Sectors: Creative, Media & Technology

US private equity firm has purchased a majority stake in UK digital ad agency group MSQ, promising further deals. MSQ, the parent company behind design agency Elmwood, and B2B shop SteinIAS, has been acquired by an American private equity firm, One Equity Partners. The group has expanded rapidly in recent years following a cash investment by private equity firm LDC in 2019, when the company was valued at £37.5m. In contrast, The Sunday Times estimates that One Equity acquired its majority stake for £170m. After a series of acquisitions – including Elmwood, Be Heard and Brave Spark – MSQ’s annual revenues rose to £125m, with an EBITDA (earnings before interest, tax, depreciation and amortisation) of around £20m, representing a fourfold expansion. Peter Reid, chief executive officer of MSQ, said that the deal would allow it to grow even further. “It’s been a highly successful four years at MSQ and there is huge potential and ambition to do more to build on our capabilities and footprint to enhance existing client relationships, attract new business and retain, develop and grow our team. “The structure of the deal and the players involved will give us access to greater resources to extend our global offering, invest in talent, technology and services and position ourselves as the leading next-generation partner for the world’s leading and most ambitious brands through the continued successful integration of insight, data, technology and creative.”

Further deals expected

In recent years, the company has focused on expansion into the US market. A company spokesperson signaled further M&A activity could follow shortly, saying that “a number of potential add-on acquisitions have already been identified and are under evaluation.” Barry Dudley, partner at M&A advisory Green Square, told The Drum: ”This is a great story showing how private equity can help accelerate a business forward and what feels very compelling here is that the growth has come organically as well as through acquisition. ”Just buying things will clearly make a group bigger, but it’s how you integrate these businesses, invest in them, lead and manage them, that will take performance to another level. It looks like Peter and his team have done a great job. To date, they have bought cleverly and arguably in a relatively below-the-radar way. With One Equity Partners now in the mix with their Madison Avenue head office, the focus is shifting to the US and also to Europe where they have offices in Germany and the Netherlands.” He added: ”My money is on a statement acquisition, something high profile, being high on their target list.”

New backer

Founded in the US, One Equity Partners previously served as the merchant banking arm of American banking giant JPMorgan Chase (in 2014, JP Morgan sold half its stake in the business). Dr Jörg Zirener, senior managing director of One Equity, said: “MSQ’s business model and strategy provide a fantastic platform for future growth and we look forward to working with the excellent team there in accelerating the vision of creating a leading international digital, tech and creative group. “With our experience and successful track record in buy-and-build transactions as well as our international set-up, we feel that we are well positioned to help the management of MSQ to develop the company into one of the leading global digital agencies.” MSQ’s earlier private equity backers, LDC, retain a minority stake in the company. John Clarke, investment director at LDC, said: “MSQ is a phenomenal business and it’s been great to work alongside [Reid] and his team as they’ve built one of the most dynamic international groups in the market. There is still so much more to come for MSQ and our ongoing investment is testament to that and the quality of the team onboard.” MSQ was first established in 2011 and has a global workforce of 1,200.

With speculation growing that Vice Media Group is on the brink of bankruptcy, we explore what could become of its creative and content agency. As its parent company seeks a sale to stave off collapse, the future of agency Virtue has been thrown into doubt. The agency employs hundreds of staff across 21 offices worldwide and has carved out as formidable a reputation in adland as its parent company has in publishing. Its ‘Backup Ukraine’ campaign released last year, for example, brought in armfuls of industry awards and saw the company in the top 30 agencies on the planet in The Drum’s World Creative Rankings. Vice is currently exploring a sale to five potential suitors, according to The New York Times, in order to avoid filing for bankruptcy. Earlier reports suggested its owners sought a sale to help the new media company grow sustainably after it missed revenue targets in 2022 by $100m. Should that effort fail, bankruptcy would lead to an auction for the company’s assets – including Virtue. Would it be viable as a standalone agency, if a buyer amputated the business from the wider Vice group?

Is Virtue viable alone?

