According to data from the Interactive Advertising Bureau (IAB), 27% of advertising spend in the first half of 2011 was online, up 14% on the year before, and for the first time, was ahead of TV advertising which had only a 26% market share. The recent IPA Bellweather survey for Q4 2011 suggests this trend is set to continue, with spend on internet and search advertising taking an increased share of respondents’ budgets. Coupled with the fact that digital revenue is growing at 2.5 times the rate of traditional or analogue media, (PR week notes that digital constitutes up to 44% of traditional agencies’ PR revenue), and it’s not surprising that agencies – both multi-service and niche – are looking to invest in their digital businesses. It means that the industry is now characterised by acquisition and fast growth. But how can those involved ensure they have the right growth strategy and adequately skilled staff to safeguard their existing assets, and expand into new markets? In an industry characterised by flux, there is no single formula which all agencies may follow to guarantee successful expansion or consolidation, but it is important that financial partners can advise on the different avenues open to your particular company.
Acquisition – expanding with the market
The issues vary for acquiring other businesses or growing organically by either absorbing a smaller niche agency, or by bringing in skilled staff. Acquisition of digital and social media capability, such as, WPP’s recent purchases in Australia and China, provides an immediate entry into target markets and geographies. However acquisition can be disruptive, even for larger companies. Larger deals may be subject to regulatory approvals, the issues surrounding operational and cultural integration are inevitably complex and on top of that, cash flow has to be maintained to meet obligations to staff and suppliers. There may well be a requirement for debt financing, and with foreign exchange elements added to the mix it can be a difficult environment for companies of any size.
Diversifying – new revenue opportunities
Keeping pace with the speed of change that comes with the proliferation of new digital channels is key, especially for the larger, more traditional agencies. For instance, WPP has increased its revenue from digital activity from 21% to approaching 30% between 2006 and 2011 and the group has a target to deliver 35% – 40% from digital over the next five years. The ability to capitalise on the opportunities available depends on the availability of flexible and informed financial support, tailored for a changing business structure.
As the channels through which digital strategies are deployed diversify, the growth process becomes more complex. Social media, SEO and other search campaigns, represent a sizeable portion of digital activity. It is the advent of the mobile internet, however, which has opened up a whole range of other avenues, including strategies targeted towards mobile browsing and tablet applications. For WPP, utilising the opportunity presented by the expanding mobile market has become a significant element of digital campaigns. WPP has been swift to act upon the new opportunity – its integrated mobile offering includes specialist resources such as running Android specific competitions, integrating outdoor with mobile media and the delivery of audience and outcomes. For both the bigger players and smaller niche agencies, access to financial expertise is critical to help maximise the return on funds, and mitigate any risks associated with the new and emerging market sectors.
Closing the skills gap and growing organically
With a diversifying digital environment, it is not uncommon for a deficit in the relevant in-house skills to open up. In some instances, acquiring other businesses can close the gap, although this has been less popular in recent times. Publicis enhanced its digital capabilities in the UK during 2010 with the acquisitions of Chemistry Communications PLC and Kitkat Nohr, while its $575m acquisition of Rossetta, announced in May last year, arguably marked the peak of M&A activity in the digital space and transformed its digital offering in the US.
Alternatives to acquisition can be particularly attractive for niche digital agencies that may have grown organically, but quickly. In those circumstances, the capital structure of the organisation may not have kept pace with the growth, and consequently these organisations may find it harder to access the debt finance required to take on bigger projects, such as an acquisition to address a skills deficit. Hiring on an individual basis could be a more viable and less risky strategy. There is, however, no one-size-fits-all set of guidelines to dictate when skills ought to be gained through acquisition or bought in individually, and the appropriate financial strategy will depend on the cash flow, revenue and previous acquisition activity of any specific company.
A digital future
It seems certain that the digital market will continue to expand over the coming years. And an understanding of the financing options available is crucial to riding the digital wave. There is no specific financial formula suited to every agency, and whilst working with a bank that can offer financial acumen is a good start, the key is to build a close working relationship with a partner who knows the digital sector inside out. The ability to assess the variety of approaches to consolidation in the digital marketing industry, and the finance options that work best for each, will best prepare an agency to meet the inevitable challenges, granting a competitive advantage.
Contributor
John Aldred is a member of Barclays Corporate Technology, Media and Telecoms Team.
