3 factors spurring this summer's agency acquisition spree

Both financial and personal motives are behind the spate of deals.

Photo credit: Getty Images
Photo credit: Getty Images

Summer is often a slow season for the public relations industry, but this year PR firms are being gobbled up faster than hot dogs at an eating competition.

Experts spot three factors driving the trend: agencies trying to build scale, the booming economy, and the encroaching retirement age of agency leaders.

"The marketplace is very active," says Rick Gould, principal of PR agency M&A consulting firm Gould+Partners. "We have another [deal] scheduled to close at the end of this month, and usually the summer is dead."

Gould’s competitor, Art Stevens of the Stevens Group, adds, "It’s like the Wild West in many ways."

"From my perspective and, sure, from my company’s, there really is a tremendous uptick in the interest," he says.

Just this week, Burson Cohn & Wolfe, itself the product of the February combination of Burson-Marsteller and Cohn & Wolfe, acquired creative shop HZ, which saw nearly $24 million in revenues last year.

Last week, FleishmanHillard combined its Boston office with that of subsidiary LPP, Clarity PR gained a foothold in the Bay Area by acquiring DRSmedia, and travel shop MMGY Global bought Grifco and its sister agency, Ophir.

And those are only the latest M&A headlines from a busy summer in agency acquisitions. Since mid-July, holding company Avenir Global has acquired Padilla, G&S Business Communications has scooped up CooperKatz & Company, Ruder Finn has bought RLA Collective, Endeavor Global Marketing has acquired Clifford French, and Huntsworth has made a deal for a majority stake in Giant Creative Strategy.

Both Gould and Stevens, as well as agency leaders, say there are factors driving the acquisition spate besides a rise in temperatures. For one, firms are looking to hit a sweet spot in size between boutique and multinational agencies.

Stevens explains that middle-tier PR shops have come to the conclusion that they must be larger to compete. "It is medium-sized firms under $10 million in net fee revenue, even those under $5 million, who are looking to make acquisitions," he said. "That never used to happen. It was always the bigger firms, but now even middle firms want to build critical mass."

Sami McCabe, founder and CEO of Clarity PR, which just purchased DRSmedia, thinks both buyers and sellers are spotting unmet demand.

"My sense is the smaller, independent boutiques probably sense the opportunity that we do to challenge the really big guys when it comes to serving clients across multiple geographies and offering a whole bunch of service options," he says. "There is a lot of client-side frustration in the way big agencies operate. So it’s a clear market opportunity and I think others see that."

McCabe says he decided that buying a firm was the quickest way to compete. "The fastest way to achieve our goals is to make an investment in an agency, giving us new locations and service offerings," he says.

Gould agrees that acquisition is the fastest path to growth. "To do it organically just takes forever," he says. "It’s more efficient and quicker to buy rather than build a firm in a new city. A buyer in Chicago who never bought before realizes he needed an LA office? He’ll get a return back on his investment back in a few years."

That’s why, Stevens says, smaller firms are the most popular targets.

"As far as size, it’s really anything from $500,000 in net-fee billing up to the sky's the limit," he explains. "A lot of smaller firms are of interest to buyers because buyers feel they can get a good deal and can get into a niche so they can add on to what they already have."

Both Gould and Stevens say smaller digital, tech, and healthcare agencies and, to a lesser extent, investor relations and crisis management shops, are the most popular items on larger firm’s shopping lists.

Stefan Pollack, president and CFO of Pollack PR Marketing Group, contends midsize firms are the popular targets, though he says the definition of mid-size varies. "It could be $3 million to $5 million or $25 million to $40 million, depending on who’s doing the acquiring," he explains.

Nonetheless, he says an acquisition is a great way to increase a firm’s pool of talent.

"There’s a tremendous amount of deep professional expertise housed in these firms," he says. "That's what these acquisitions are about."

A booming business cycle is another reason for the increase in deals, experts say.

David Speiser, former owner of DRSmedia and MD of Clarity’s San Francisco office, notes that when talking about his speciality, tech PR, the industry has reached another stage where acquisitions make sense.

"Anytime there is rapid growth, it seems like frequently what follows is some level of consolidation," Speiser explains.

For an acquirer such as McCabe, a growth period put him in the mood and the position to buy. "We had a tremendously successful 18 months and are hugely cash-flow positive, naturally growth orientated, and aggressive," he says.

Stevens adds that when smaller firms do well in a good business climate, they become more desirable targets.

"Buyers like to see clean records, ideally," he says, "Hypothetically, they like to see a firm increase revenue and profitability three or four years in a row."

Another factor behind the recent surge in sales: the age of the sellers. Often acquisition deals are written so owners have to earn their way out the contract by passing on institutional knowledge and smoothing out the transition from being independent to being part of a larger company. Gould says many owners are choosing to sell while they’re young enough to commit to an earn-out period and in turn make their agency more attractive to buyers.

"I think the boomer generation has a lot to do with the real spike in M&A activity," Gould says, "because boomers are coming of age in their late 50s early 60s, and they realize if they don’t sell soon they’re never going to sell. That’s why even a lot of smaller deals are very, very active."

Stevens says there are many reasons why agency owners are choosing to sell. It could be a domino effect, he adds, where owners watch other firms grow in talent and scale and decide they’d rather not compete with the newly combined, more powerful companies. However he notes that while some younger owners are selling, age is definitely playing a role in many deals.

"For small firms headed by a really young person, that person wants to see the process through and see to what extent they can grow their own agency," Stevens says. "But for people getting on in years, it is a consideration. They have to consider how to exit gracely and get some value."

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