According to M&A expert Tony Walford, partner at Green Square, Vice’s quest to find a buyer doesn’t necessarily reflect on Virtue. “I’m not surprised that it has been hard to find a buyer for the Vice Media Group as a whole, primarily because of the diverse nature of its operations – from news, to ad creative, entertainment platforms, TV and feature film production, distribution of the content it has created and more,“ he says. “Many acquirers will likely want some of these capabilities and assets, but not all. But if you separate any or all of them does the sum of the parts end up at a value lower than the whole? One has to question if there’s some co-dependancy.“ The agency’s connection to the media company is both pro and a con, he notes. “Virtue will probably have won some pitches simply because of the connection to Vice – the halo effect. It will have won work because of the unique cultural insight and expertise it can bring from elsewhere in the group. “What if it no longer has access to this? Or has Virtue been though childhood and adolescence and matured into an adult that can now master its own destiny, with this being a new chapter in its story?“ Rebecca McKinlay, managing director of the Financial Times content studio Alpha Grid and formerly head of The Economist’s Impact outfit, says such an outcome is possible, but difficult. “Virtue has a great client base and it has got very strong creative credentials… it has got an opportunity to stand up as a standalone creative agency or creative content agency. But as we all know, that’s a massively competitive market.” “What is that differentiation when it’s not ‘powered by Vice’? It’s a very hard thing to differentiate in a marketplace when you’re talking about culture and creativity – because so many others are.” Virtue has established a heavyweight reputation among a set of peer agencies created by rival publishers, including names as diverse as The New York Times and LadBible. Business consultant Mark Sandford, who helped to establish Shortlist Media’s in-house creative agency Family, says: “They have got a great reputation in the market as great content creators for brands.” There’s a future for the business, he says, “if brands are still confident that they can deliver on what they want. Their big thing is reaching young people authentically and making sure that the content they’re putting out is relevant and engaging, and they are very good at that. It’s something they can certainly build on for the future.” And though Virtue operates in a competitive agency space, he suggests Vice’s connection to younger audiences has given it a “leg up” that could provide a distinct foundation even after a potential separation. Publisher-owned agencies are, however, very closely tied to their parent companies. McKinlay notes that “for a business like Alpha Grid, truly our differentiation is our ownership by the FT. There are no other creative businesses owned, supported and invested in by the FT.” As such, “the majority of our clients come to us via the FT… to reach its audiences of C-suite decision makers and financial influencers. That has historically always been the majority of the business. “We do work with clients that might not want to spend on FT.com and want content for their own channels. That’s where the real competition lies because any agency can build content for clients and lots of clients can do it themselves.” Though the studios have different clientele and different target audiences, she says the principle applies to Virtue, too. One media executive, who asked not to be named, was skeptical Virtue would be attractive to an acquisitive agency group without its umbilical cord to Vice. “Would anybody buy it? I doubt it very much. I can’t see any of the agency groups buying it. I don’t know what you would buy.” The primary temptation for a potential acquirer, they suggested, would be the agency’s talent. “There may be individuals within [Virtue] that have specific knowledge of certain formats. The speed of being able to turn around content on social platforms, the whole idea of being able to generate engagement… most creatives in agencies, even the cool ones, wouldn’t be able to do that.” It’s not just the association with Vice’s brand. The publisher’s access to first-party data is an invaluable aid to creative agencies like Virtue, says Sandford. “The advantage of having real first-party audience insight is great for forming those ideas and making sure they get the best outputs,” he says. Vice may yet reach an agreement with a buyer that takes the entire group, keeping Virtue and its parent company intact. But even then, Virtue will likely come up against heavy competition from other agencies hungry for its share of youth-focused brand budgets. “No one can rest on their laurels,” says McKinlay. “Innovation across formats, across messaging, deployment of AI, you do need money for all of those things.” Sandford agrees that Virtue will likely find other agencies parking their tanks on its lawn. “Without investment… other agencies are going to be looking and saying: how can we replicate that? They’re going to see a gap in the market to counter what they’ve done.” A Virtue spokesperson declined to comment for this story. 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A recent ‘flurry’ of deals for specialist influencer agencies indicates the sector has become important industry crossroads, say M&A experts. British holding company WPP made two significant deals late last month. It acquired Obviously and Goat – both agencies active in the social and influencer space, both in the same week, both with the intention of making its established flagship networks GroupM and VMLY&R more competitive. The timing might be a coincidence, but the deals themselves aren’t. Indeed, they’re a sign that confirms the industry’s biggest players have come to see the influencer sector as a serious business. According to Barry Dudley, partner at media and marketing M&A advisors Green Square, WPP’s pair of deals showed the agency giant was fighting to keep up with competitors. “When these two landed, it looked to me like WPP was playing catch-up. They bought probably the two biggest [agencies] they could get their hands on… and they’re not going to go hungry for work,” he says. “They’re good things to have bought, it just feels like they got to the party quite late.” Before WPP’s move, Publicis Groupe sprung for Perlu, while S4 acquired XX Artists last year. Across the Atlantic, Omnicom launched LevelUp OAC, an influencer and gaming practice. Green Square analysis shows that in addition to Obviously and Goat, the last six months have seen agency acquisitions by a range of groups in a lower weight class – including deals for Social Chain by Brave Bison, Born Social by Croud and Populate Social by Mission Group. There’s also been activity from lesser-known names such as Keywords Studios, Dolphin Entertainment and Velstar. Farther back, you might look to Plus Company’s deal to merge Singaporean influencer shop Kobe into We Are Social. Read more  

