The flurry of industry M&A around the turn of the year suggests that 2011 could finally see large-scale consolidation in a fragmented UK PR industry.
Already, the first few weeks of 2011 have seen a number of specialist comms shops banding together - Four Communications taking over travel agency BGB, financial shop Tavistock acquiring Conduit and Brando merging with Band & Brown.
These deals, together with a raft of M&A in the final months of 2010, give credence to the view that the UK PR industry is entering a period of consolidation.
Key industry figures believe the outbreak of M&A is likely to be defensive in nature, with smaller agencies sharing resources and cutting costs to fight through the downturn.
Lord Chadlington, chairman of Huntsworth Communications, commented: 'Some have found the past three or four years quite difficult and I think a lot of the deals that are currently coming through are defensive.'
Tony Langham, founder of Lansons Communications, insisted that the argument for independence remained compelling, but that margins were sharply reduced across the industry. 'Most of the recent agency deals have been defensive in nature and are a direct result of squeezed margins,' he said. 'Many agencies are no longer delivering 15 per cent margins and are looking very carefully at their costs, which is pushing them into mergers.'
Industry consolidation has been widely predicted since the start of the recession, with a host of agencies tipped to be seeking buyers and agency bosses regularly reporting approaches.
One agency boss argued that the consolidation was primarily happening among agencies that have failed to find a significantly larger buyer and so decided to integrate with another business instead.
He added that the acquisitive appetite of the big comms groups had noticeably waned in recent years.
However, Lord Chadlington predicted that the lower-end consolidation was likely to lead to more significant deals among the bigger players as the year progresses.
'Larger companies are no longer looking for bolt-ons, they want companies with more than 100 people that are not dependent on one individual,' he said.
M&A time line
- January 2011: Financial PR consultancy Tavistock acquires fellow City agency Conduit; Band & Brown Communications merges with sister PR agency Brando; APCO swoops for corporate PR agency Eloqui; Four Communications buys BGB
- December 2010: Redleaf Communications buys financial agency Polhill Communications
- November Hill & Knowlton reveals it is to merge with sister WPP firm Public Strategies; Biss Lancaster merges with sister advertising shop Euro RSCG London; Lansons acquires public affairs shop Foresight Consulting
- October Engine merges its Mandate, Hogarth and Penrose Financial brands.
4 - Number of agency deals already completed in 2011
14.3% - Average operating margin for top 40 independent agencies in 2009*
17.3% - Average operating margin for same 40 agencies in 2008*
75% - Consultancies showing a decrease in operating profit in 2009*
*Source: Kingston Smith W1's Financial Performance of Marketing Services Companies 2010
HOW I SEE IT
A buyer and a seller give their perspectives on how they see the M&A market progressing
Nan Williams, Group chief executive, Four Communications Group
The major trend is towards integrated briefs - from the public and private sector. Clients no longer just want a great PR campaign - they need all the content to support it from digital assets to film, and design to copy, and need social media integrated into their mainstream work, not handled separately in some 'social media silo'.
For standalone specialist boutiques, it takes a huge investment to deliver all those services effectively, so there is a real move to find partners who can provide those extra services while letting their specialist practice flourish.
Where we are seeing most activity is in small and medium-sized specialists looking for partners who can provide that integrated service, but allow them to continue to follow their passions and run their own show in their specialist area.
Andrew Sharkey, CEO, Redleaf Polhill
I believe that in the next two years we are going to see a lot of M&A activity between PR and marketing firms.
Some firms have scraped through the recession and downsized, and if they want to rebuild as we move into the upturn they will need a stronger home. There will be some companies searching from a position of weakness, having just got through the recession but seeing an upside if it can be part of a larger company. Other healthier and more robust companies will be looking to merge with firms that can offer a wider range of services to clients.
The very large firms will start to become more acquisitive again. When the upturn comes, they will be looking for specific opportunities to purchase medium-sized companies that are able to offer additional services or bolt-ons to what they already have.