Is It Better to Buy an Agency or Grow Organically?

Lessons from the Publicis purchase of LBi

Publicis Groupe’s purchase of LBi last September grabbed headlines as one of the year’s biggest agency acquisitions. But as the French holding company now grapples with integrating the digital shop into Digitas and dealing with client conflicts between General Motors and Volvo in the U.S., the jury is still out on whether it’s wiser to buy pricey agencies or go the less sexy route, like Omnicom, and focus on organic growth.

Publicis bought LBi for a cool $520 million. For the sellers, the timing was right—what they’re doing may not be so special in another five years, as digital becomes a more central discipline at traditional agencies.

For buyers looking for scale and staring at a thinning crop, LBi was ripe for the picking. Various players looked at LBi (with $300 million in revenue) and took a pass—among them, Omnicom. “Our competitors have gone out and bought billions of dollars worth of interactive companies—talking about how they’re growing so fast, how high their margins are and how that’s going to power their business in the future,” said Jonathan Nelson, CEO of Omnicom Digital. “Yet we’re growing fast or faster without taking on the debt and complexity of the acquisitions.”

With the era of consolidation of large interactive ad companies having come to a close last year, the contrast between the Publicis and Omnicom strategies has become more pronounced.

Brian Wieser, analyst at Pivotal Research, notes that after Publicis’ $1.3 billion purchase of Digitas in 2007, Omnicom’s organic growth, without the benefit of major digital acquisitions, beat Publicis from first-quarter 2010 through third-quarter 2011.

Meanwhile, Wieser disagrees with the extent to which Publicis allocates digital minutiae to billable hours, a practice not shared by competitors.

Maurice Lévy, CEO of Publicis Groupe, which says one-third of its revenue comes from digital, counters: “We are very careful in reporting digital. If we claim too high a level of digital, people will expect growth in line, so we have to be cautious.”

Lévy is the architect of Publicis’ expansion from an agency with a primary focus in France to the third-largest global player, something it accomplished through big acquisitions. The CEO admits buying digital assets like LBi is “not cheap.” But even with integration ups and downs, it pays off over time.

“Strategically, they are indispensable for the future,” he said. “Either you win the future progressively, which takes a lot of years, or you accelerate your position through digital acquisition. You have two advantages with [the latter]: You show your clients you are ready to sell them the future, and you have the contagious effect of digital innovation and technology throughout the [Publicis] group.”