Columnist Nick Berry of M&A advisory practice Green Square sits down with Engage Interactive’s Alex Willcocks to find out what B Corp status has meant for the digital agency. Back in August, I wrote about how environmental and social credentials are an increasingly important value driver and influence on M&A activity. Since then, there is no doubt that both the backlash against greenwashing and demands for agencies and clients to show true sustainability commitments are growing stronger. London has now been dubbed the B Corp capital of the world and the UK has over 1,000 B Corps, with more businesses seeking accreditation all the time. In the agency world, Havas was an early champion of the B Corp movement and was accredited in 2018. Xavier Rees, chief executive of Havas London at the time, said: “As well as being the right thing to do, there is a substantial business benefit to B Corp. With people increasingly environmentally and socially conscious, and with global clients now expecting their suppliers to have a point of view on these issues, B Corp certification will be a key differentiator when attracting both talent and new business in an increasingly competitive environment.” This message resonates even stronger, five years on. Agencies have always acted as a barometer of the public’s consciousness. They are in a powerful position to lead clients in the right direction towards real change and true sustainability, as opposed to tokenism and empty promises to which consumers are now wise. So, I caught up with Alex Willcocks, chief exec of Engage Interactive, a digital agency based in Leeds, to get under the skin of how the process of becoming a B Corp has helped support and enhance its internal culture and external perception.

So Alex, tell me what made Engage become B Corp certified?

“B Corp first appeared on our radar in early 2020, at which time only around 300 UK businesses had become accredited. There were some brands I already admired on the list, such as Alpkit, Cook Food and Patagonia, which made us look further into the certification. On digging deeper, it was reassuring to see we were actually already doing a lot of the things B Corp is looking for. Naturally, we had a number of areas to work on and improve, but it was definitely a door half open, which gave us the confidence to proceed with the full process.”

Has B Corp status helped to attract and retain staff?

“It certainly helps attract and recruit the right kind of people, who are looking for a more holistic work experience versus perhaps being solely motivated by salary. “Churn is one of the biggest costs to a business. Not just in money, but also in disruption and time to onboard and integrate. That’s why keeping an engaged and happy team is so important to me. Going through the process encourages you to improve your workplace diversity and inclusivity as you strive to score better in these areas, helping you make sure everyone in the business feels valued and has a sense of belonging. It’s also proven that businesses with highly engaged employees are more likely to significantly outperform their industry peers in terms of growth in profit.”

How did clients react to the news?

