Can Indie Ad Agencies Thrive in the Merger Era?

Nimble and tech-savvy shops dodge both acquisition and bankruptcy

The staff of Breakfast, photographed at its office in Brooklyn, N.Y. | Photo: Sasha Maslov

Inside a converted manufacturing building in the Dumbo section of Brooklyn, N.Y., lies an independent ad agency called Breakfast. Its tiny band of workers sits before a tight cluster of computers in the huge raw space. Breakfast (as in “break fast,” not scrambled eggs) has a full-time staff of eight, including its three principals. And in a Peter Pan kind of way, while the shop will continue to mature, the intention is to never grow beyond a dozen employees.

“We’ve always wanted to be very nimble,” explains Andrew Zolty, Breakfast’s co-founder and creative director, noting that the agency’s focus on unusual out-of-home creative has attracted clients like Major League Baseball and Google. But “we haven’t wanted to get in a trap where we have 30 people and have to take on work that we didn’t want to take on.”

From Breakfast’s small shop to giant-among-the-indies Horizon Media, with $4.3 billion in media spend and 900 employees, independent agencies with national scope are enjoying a vibrant period in the age of the conglomerates. Perhaps the biggest threat to the indies is the tendency of the conglomerates to gobble them up—that, and the occasional bankruptcy, like last year’s closing of KSL Media.

Fear the Giants
In 2013, the big six holding companies tallied 116 agency transactions—an average of about two per week, according to Stewart Shanley, joint CEO of indie shop Iris Worldwide, citing statistics from the research intelligence firm Mergermarket and U.K.-based M&A adviser Clarity. North America accounted for about 20 percent of merger and acquisition activity, down from 30 percent in 2012.

The recently failed Publicis Groupe-Omnicom merger aside, WPP is the most voracious. In the first quarter of 2014 alone, it completed 20 transactions, and last year it inked 62 small and medium-size deals, according to the company’s financial filings. The acquisitions “added 2.2 percent to revenue growth in 2013,” WPP states.

That doesn’t sound like a lot—but in the big-agency world, every bit of growth helps. “Network organic growth is still low-single digits—3.2 percent in 2013, and projected at 4 percent in 2014—so they have to acquire to grow,” says Shanley.

Another shop-happy owner is MDC Partners, which calls itself a “strategic partnership” and “entrepreneurial accelerator” rather than a holding company. It now includes some 50 agencies spread among 60 to 70 offices. “On average, we have never been successful at finding firms at more than a rate of probably one every two months,” says Miles Nadal, MDC’s chairman and CEO. For much of 2012 and 2013, however, MDC didn’t buy a single firm—and so far this year, it has purchased “three or four firms,” which may grow to six before 2014 is through, he says.

For all the acquisitive activity, indies don’t appear to be going the way of the Sony Walkman. In the last two years, 26 independent agencies (both national and regional) have joined the 4A’s, according to the organization’s president and CEO, Nancy Hill.

On the flip side, “we lose agencies every year because they can’t afford the dues or they go out of business,” Hill notes, adding that there are situations in which shops drop out because they’ve merged into other firms. Hill says it is near impossible to say whether the number of indie members has grown or declined.

Agita and Accelerators
Age-old trends and newer developments suggest that independent agencies that don’t seek the warm embrace of conglomerates can rely on fertile aspects of the business to help fend off difficulties that certainly have caused some agita. “The independent agency world is thriving,” says Greg Stern, CEO of Sausalito, Calif.-based Butler, Shine, Stern & Partners. “San Francisco, New York and markets across the country have seen a significant number of independent marketing service startups launch in the last few years.”

Among the positive trends, entrepreneurial staff members at large agencies continue to break free and hang out their own shingles. At the same time, clients are increasingly calling on shops of all sizes to handle specific projects, as some advertisers bring more agency work in-house or opt against naming a lead agency.

The economic winds are favorable as well. “It appears that the agency industry in general has grown faster than the holding companies on an organic basis,” says Brian Wieser, senior analyst at Pivotal Research, citing his own research and an analysis of U.S. Census Bureau revenue stats.

“When you aggregate all the businesses, there’s a lot of economic activity [reported revenue] that is growing faster at the agencies than at the holding companies,” he says. Wieser estimates that in 2012, organic growth at the five holding companies was 1.9 percent while the industry as a whole grew by 9.4 percent.

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