Deal or No Deal? The Value Factors That Sellers Fail to Recognise in Marcoms M&A

By Miles Welch, founder & partner at M&A advisory firm Milestone Advisory

After a turgid start to the year, the M&A market is picking up speed – with more than half of European players expecting to pursue game-changing deals into 2024. However, this newfound confidence comes with major caveats. Financing has become more difficult and expensive for buyers, fuelling “a real need to go deeper and identify additional – often transformational – levers of value”.

The pressure is on for agencies to prove their worth, especially in the marcoms sector, where digital transformation and generative AI are fuelling rapid change. At the top end of the scale, media titans such as Accenture continue their spending sprees; even as smaller agencies across the board struggle to garner interest.

This could be down to the ongoing conflict between what sellers think drives value in a marcoms M&A deal – and what truly makes them an attractive target. The M&A process often surfaces a big perception gap between what a buyer and a seller prioritise as important; and recent analysis we carried out confirmed this disconnect. Capturing a broad range of views across buyers and sellers in the marcoms market, our study revealed a clear difference between what both sides view as core value drivers in sealing a deal.

In fact, our research showed that sellers routinely misjudge what makes a business worth buying – meaning they fail to develop a standout proposition. Here’s why:

Sellers are over-invested in awards and brand appeal: According to our analysis, marcoms sellers believe that being “a high profile, known leader in the market” is the number one value driver in M&A deals. By contrast buyers prioritise “top line growth” as their highest value driver. This disconnect reflects the fact that agencies looking to sell tend to prioritise areas of the business that are less important to the buyer.This includes pouring time and money into awards and profile building, often marketing to other agencies in the process. While profile can build a business, this is not always top of buyers’ minds who are often looking for capability and differentiation.

Buyers are thinking long-term. They want credentials in place to harness their confidence that a company will deliver on its promises, reducing their investment risk. For instance, when WPP brought influencer agency Obviously, it credited the platform’s “ability to scale creator content quickly and efficiently, and in every language,” allowing it to be “instantly prepared to be leveraged globally.”

Within this picture, visibility or awards won’t sway a decision. But top line growth will because it provides a helpful snapshot for acquisition viability that speaks to other factors including good EBITDA  and strong senior management.

A differentiated offer is key in a buyer’s market: Acquisition in today’s marcoms landscape is based around developing a compelling, full service, future proofed offer to attract and retain new clients. Buyers are actively looking for agencies with a clear, differentiated offer that is going to expand their existing capabilities. In fact, a differentiated offer ranked as buyers’ second highest value driver in our study; yet, strikingly, it did not appear within seller’s top five value drivers at all.

Agencies are often unable to define their USPs in a way that meets what buyers are looking for. Buyers want a narrative around how a particular business stands out from the competition; the capability it holds to help buyers scale, or break into new market areas. Omnicom’s recent acquisition of digital commerce platform Flywheel, for example, was designed to expand the marketing giant’s “reach and influence” in the fast-moving digital commerce sector.

Sellers need to spend more time considering what makes them different. If this happens ahead of the M&A process it will help buyers understand what makes an offer stand out.

 Sellers must build evidential proof: Buyers rank a strong proposition (credentials and case studies) in their top five M&A value drivers; but sellers rank it in their bottom five value drivers. This again ties into the need for stronger differentiation, as rooted in a solid body of evidence. Generic or wishy-washy marketing speak won’t cut it. This is about creating watertight testimony that shows how agencies have moved the needle in relation to their market position and specific KPIs.

A healthy culture is moving up the value agenda for buyers: In fact they name it as their fourth highest value driver. This likely speaks of changes we’ve seen over Covid – including a boom in remote working and employee wellbeing trends such as The Great Resignation – that have pushed the issue of cultural alignment into the limelight. Surprisingly given the seismic impact of acquisitions on team engagement and a potential loss of independence, sellers don’t rate healthy culture as a top value driver.

Nevertheless, they need to be aware that buyers are searching for a cultural fit early on in M&A conversations. Deal-makers want to know, do we have a shared sense of direction? How easily can we integrate our two company mindsets? It’s the kind of alignment noted by Nigel Vaz, CEO of Publicis Sapient after Publicis acquired Latin American company Practia to expand its market reach – and he praised “the cultural synergies between our two organisations.”

Tech and client relationships aren’t as significant as they seem: Unlike more nebulous cultural signals, the impact of technology and client growth/satisfaction both appear towards the bottom of value drivers for marcoms buyers. Possibly, they are seen as basic hygiene components within M&A; i.e. if a business is healthy overall in terms of revenue and top line growth, client relations and tech literacy are factored within that model.

Interestingly, sellers don’t recognise the importance of strong financial controls and a scalable business model; they appear towards the bottom of their list of significant value drivers. While these factors don’t make buyers’ top five value drivers (they are seen as a given), this finding suggests agencies need to place greater emphasis on robust datasets that will reassure buyers on the risk of their investment.

The learnings above point to a lingering disconnect between buyers and sellers. To bridge the gap, agencies must focus on maximising their valuation – in a process that begins around 12-18 months’ out from a deal. To avoid leaving their biggest assets off the table, sellers need to double down on top line growth, defining their point of difference and supporting claims with data-driven proof.

Marcoms M&A is a matter of nuance. But, as our research shows, successful M&A is an ambition that begins by digging beneath the surface to understand more closely what it is that all parties want to achieve.