“The reaction was unanimously positive. We try to work with brands that are in some way making their own positive impact, be that through B Corp or other initiatives. Many of them were therefore already familiar with the process, so appreciated the effort and time taken to get certified, which ended up being about 12 months from start to finish.”

Has B Corp status changed the way you do business or look for new clients?

“It’s definitely helped shape our new business strategy. Our vision is to become the digital agency of choice for brands using business as a force for good. Our growth plan, therefore, has a clear focus on getting on the radar of more brands that align with this vision and speaking to them about how we can fuel their growth online through the three core pillars of our offering; people, purpose and performance. Each pillar’s legitimacy is supported by a relevant accreditation, so for our people that is our Great Place to Work certification; for our purpose, it is our B Corp Certification; and for our performance, Engage is the UK’s highest-rated B Corp Agency on The Drum Recommends. We’re confident this will be a compelling enough story and proposition to attract more like-minded clients to work with us and enable growth while ensuring that we deliver exceptional service to our existing clients and retain them.”

Any concerns about the movement?

“While the B Corp movement is still relatively small, it’s definitely gathering pace and is one of the most common topics I get asked about by other business owners and brands. Some people have concerns over what happens when B Corp is just something every business has and becomes less of a differentiator. Personally, I think that would be fantastic because if there are more businesses with B Corp, there are more better businesses. The other way to look at it is you risk getting left behind in a competitive market, you may struggle to attract like-minded talent and could miss winning key contracts as procurement starts to ask for certifications such as B Corp as a prerequisite to pitch.”

What has been the biggest benefit of achieving B Corp status?

“I’d have to say the network it has opened us up to. The wider UK B Corp community is very active through the ‘B Hive’ (get it?) and there’s a genuine passion for championing and growing the movement. More locally, the community has put us in contact with some fantastic companies, all of which have a similar view of the world and want to make a positive impact.”

What will this achieve in the long run for Engage?

“I just hope it legitimizes Engage as a business that cares about how we do business. This in turn should help us attract the right kind of people to join us and the right clients to want to work with us. And if you’ve got great clients and a great team, I think that’s something to be proud of.”

Evolution rather than revolution

A lot of the points cited by Alex above are fundamental to building a solid business. So becoming a B Corp seems more like evolution as opposed to revolution from a company culture perspective. This naturally underpins a solid platform for growth and, when the time is right, will ensure many ticks are in the right boxes for acquirers. There is a growing number of examples in a variety of sectors where acquirers have targeted B Corps. Unilever was proactive earlier than most, with five different B Corp acquisitions in 2016 and 2017. Other conglomerates have followed suit and actively encourage their brands to pursue accreditation. Coca-Cola’s Innocent Drinks obtained B Corp status in 2018 and Danone proudly promotes the fact 70% of its group global sales are now from its various B Corp entities. Banks through to private equity firms are now using the B Impact Assessment to review their internal activities and that of their portfolios. So as acquirers become more comfortable with what’s involved in obtaining B Corp status and what it means operationally, this will help in due diligence. They will understand the rigorous assessment that has already taken place in key areas and it will help agencies stand out as well-structured, progressive and differentiated. Read more

Green Square’s Barry Dudley looks into the performance of the big agency groups following their annual earnings presentation. Our topsy-turvy world continues to spring surprises on us. Silicon Valley Bank’s collapse is the latest shock wave. Meta, the owner of Facebook, Instagram and WhatsApp, has just announced that another 10,000 redundancies will happen over April and May, to go with the 13% cut (around 11,000 people) announced back in November. It has been reported that Alphabet, Amazon, Meta and Microsoft will be hit by over $10bn in costs as a result of their collective lay-offs, alongside property and other restructuring costs. Is there any light at the end of the tunnel, you might wonder? I’d argue that this reset across the big tech world, painful as it may have been for the people that have been cast aside, is going to make for stronger businesses in the long term. We need innovation, invention and advancement, but the ability to deliver this has to be protected by creating a strong business platform, with the right environment, culture, systems and processes. And this is where I believe these tech players can learn a little from the big marketing groups, which have worked their way through many crises over a lot of years, investing in talent, culture, tech and operations. So, while you might assume things will not have been pretty at WPP or Publicis, I think you may be surprised. They have faced and still face plenty of challenges, but here’s what we found from taking a look at some earnings presentations. Please bear in mind that there are many ways to define revenue, nuances to the calculation of like-for-like, underlying organic growth and adjusted versus unadjusted profits, to name just a few areas where businesses analyse things differently. And then there are the different currencies that may have worked to the favour of one and to the detriment of another. Thus, I’ve not sought to compare the businesses, but what seems clear to me is that all these groups are doing pretty well. See what you think.

