Buyers and sellers are currently showing high levels of enthusiasm for M&A activity – the marketplace is busier than at any time since the late 1990s in practically all territories. Moreover the rapid entrance of Private Equity (PE) money in the UK marcoms sector –over £230 million in the last eighteen months – and elsewhere throughout Europe is seen as beneficial. Moreover, those agencies who can offer digital PR services are very much sought after.

While international and local trade media titles report, often hysterically, on multiples and the speculated fortunes that are likely to be made, there is very little discussion of the long, hard road that many agency heads have trodden on their way to closing a deal. Emotionally, mentally and physically, it can be a gruelling experience.

Ask any agency head who has been through the M&A mill and most will tell you that the process was much, much tougher than they could ever have foreseen – "nothing could have prepared us for how hard it would be" is a familiar refrain. Remember too that most agency principals who sell have few people, beyond their immediate agency colleagues, with whom they can share their experience.

For this reason, one evening earlier this year, Results brought together a group of leading figures from across the marketing communications spectrum, including senior PR professionals, to reflect on the M&A process. The one thing they all had in common was that they had at some point in the last decade sold an agency. All were post earn out. Several now hold positions within the group they were acquired by.

Even with the distance of time, all still talked passionately about their experiences. All were reassured to find that they were not alone in the difficulties they had surmounted and the infinite reserves of energy and patience they had had to draw upon. All found the exchange an extremely cathartic one.

For anyone about to embark upon an agency sale the issues raised during Results M&A evening debate will make for valuable reading. Acquirers too will find useful reflections on how vendors believe they can improve their handling of the post acquisition process.

The legals – could they be any worse?

To a man, all participants had been stunned by the hassle and frustration factor involved in the legal and contractual elements of a deal. While the process may vary from market to market, the complexity remains a common thread. To use a lawyer without an understanding and experience of the industry was seen as nothing short of masochism.

While one should not allow oneself to be intimidated by the legal process there was a universal feeling that it was easy to feel "out of one’s depth". A shared piece of advice was to aim to reach a "heads of agreement" stage before involving lawyers and in a format that the latter could not "tinker" with excessively as this document can play a key role in directing the deal process.

Several participants reported that they had initially been cynical about the value of expert advisers. However actual deal experience quickly did away with such sentiments. Moreover, because vendors are unlikely to have the same level of expertise in M&A as the buyers they face, expert support becomes even more critical.

Both vendors and acquirers agreed that advisers provide context and can help set realistic value expectations – vendors are unlikely to have access to such insight if acting alone. Input from advisers also means that negotiations can begin within commonsense parameters. Acquirers agreed that adviser involvement was a useful way of securing a sensible first conversation and reducing time wasted on fruitless meetings

Tough and Bloody Negotiation

When it comes to the cut and thrust of negotiations, the role of professional advisers was quickly recognized. M&A negotiations can be tough and bloody. The presence of respected advisers provides a useful distance and buffer – especially important given that after the deal is concluded both sides share a future and will need to work together.

Crucially too, advisers create a competitive bidding environment which needs experienced and careful management to secure the best all-round deal available in the market at that time.

Why agencies sell was one area where a sharp difference of opinion was to be found and which essentially depended on where in the economic cycle participants had sold their businesses. When selling at the top of the market, getting "top dollar" up-front was seen as likely to be a priority, because of limited earn-out potential as the market goes into recession.

On the contrary, when selling at the bottom of the market there is a more limited range of values on offer and other factors such as the culture and style of the acquiring company and their plans for the future of their acquisition assume greater importance, in order to maximise the earn-out.

Yet a cynical note was also sounded: "Ultimately it’s all about the money." Those who talked about a "need to extend into overseas markets" or "develop new skill sets" were seen as simply paying lip service. That’s one for readers to come to their own conclusion on!

Who should agencies sell to?

Whichever market you operate in, the founders/heads of independent agencies are by definition entrepreneurially minded. The rise of entrepreneurially driven mid-cap groups such as Creston, Media Square and Cello in the UK provides a welcome new alternative to selling to the leading global networks.

Participants commented that the corporate managers who lead the acquisition process in the latter organisations have in the main never owned or founded a company. Consequently there exists an instant disconnect between them and the entrepreneurs whose businesses they are buying.

The immediate post-acquisition period

There was general consensus that acquiring companies often "neglect" a newly purchased agency. As well as obvious interest in the financials, e.g. by attending board meetings, it is equally important for senior figures within the acquiring company to demonstrate a "people" interest and to have "real conversations" with heads of businesses they have bought. Creston was held up as a good example of doing this well while at the same time supporting each acquired agency brand to retain a strong, stand alone identity within the group.

Participants agreed that large global networks are generally poor at preserving the value of businesses they acquire – they described this as akin to leaving a newly purchased car out in the rain to rust.

They also commented that some larger networks appear to have limited mechanisms in place to preserve the value of an acquired agency or to plan for its future, once the earn-out period is up. In contrast the culture of the entrepreneurial small cap acquirers was described as vendor driven, meaning that the above issues were considered of significance and were more carefully thought through and planned for.

The year following the close of the earn-out was seen as crucial. Acquirers need to think harder about how to personally motivate and drive the senior managers who remain at the head of the business once the original vendors have "cashed in" or departed.

As the evening came to a close, conversation – quite naturally for a people industry –turned to dealing with people. From among the shared M&A wisdom one key insight shone through – and that was: "if you focus on people you’ll make money." Not one word of dissent was to be heard.