The Beginning and End of Agency IPOs

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Dentsu Creative won the coveted agency of the year at Cannes this year. If you look at the history of the advertising network in India, it has been entirely built out of acquisitions.

They expanded their network by acquiring agencies like Taproot, WebChutney, Communicate 2, WATConsult, Happy Mcgarrybowen, Smile Group, and Fractal. The story isn’t any different from other global networks.

Almost every independent agency that began in India in the last decade has been acquired. That makes you question why didn’t any of these agencies decide to remain independent or raise money via a public offering. To answer the question of why agency IPOs are no longer common, we will have to travel back to Madison Avenue in the 1960s.

The Beginning of the Agency IPOs

The 1960s were the heyday of agency IPOs. Papert Koenig Lois (PKL) was among the first agencies to kick off the IPO frenzy. Grey, FCB, and J Walter Thompson all followed later that decade.

David Ogilvy took Ogilvy public in 1966, bringing Warren Buffet as an early and long-term investor. Agency IPOs were common in the latter half of the twentieth century. In 1975, the renowned Saatchi brothers reverse-merged Saatchi & Saatchi.

Manhattan, Maddison Square, NYC

This was followed by public offerings from the Australian Agency, John Singleton in 1993, CIA media agency in 1998, and Dentsu in 2000. In 2004, the Saatchis pulled off another IPO of their new agency M&C Saatchi, demonstrating extraordinary financial dexterity. But the party didn’t last for a long time.

Experts had long predicted that the space would consolidate in the coming years. But consolidation had started earlier than the industry experts predicted. In the 1970s, London-based Charles and Maurice Saatchi began aggressively purchasing American advertising agencies.

Advertising professionals had nick-named the agency “Snatchit and Snatchit.” Then, through WPP Group PLC, Saatchi & Saatchi’s CFO, Martin Sorrell, struck out on his own and took the unprecedented step of a hostile takeover, which was thought impossible in the service industry. He bought the much bigger J. Walter Thompson agency.

When WPP focused on Ogilvy & Mather, David Ogilvy’s perspective on public ownership shifted. One of his memos was titled “Exculpate My Sin!” “Going public was the worst mistake I ever made.” “Can we go private?”

WPP overleveraged itself in order to acquire O&M, and it was only saved by renegotiating its banking covenants. Ogilvy swallowed his pride and became a figurehead chairman at WPP.

When digital agencies Razorfish and Agency.com went public at the end of the 1990s with valuations in the hundreds of millions of dollars before collapsing in the dot com crash, it may have been the last straw for the agency IPO. Though both still exist in name, the founders lost control of their agencies following the crash, and both were sold for a song.

The Extinct Agency Initial Fund Offering

In the late 1990s and early 2000s, the wave of consolidation also affected the Indian advertising industry. Grey bought Trikaya, Leo Burnett bought Chaitra, and FCB bought Ulka. The acquisition frenzy initially focused on advertising firms and then moved to digital advertising.

There are a few outliers, with independent advertising companies like Rediffusion refusing to succumb to pressures from international advertising networks.

Pressman Advertising became the first advertising agency in India to be listed on the stock exchanges in 1985. They did not, however, raise any public funds and followed the SEBI guidelines that allow SMEs and startups to list without going through an initial public offering.

When asked why they did not raise funds through an initial public offering, Navin Suchanti, director and promoter of Pressman Advertising, stated, “Our intent is to be known for good corporate governance and transparency, which will pave the way; for future opportunities.”

Pressman recently merged its operations with SignPost, a leading digital out-of-home (DOOH) brand. The other listed entities on stock exchanges include Affle (India), Vertoz Advertising, and Touchwood Entertainment.

Why do Agencies Opt to Get Acquired?

Taproot had spoken with every global advertising network before its acquisition by Dentsu in 2012. There are several reasons why global ad networks are actively scouting for creative boutiques.

The Dearth of Talent

With so many agencies, you’d think we’d never run out of talented people. That, however, is not the case. The talent gap has grown disproportionately with the growth of the advertising industry.

Most acquisitions are made for strategic reasons, as worldwide networks desire to partner with the most sought-after talent. In comparison to hiring, the acquisition increases the likelihood of them retaining them for a longer period of time.

Eroding Margins and Cost Controls

Bigger agencies are under pressure to do more work for less money in order to keep clients, and as a result, work quality decreases.

Independent agencies represent a new business model and pricing structures for the future for global advertising networks and their peers, which are legacy-ridden and are incapable of achieving it themselves.

Independent agencies are ready-made packages of revenue and client relationships that can be bought and added straightaway to their topline.

Support Structure

When asked why they decided to sell, the Taproot founders replied, “It’s a fast-moving world in which clients expect solutions to be provided overnight.

You can’t do everything alone in such a world. After two-three years, we realized that we are just creative guys, but we need support systems and expertise in areas like on-ground activation, digital, outdoor, etc. Having them in-house makes it much easier.”

With global advertising networks on their side, independent agencies are better positioned to focus on their creative work while outsourcing the rest to support systems provided by the larger network.

That explains why independent agencies usually opt to be acquired. But why do agencies don’t consider an initial public offering as a viable option?

Why Don’t Agencies Consider IPO as a viable option?

Profit margins for advertising companies range from 9 percent to 30 percent. Most agencies typically earn anywhere between 15% and 20% of their revenue. Agency business still relies heavily on people and word of mouth. To truly scale their business, agencies are increasingly considering productizing their offering.

If they succeed, the upside is that you keep increasing your revenue without adding additional overheads. But even when you productize the offering you can’t get rid of people. Because most client-agency partnerships still rely on human ties, people are the essence of the business.

The truth is that agencies do not require external funding; instead, they need a support infrastructure that allows them to scale more quickly while maintaining their financial agility.

Aside from providing a path to a partial or total exit for the founders, an IPO or acquisition adds little value from the client’s perspective. In response to WPP’s acquisition of Ogilvy, Young & Rubicam, Chairman Alexander Kroll said, “None of these megamergers has delivered a new idea for clients.”

Developer (Digital Agency)

So, aside from the reality that an IPO benefits neither the client nor the business, why should an agency bother? Because without the IPO, agencies are unable to retain the best talent.

When tech companies with stock options lure developers from agencies, agencies are left scrambling for talent. That explains why some of these tech sites load in milliseconds while banks, airlines, and other industries have sluggish websites.

In India, developers are in short supply. Developers who wish to work for a company that does not provide stock options are becoming increasingly scarce. Lee Clow, the man behind most of the iconic Apple advertisements, including the iconic 1984 campaign, has stated that advertising companies are “paid like they’re cleaning the client’s laundry.”

The finance industry’s aversion to agency IPOs is directly responsible for many of the awful sites we see today.

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