WPP

WPP is the biggest of the groups by revenue, which grew to £14.4bn from £12.8bn – 12.7% growth, with 6.7% like-for-like growth (sometimes referred to as underlying or organic growth, as it takes out the impact of acquisitions or dispositions, as well as foreign exchange movements). Headline operating profits of £1.7bn at a slightly improved margin of 14.8% against revenues less pass-through costs. A very impressive 114,000 staff worldwide, which is some way beyond the 60,000 to 70,000 people that I calculated Meta will have post redundancies. It is planning further simplification of the group; its ”transformation savings” of £375m is ahead of plan. It has been reshaping the business for some time, so these aren’t the result of knee-jerk reactions. ”All major agencies grew” and there was ”good growth across most major markets,” it announced. GroupM is still a powerhouse within WPP, commerce media and connected TV being key drivers for it. Ogilvy (creative) and Hogarth (production) also performed strongly. PR performed well too, with ”strong demand for strategic communications”. ”Experience, commerce and technology” were commonly referenced growth areas, which may be a clue for the destination of the £237m that’s earmarked for acquisitions. Outlook for 2023: ”Like-for-like revenue less pass-through costs growth of 3-5%.”

Publicis

The heading of the first slide of their investor presentation sets the scene – ”2022: Another record year”. Net revenue was up 19.9% to €12.6bn from €10.5bn, with underlying organic growth of 10.1%. Operating profit was €2.3bn at an 18.0% margin on net revenue. These are an impressive set of results. What it says lies behind this is its ”unique revenue mix: capturing shift in client spend to 1P data, digital media, commerce and DBT”. A third of the group’s revenue and half of the growth comes from ”data and tech” with Epsilon and Publicis Sapient at the very heart of it all. Media (double-digit growth) and creative (mid-single-digit growth) collectively represent the other two-thirds of revenue. Europe saw the strongest growth, US was next, then APAC. Growth was ”+38% organic in Q4 for UK, led by Publicis Sapient”. And there was an interesting point within its margin improvement narrative: ”record high bonus pool for the second year in a row, one-week additional salary in November”. Investment in talent is fundamental to this sector and, having seen a wave of people running towards heady packages with the tech giants, I think it’s clear we are going to see things swing back the other way. Outlook for 2023: ”Confidence for 2023 despite global macroeconomic uncertainties’ with ‘organic growth +3% to +5%.”

Omnicom

At face value, it would appear Omnicom stood still – revenue remained unchanged at $14.3bn. But when adjusted for businesses acquired and disposed of in the year (and foreign exchange movements), there was organic growth of 9.4%. Non-GAAP Adjusted Operating Profit margin was slightly up at 15.4% ($2.2bn) from 15.0% ($2.1bn). From its ”revenue by discipline” analysis there were some key themes in 2022 – ”advertising and media”, which represented 52% of the year’s revenue, had healthy organic growth of 7.3%, but precision marketing saw an impressive 17.1% organic growth, experiential 26.1% and public relations 13.7%. Middle East & Africa, Latin America and the UK saw double-digit organic revenue growth, with the United States (51.6% of total revenues), other North America and Europe all having high single-digit growth. APAC was the slowest growth market at 6.6%. Omnicom’s ”Business Update” referenced ”continued investment in retail media, data clean rooms and connected TV”. Outlook for 2023: ”Planning for macroeconomic uncertainty, with confidence in the flexibility of our business.”

