Are Adland's Small Holding Companies the Next Big Thing?

Small and Mid-sized Players Surge Into an Industry Gap

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Project Worldwide, the 30th largest agency holding company, announces its latest acquisition, Pitch, on its website.
Project Worldwide, the 30th largest agency holding company, announces its latest acquisition, Pitch, on its website.

In the past year alone, Peter Clark and Edmond Huot have gone on a shopping spree for CHR Group, a tiny but ambitious ad agency holding company that they're building from the ground up. Chicago private equity firm Lake Capital bought the larger, U.K.-based Engine Group to build a global network of agencies under the Engine name. And four-year-old Project Worldwide added Burger King creative shop Pitch to its growing roster of shops.

A surge of small and mid-sized agency holding companies is being fueled by a mix of ingredients. A healthier economy is providing more buyers and sellers, for one thing, while marketers are demanding more integrated services and close agency attention.

"There's quite a big void in the middle between the independents and the massive networks," said Keith Hunt, managing partner at M&A consultancy Results International. "In the U.S., one would have expected to see more of these."

Although many of the M&A deals in which small companies come together or do one to two deals a year haven't given rise to mini holding groups, that's changing, Mr. Hunt said. "There's a lot of money available, and client-driven need to diversify services and geographic reach."

The small to mid-sized network is popular among a growing number of private equity firms excited by the high growth potential of digital marketing, he added. And the market is generally ripe for activity. "Interest rates are very low," he said. "Money needs to find another home rather than fixed income."

More services on the shelf
Mr. Clark had been running a boutique shop in Canada before embarking on a holding company strategy in late 2011. "We were offering a wide range of services, but more and more needed a shelf to go to and pick items to sell to clients," he said. "I needed to be able to compete better."

Potential acquisition targets have found similar reasons to sell. "Whether it's PR or digital agencies being asked to do more brand work or advertising agencies asked to do programmatic buying, change makes people nervous," Mr. Clark said. "We came along with a vision that says, let's bundle services, build a group together and be stronger."

Based on advice from a friend in finance, Mr. Clark decided to keep CHR independent -- meaning building its holdings without financial backers. The company has grown instead through acquisitions that offer sellers equity in their new parent. It's also gone after targets that are still very small. Its 15 acquisitions in Canada and the U.S. would suggest otherwise, but the network is barely pushing 100 staffers.

That could change soon, however, as talks proceed with two "well known" ad and experiential shops counting 60 to 80 staffers each, according to Mr. Clark. And while CHR only recently surpassed $10 million in annual revenue, it expects to more than double that by year-end and top $75 million soon after, said Mr. Clark. The goal is $100 million within the next 36 months.

In the shadow of giants
Lake Capital said its move to buy Engine and turn it into an agency umbrella was designed to fill a void in a business where huge players like WPP Group, Omnicom Group, Publicis Groupe and Interpublic Group make most of the headlines. Publicis and Omnicom struck a deal in 2013 to merge into a new No. 1 agency holding company, surpassing WPP, but abandoned the effort this year.

"Our thesis is that pre- and post- the Omnicom-Publicis merger and lack of completion, there's a real opportunity to create a middle-market player in the space," Lake Capital co-founder Terry Graunke said as the company bought Engine, defining mid-market as an operation with revenue from $500 million to $2 billion. WPP, by comparison, had $17.25 billion in global revenue in 2013.

Engine's network already included Deep Focus, Noise and other agencies when it was bought. Lake Capital had entertainment shop Trailer Park, research outfit Orc and Mischief PR. "The world is begging for content, specifically digital content," Mr. Graunke said then, "and when you look at Trailer Park combined with Deep Focus, that creates a huge digital content play."

Engine now has combined revenue of north of $400 million, the company had told Ad Age. Lake said in July that it expects to make additional acquisitions over the next 18 months.

"It really is an alternative for the market, and it's an alternative for the marketer," said Phil Palazzo, founder and president of M&A firm Palazzo Investment Bankers, of the smaller agency networks. "15 years ago, I'd say 80% of the transactions were driven by five companies. Today, those five companies may be doing 10% to 15% of the transactions. They've grown enormously over the last ten years, so as a result, there are people looking for alternatives." At the same time, smaller networks are "aggressively piecing together PR, social and digital advertising," he said.

Sometimes agencies would rather be bought by a smaller holding company than one in the top tier. Like CHR, small buyers are more likely to use equity in the parent as a currency and less likely to pay with cash and "earn-out" incentives tied to the acquired agency's future performance.

That can affect the culture, said Deep Focus CEO Ian Schafer, who sold his U.S. based social shop to Engine in late 2010. "I'm an outspoken dissident of earn-outs," he said.

Becoming targets themselves
Project Worldwide began with the 100-year-old experiential shop George P. Johnson. The group now has over 2,000 staffers, has built Argonaut from scratch and has acquired more than five shops, including Partners & Napier and Australian shop Spinifex, over the past few years.

It's now the 30th largest ad holding company, according to Ad Age's DataCenter, with 2013 revenue of $275 million. The model has served the group well. A quarter of the total revenue is interagency revenue, or revenue coming from cross-agency projects, said Project Worldwide CEO Robert G. Vallee, Jr. Although the group was down 1% in 2013, this year it's on track for 8% to 10% growth, he said.

As integrated agency networks grow, so too can the appetite among larger players to buy them. But small holding companies, often driven by an entrepreneurial spirit, aren't always willing to sell.

"We don't talk about selling. It just isn't remotely on our radar," said CHR's Mr. Clark. If it was, "it would never be to one of the traditional buyers." There's no need to sell if the group can continue to grow and maintain its profitability, he added.

"I don't have interest in selling to one of the large holding companies," said Mr. Vallee. "We have the ability of making money to acquire and organically develop new agencies."

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