Strategic alliances reap the rewards of a merger, not the risks

Partnership, alliance, affiliate network - whatever the parties want to call it, such deals can offer both large and small firms significant benefits without the risk of an all-out acquisition.

Partnership, alliance, affiliate network - whatever the parties want to call it, such deals can offer both large and small firms significant benefits without the risk of an all-out acquisition.

In the PR world, as in most businesses, mergers and acquisitions represent a significant risk. Just ask the holding companies and large firms that went on a spending spree right before the tech bubble burst: They'll tell you that buying firms outright is not necessarily all it's cracked up to be.

Still, there's a common axiom that it is much easier to grow through acquisition than it is to build new offices from the ground up. To hedge against this inherent risk, many large national and multinational agencies instead turn to so-called strategic alliances, strategic partnerships, or affiliate networks.

In some instances, the logic of these arrangements is clear. Why open an office in Alaska to service the Iditarod account when you can simply kick the local work over to an Anchorage shop?

From the perspective of the smaller firm, though, the incentive is not always so apparent. Why do established boutique firms choose to enter into strategic alliances with large agencies, even if the boutique's specialty precludes it from doing a wider array of work?

Most small agencies cite the "one hand washing the other" aspect of any strategic alliance. Brian Ballard, managing partner of public affairs firm Smith & Ballard in Tallahassee, FL, says mutual clients and acquaintances led to his firm's recently announced alliance with Fleishman-Hillard.

"Their unique need is to look at key, big state capitals and provide potential service to their public affairs clients," he says. "I need my firm to have people I can rely on, who are knowledgeable, who can help my clients in the capitals where I'm not."

He notes that the move made "ideal sense" because his firm makes many referrals to firms in the state capitals of Texas, California, and New York, as well as Washington, DC. In turn, any Fleishman public affairs clients that need work done in Tallahassee will be directed toward Smith & Ballard.

Indeed, the public affairs space lends itself especially well to strategic partnerships for two reasons. First, the relationship-driven nature of the business means that small firms can be just as effective as large ones, in many cases. Second, local firms often have an advantage in state capitals, where long-standing roots are highly valued.

Sawchuk Brown, a public affairs firm in upstate New York, formed an alliance with GolinHarris in 2001. "We refer clients to them and vice versa," says CEO David Brown, citing clients that had asked him for IR and other services that Sawchuk Brown doesn't provide. As an added bonus, some of his clients are able to expand their public affairs scope because of the firm's connection with GolinHarris.

"They figure, 'We can't afford the kind of work we need to do in DC,'" Brown says. "But coming through us, they probably get a better deal."

Not all strategic alliances are matches made in heaven, however. Jasculca/Terman, a Chicago-based public affairs firm that formed a partnership with Burson-Marsteller in 2003, did not end up receiving the expected benefits, according to president and CFO Jim Terman. "There just wasn't the activity that was anticipated by either party," he explains.

Although the agencies are still friendly, Jasculca/Terman is once again fully independent.
Art Stevens, a partner at the PR M&A advisory firm StevensGould, says strategic affiliations will always remain attractive. "Big agencies like to have dots on the map," he says.

And as smaller agencies seek to compete for larger accounts, Stevens notes that many are scrambling to form partnerships in order to demonstrate their reach to potential clients.

"More and more, independent firms feel they have to reflect greater depth, greater capability," he says. "There's a movement either to become affiliates of the majors or to join up with one of the networks... Alliances are something that's very hot right now."

The tech sector, which is rife with specialized boutique agencies, is also fertile ground for strategic partnerships. New Venture Communications, a technology firm formed a year and a half ago, has informal arrangements with Bite, Text 100, and other larger tech firms to refer clients that are too large or small to each other.

"[We say] when you know of companies looking for agencies that are a better fit for what we're doing than for you, please send them our way," says New Venture principal Rich Moore. "That's worked very effectively with quite a number of these [larger] agencies."

Advantages of strategic alliances

  • Mitigates the risk of spending the money on acquisitions
  • Offers geographic reach and diversification of expertise for large agencies, without having to invest in a new office
  • Gives smaller agencies the ability to tap into agency networks and refer clients to partner offices

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