Interpublic Group

IPG summarised its performance as ”a strong year, notwithstanding general macroeconomic concerns”. Revenues before billable expenses grew from $9.1bn to $9.4bn. This was a 3.7% increase, but the underlying organic growth stood at 7.0%. Operating income margin on revenues before billable expenses saw a slight decline to 14.6% ($1.38bn) from 15.8% ($1.43bn). Each of IPG’s business segments had broadly the same organic growth: specialised communications and experiential solutions at 8.5%, integrated advertising and creativity-led solutions at 7.1%, and media, data and engagement solutions at 6.4%. Organic net revenue growth was achieved across all geographies, with UK at the top of the list at 9.4%, followed by all other markets, continental Europe, Latin America and Asia Pacific, with its largest market – the United States – growing the least at 2.4%. Outlook for 2023: ”Continued focus on driving growth, building on our industry-leading foundation.”

Dentsu

Another record breaker! With 14.4% growth, Dentsu has achieved ”record-high” net revenues of Y1,117bn. This is partly down to organic growth that sits at a more modest 4.1%, partly due to acquisitions but also positive foreign currency impact that was greater than organic and acquisition-based growth combined. Underlying operating profit on net revenue was 18.2% at Y203bn, which was fractionally down on 2021 (18.3%, Y179bn), although excluding Russia it was fractionally up at 18.4%. As with other groups, organisation simplification and property rationalisation were important margin factors. Customer transformation and technology (CT&T) and media in international markets were performance drivers. In 2022, CT&T represented 32% of net revenues, with advertising, media and creative being the balance. The 2023 target is for CT&T to be 50%. And since its results presentation, Dentsu took a big step towards this target with its acquisition of Tag. Geographic growth has some similarities with other groups – EMEA the strongest at 9.7%, then Americas at 6.1%, APAC at 2.5% and the home market of Japan at a mere 0.4%. Outlook for 2023: ”Macro outlook remains uncertain, but guidance of c.4% organic growth.”

Havas

Havas’s results sit within Vivendi’s, but they are by no means lost – alongside Gameloft, a mobile video game developer, Havas is a bit of a star in the bigger group. Net revenues grew 15.8%, 6.8% organically, to €2.6bn. With eight acquisitions it was a ”record year” for M&A. EBITA (earnings before interest tax and amortisation) showed a similar profile with growth of 19.7% to €239m (organic growth 8.8%). Latin America was the key organic net revenue growth region at 13.6%, followed by Europe at 7.6%, Asia Pacific and Africa at 5.8%, then North America at 5.2%. By business unit, the 2022 net revenues were split: 43% Havas Creative; 32% Havas Media; 15% Havas Health & You. Outlook for 2023: ”Vivendi is moving into 2023 with confidence. Nevertheless, we remain attentive to the macro-economic and geopolitical context.”

Stagwell

Net Revenues were up 15.3% to $2.2bn, with organic growth at 14.5%. There were eight acquisitions in the year, although these had a relatively small impact as they represented just 2.0% of total growth, with negative foreign exchange impact of -1.2% bringing growth back to 15.3% overall. Operating income grew a very strong 56% to $159m, which improved the operating income margin on net revenue from 5.3% to 7.2%. The best-performing units with respect to organic net revenue growth were digital transformation at 33.4% and consumer insights and strategy at 25.3%. Performance media and data at 9.6% and creativity and communications at 5.1% balanced the overall picture to 14.5%. Outlook for 2023: ”Organic net revenue growth 7.5–10%.” So, all in all, an impressive set of results in what was another very tumultuous year, with the groups continuing to deliver decent profitability on revenue growth. Going back to where I started, perhaps tech businesses should look at some of these ‘old school’ models and understand how this legacy of experience and resilience could be applied to benefit their own organisations. Read more

As part of our January Predictions series, Green Square partner Barry Dudley gives his take on which agencies will be most attractive to buyers this year – and who those buyers will be. I couldn’t resist it. ChatGPT: What are the predictions for the creative, marketing, media and tech M&A market in 2023?

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