Acquisitions: Seal the deal

With the acquisitions market showing signs of a resurgence, Cathy Wallace and Calum Chace ask the experts for tips on selling and buying an agency.

It is fair to say the past couple of years have been quiet when it comes to acquisitions. The odd agency has been snapped up here and there - Quintus Public Affairs was bought by Luther Pendragon last December, and Pelham became Pelham Bell Pottinger in July after being bought up by Lord Bell's marcoms group. Huntsworth also acquired Tonic Life Communications in July 2009.

But the market has largely been quiet thanks to the recession and the big global networks such as Omnicom and WPP have been particularly subdued in the buyout arena.

Now things are starting to improve, we could be seeing more acquisitions in the future. Several groups are openly on the hunt, including Engine, which has just acquired Penrose Financial. 'This shows there is continuing activity in acquisitions,' says Alistair Angus, partner at S.I.Partners, which acted as advisers to the Penrose shareholders. 'We anticipate further deals in the UK, Europe and Far East during 2010.'

Here, PRWeek looks behind the scenes at two acquisitions and offers some expert views and tips on the process for agencies on the lookout, and agencies wanting to position themselves as buyout targets. We also examine the implications for agencies that are bought out. As John Saunders, who sold his agency to Omnicom (see case study overleaf) says: 'You have to be open to becoming a different person after the deal.'

CASE STUDY: PENROSE FINANCIAL/ENGINE

Acquisition: Penrose Financial

Acquired by: Engine (2010)

The courtship between Engine and Penrose was hardly swift. Engine CEO Sacha Deshmukh says the agencies had known each other for several years before even beginning talks about a possible acquisition.

'We knew each other, talked to each other about our businesses and got to know each other's business for about five years,' says Deshmukh. 'For us, the key thing is: does the agency have a particular expertise or approach? Penrose is a premier business in the financial sector and clients in that area think of it as a leader, so that made it an interesting business to look at.'

Gay Collins, CEO of Penrose, said when it became clear an acquisition was on the cards, the firm took on its own advisers, S.I.Partners: 'It tweaked some of the board roles, as there were a few things it felt would make sense for the business for the next stage of growth.'

This included appointing two managing partners, who were given responsibility for the operational side of the business.

This left the founding partners free to focus on strategy and client relationships. The financial manager was also made financial partner: 'We were advised to let the three of them take operational responsibility, more than they had been doing and in a more externally obvious way.'

Collins says having an external party examine the business was valuable as a form of MOT, as the advisers looked at the company in great detail before writing a memorandum.

She advises firms that are planning to prepare for acquisition to be honest about their businesses and warns against trying to change the business before a buyout: 'A lot of acquisitions fall through, so don't try to make yourselves look prettier just to get a deal done. Focus long-term, not short-term.'

Unusually, there was no earn-out period incorporated within the deal, which Deshmukh says is a policy of Engine's: 'We believe an earn-out incentivises the wrong behaviour,' he says. 'We want, from day one, to incentivise everyone to use the expertise within the business. If you have an earn-out, you have one group of people who might want to keep every penny for themselves rather than use expertise from within the group. They would not become part of the team.'

CASE STUDY: FHS/OMNICOM

Acquisition: FHS (Fleishman-Hillard Saunders)

Acquired by: Omnicom (2001)

John Saunders was first introduced to Fleishman-Hillard in the 1980s when working for Anheuser Busch in Ireland.

A year later, Saunders' agency, Pembroke, became F-H's Irish affiliate.

Upon leaving Pembroke, Saunders persuaded F-H to sign a joint venture with him. Saunders and F-H CEO John Graham struck a deal whereby, for the first three years, every year Saunders hit his aggressive growth targets, F-H gave him three per cent of its 50 per cent stake in Fleishman-Hillard Saunders. A few years later, F-H was sold to Omnicom. Saunders had the right to buy back F-H's shares in the joint venture, but decided to remain in partnership in the hope of becoming the leading PR firm in Ireland.

Saunders decided to enter into exclusive negotiations with Omnicom: 'As an affiliate, I got to see what it was like and I felt that I shared its values.

'F-H included me in discussions and shared information with me that I had no right to expect, given that F-H held only a minority share.'

Saunders entered into negotiations with Noel Penrose at Omnicom, rather than negotiate with Graham, who had become a friend: 'John said we are friends and we are going to stay that way, so I am not going to do the negotiations. When you're an entrepreneur, the company is your baby and it gets very emotional.'

Saunders advises spending time checking that the chemistry is right: 'I see people doing deals but know they will fail because the people involved have nothing in common.'

He says the idea of becoming part of a large network initially made him anxious about 'losing certain freedoms associated with being my own boss'. But he adds: 'Omnicom could not grow and be successful without having the ability to provide an environment where entrepreneurs can thrive after they have sold their own businesses.'

Saunders now heads F-H's continental European operations.

From Omnicom's perspective, Penrose and Tom Harrison, CEO of Omnicom's diversified agency services group, say Saunders' agency was attractive because of Graham's confidence in Saunders.

Harrison says Omnicom's style of deal-making is based on relationships and trust. 'We work hard to ensure the chemistry is right. We buy talent, not revenue, so we have to get that right. The founders of most of the businesses we have bought have stayed with us.'

When negotiating the deal with Saunders, one unusual step Penrose took was to identify and recommend a new financial manager for Saunders' business. A number of management factors will make an agency more attractive to Omnicom. One is a clear succession plan, so that when the earn-out is complete founders can move to management roles within the Omnicom group, as Saunders did.

But Penrose and Harrison warn that those joining Omnicom must be prepared to work on relationships. Penrose says: 'We can do a lot to help agencies and give them a platform, but they have to mine the network. It is not just business by email - they have to build their own network of trust.'

Additional reporting by Calum Chace, a consultant with marketing services advisers S.I.Partners

TOP TIPS FOR AGENCIES THINKING ABOUT SELLING THEIR BUSINESSES

Be clear about your goals. Are you building a relationship, or just completing a transaction? The two are very different things.

If you want to build a relationship, do not underestimate the importance of chemistry.

Get good advice and delegate parts of the process completely. If you are not familiar with warranties, restrictive covenants, due diligence and all the jargon, ask for help from someone who is.

Be open to becoming a different person after the deal and ensure you will be comfortable operating in a corporate environment.

Extracting the last ounce of value from the deal is less important than building relationships that will sustain the business in the future. Try not to get over-emotional about the technical aspects of the contract.

Have a unique selling point. This could be the sector in which you work, or the way you run your business. A well-run business is essential but think about what makes you different and stand out from the crowd.

PR yourself. Often PR agencies forget to focus on their own PR, but awards and being featured in trade press show you can handle your own PR.

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