Opinion: Consultancy consolidation is inevitable

The rumour mill is working overtime at the moment. Hot on the heels of a glut of pitches, M&A activity within the consultancy sector is apparently buzzing at a level not seen since pre-2000. Admittedly these rumours remain unsubstantiated and there's precious little ink actually drying on deals, but the Chime/Grandfield and Huntsworth/Incepta tie-ups seem to have whetted appetites, and many are predicting a bumper 18 months of acquisition and consolidation.

To some extent it is to be expected. No trend lasts for ever. The industry has been through a period of sustained proliferation, with a raft of agency start-ups. The hard fact is that there are too many players in the market and consolidation seems almost inevitable.

There's also no shortage of buyers, either from the UK or overseas. Plus the market has been given a boost by a number of private equity houses that are now showing interest in PR consultancies, as well as AIM-listed aggregator vehicles such as Cello, Media Square and Creston seeking to build volume revenue businesses in the marcoms arena. For these buyers, PR is likely to be an increasingly attractive option in the face of increasing regulatory pressures on the advertising industry.

Rumour has it that earnings multiples are also on the rise. Having sold at three to four times earnings, agencies can now look at multiples of six to eight. And there seems to be no restriction on size, with both larger and mid-scale agencies and boutiques under scrutiny.

But before vendors and buyers get too carried away, isn't it worth asking why?

From the seller's point of view, in hindsight a cheque usually doesn't turn out to be enough. The deal has got to represent a positive step change in the company's development. The PR consultancy business as a whole is facing an almost continuous recruitment and retention crisis, in particular at middle-management level. With a contracting number of senior openings available, it is almost inevitable that consultancies will lose senior talent either to in-house roles or even to other disciplines.

Buyers might also pause to question the sum of the parts purchased. Without a rationale beyond pure volume revenue, aggregators can be left with no obvious purchaser and shareholders can get nervous about the offering.

Just buying anything that moves is a short-term and risky strategy.

But if the rumours prove to be more than hot air, the consultancy world may look rather different by this time next year.

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