A buy & build strategy: driving growth in the marketing services sector
Including interviews with Oxyma and Sideshow Group
Driving sustainable growth is one of the greatest challenges that businesses face, no more so than in the marketing services space. Organic growth is critical and allows you to control culture, but it takes time. A carefully planned buy and build strategy, using acquisitions to secure new capabilities and extend the footprint of the business can turbo-charge growth. Today there is plenty of private equity money available to support such ambitions, however this hasn’t always been the case.
Raising funds has often meant floating on the public markets where companies are under enormous scrutiny and pressure to perform, with frequent public reporting requirements. Keeping investors happy can distract the C-Suite from their day jobs. The focus on short-term profits can impact investment decisions and the process of integrating new businesses into the group. A handful of entrepreneurial businesses emerged on the scene over the last ten years or so with buy and build strategies; names such as Creston, Chime, Perform, Mission Marketing and, more recently Be Heard, who floated on the UK markets. It’s telling that the first three of these groups have since de-listed, primarily taken private by PE groups.
Many of the new generation of businesses who are going down the buy and build route are taking a different path for funding, using private equity as an alternative to the public markets. They have the benefit of being able to think about their strategic growth plans away from the gaze and pressures of the public markets. This is being driven in large part by the increased interest of the private equity community in the sector and increased availability of funding. Our global deal data for the marketing services sector shows that the number of deals involving private equity has risen from just 7% in 2015 to 22% in the first three quarters of 2018.
Sir Martin Sorrell’s S4 Capital is one of the few recent exceptions to this trend, choosing to list on the London Stock Exchange rather than taking the private funding route.
So, who are these groups? Private equity backed groups undertaking buy and build strategies include companies as diverse as Stagwell, Dept, Ansira, You & Mr Jones and The North Alliance. Despite their respective differences in size, war chests and focus, each shares a number of traits.
In contrast to the traditional approach of the networks, they generally aren’t buying multiple competing businesses but rather are looking to buy complementary skill sets, then looking to deploy the necessary resources to make synergies work between those companies. There is also a high degree of focus on compatibility of working cultures, with the desire to create a coherent culture across the group. Being smaller, and less constrained by legacy activities, they also tend to be more agile.
Their approach to acquisitions does vary. Some of the new groups tend to favour traditional standalone profit-based earnout deals, which from a deal structure perspective are similar to the earnout deals we’ve seen the networks deploy for decades. Others tend to require the target’s shareholders to take a portion of deal proceeds in the acquirer’s equity, thus ensuring the shareholders of the acquired groups have an interest in the success of the whole group rather than their individual business. It becomes in everyone’s interests to cross refer and support overall growth.
This model isn’t without risk. The selling shareholders are taking a minority position in a private company, where the capital value (and timing) is linked to wider group performance. This is in contrast to a traditional earnout, where future proceeds can be accurately estimated (assuming forecasts are hit) and are within the sellers’ control.
In this article, we include an interview with Jos van Loo, CEO of Oxyma Group, who shares his learnings from the successful buy and build strategy Oxyma executed with the support of Nordian Capital, before their acquisition by Merkle in 2017 (Dentsu Aegis Network).
“When it comes to culture, it’s important to recognise that the culture will inevitably change post-deal and to tackle that head on and make this a positive” – Jos van Loo, Oxyma Group –
Read the Oxyma case study here
Taking private equity money (or indeed going public) is not the only means of funding a buy and build strategy. There are many examples of independent agencies using a combination of internal cashflow, bank debt and equity to fund acquisitions, avoiding the need to take external funding. The buy and build route is open to all independent agencies looking to accelerate growth; the US$260 million raised by Stagwell is one end of the spectrum but there are plenty of agencies growing via smaller, self-funded acquisitions.
Sideshow Group, a UK-based agency, is one such independent that has developed a very successful model for acquiring and integrating other agencies Read on, where its founder Tony Hill shares his advice.
“If the leadership team is open and fair-minded with an absence of politics, that helps set the tone for the whole of the organisation including companies that join” –
Tony Hill, Sideshow Group
Read the Sideshow Group case study here
What does it mean to become part of one of these new groups? A group that’s being assembled through a buy and build strategy won’t automatically be the right option for every ambitious scale-up looking to their next stage of growth. But if there’s a great strategic fit and the culture is right, it can provide a viable and attractive alternative to the more traditional acquirers, with an opportunity to have more impact on the group you are joining and its future direction.
As always, the right growth strategy or the right home for any independent agency depends on the specifics of the situation, the risk appetite and personal situations of the founders, the culture and the market opportunity. However, what is clear is that at a time when the holding companies’ model of maintaining multiple and competing P&Ls looks increasingly unwieldy and where clients are looking for streamlined services and access to the best talent through a single point of contact, there is an alternative approach.
Read the full version of The Bulletin: Issue 70 Buy and build in marketing services