Feature: To consolidate or be consolidated

Daniel Domberger, a deal leader at investment banking boutique Livingstone Partners, reports on an event looking at consolidation in the marketing services industry

Buying and selling businesses in the services industry is really all about the people. Talent is what differentiates one marketing services company from another, so keeping employees informed, happy, and, where possible, involved in the sales process is paramount.

This was one of the conclusions that came out of a half-day marketing services event hosted by Livingstone Partners in June, organised in association with the ISP and the Direct Marketing Association. Held at London’s Soho Hotel, it attracted more than 100 owner mangers, CEOs and financial directors from the industry.

The event featured keynote speakers who focused on the core theme: “to consolidate or be consolidated”. Each of the presenters explored some of the issues faced by themselves and other entrepreneurs when deciding the right time to buy and/or sell businesses.

Shane Redding, chair of the Institute of Direct Marketing, reviewed the UK media and marketing services deals from 2007, ranging from the largest, such as the multi-million-pound deals involving Reuters Group and the Thompson Corporation, to the more modest 82 deals from Ł1 million to Ł100 million.

Redding highlighted the fact that, with the economy slowing, it is more important than ever for companies to prepare themselves for a potential transaction and to focus on differentiating themselves from the competition.

Kevin Steeds, chairman of market research and consulting specialist Cello Group, discussed the declining trend of initial public offerings (IPOs) in marketing services companies. He also highlighted those sub-sectors, such as digital and interactive marketing and niche PR, that are still attracting significant attention from strategic purchasers, even in the current slowing economy.

He noted that the four types of acquirer still on the acquisition trail are

• UK small to mid-sized PLCs, such as YouGov and M&CSaatchi;
• international “newcomers” including Australia’s Photon Group and Canada’s Cossette;
• larger UK PLCs and international groups, such as WPP and Publicis;
• and private equity-backed vehicles such as Engine and i-level.

Steeds advised that, while there are still buyers out there, they are more cautious, telling owner-managers to watch their revenue forecasts, project margins, client behaviour, variable costs of doing business, and their cashflows “like a hawk”.

I moderated a panel session which included Tim Birt of Osborne Clarke, Andrew Hartley of August Private Equity, Chris Lovell of Golley Slater, Paul Baker of Royal Bank of Scotland and Tim Lyle of Livingstone Partners. The key thread from this was the point that buying and selling businesses in the services industry is about people and retaining talented employees.

Earn-outs were a controversial topic, as some panel participants suggested they “do not work”, but they all agreed that some sort of well managed post-deal incentive programme was necessary to keep employees from taking the money and running. They also agreed that pre- and post-acquisition plans were essential to retain staff and to ensure the success of the new company after a transaction was completed.

The panel also addressed the subject of accountability: a plan is only effective if someone owns it. They pointed out that a member of the original company’s team needs to be “liable” for the delivery of the agreed objectives. Echoing Redding, the panel participants concluded that agreeing a common vision of success would help make an acquisition more fruitful and likely to succeed.

Stephen Woodward, former group chairman of data-focused customer relationship management services company Moonriver, delivered a first-hand account of his former business’ growth trajectory and its ultimate sale. It started with a four-year “organic growth” phase based on hiring the right people, building services and keeping costs down, and then the next five years marked the “acquisition-led growth” phase, in which Moonriver made five acquisitions of small companies with the technology, services and employees that were needed to fill gaps in its offering and make it more attractive to clients and buyers alike.

In the final phase, Moonriver worked closely with Livingstone Partners to explore options, identify opportunities and navigate the sales process. Woodward made the point that selling a company you have helped to build is an emotional experience. It is a long journey, but with the right partners and support it can be a fulfilling one.

Clive Mishon, chairman of the ISP and CEO of Mentor Marketing & Investment said that the event made it clear that “even in difficult economic times, the entrepreneurial spirit that has always been a key characteristic of the marketing services industry continues to burn bright”.

“To me the key theme from the conference was that if one is to prosper, you need to demonstrate quality throughout all aspects of your business from creativity to financial management, otherwise you face being swallowed up by the predators who believe that they can make value from the failings of others.”