes to follow that vision.

The people who are now talking about consolidation are more pragmatic, less wedded to interactive media as an idea while still recognising its importance. The next phase of the growth of digital agencies looks likely to be led by them.

Michael Nutley is editor-in-chief of New Media Age

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