Staying Solo: Independent Agencies

How long can an independent ad agency remain independent? Is there a sell-by date beyond which it cannot afford to remain solo?

"When I was at Leo Burnett, my problem was to make the creative product look good and to come up with cutting-edge ideas. The day we started Taproot, internet, electricity, water, a city-wide 'bandh', people not coming to office - became my problems. Now, if somebody is saying 'Give me 2 per cent of your stake and let me take care of all that', I'll be happy to comply." This came from Santosh Padhi, chief creative officer and co-founder, Taproot India, when we met him 10 days ago. That was just a hint at selling out, and the confirmed news of Dentsu buying 51 per cent stake in Taproot has just floated in.

Both parties seem to be happy. "Aggie (Agnello Dias) and Paddy (Santosh Padhi) are globally recognised and celebrated creative talents. This alliance will give a significant fillip to our growth plans for India," says Rohit Ohri, executive chairman, Dentsu India Group.

Post the acquisition, Paddy says, "Though we will still be involved in the daily management, we will now get more time to do justice to the creative product. Besides, Dentsu's digital expertise, financial prowess and client relationships will be an added advantage."

There has been a slew of takeovers in the past with the big ones like Trikaya-Grey, Clarion-Bates, Lintas-IPG, Ambience-Publicis and Zen-Publicis. More recently, the Omnicom-Mudra, Dentsu-Aegis and Publicis-BBH deals were nothing short of star marriages. And now comes the Dentsu-Taproot deal.

A good independent agency is worth its weight in gold. Three-and-a-half-year-old Taproot India, for instance, has been under the scanner in the fertile acquisition market more than once, for over a year now. Going solo is not a problem. What an independent agency has to answer is this: how long can it stay solo successfully? Why is it that, unlike other businesses (like the media publishing market), in the advertising or media industry, being independent for very long becomes a limitation and, therefore, selling out to a larger entity becomes the best - and often the only - alternative?

Consolidation Culture

Timmy Kandhari, independent media analyst and former executive director, financial advisory services, PWC, says, "Often, for big networks, the only type of growth is to acquire smaller independents. They don't know how else to grow after a point. Individual agencies also stand to gain by being part of these networks." To understand the situation clearly, one needs to look at it from the buyer's and seller's perspectives.

The buyer's perspective is driven by external economic conditions that make the marketplace an ideal hunting ground. For starters, globally, there appears to be the need for agency networks to consolidate offerings and offer more uniform solutions to clients across markets. Acquiring agencies is an effective way to do this.

Nakul Chopra, CEO, Publicis Communications, South Asia, says, "Consolidation is happening at a global level. Going forward, we will see more acquisitions and successful independent agencies will find it worth their while to consolidate with larger networks."

Even if some clients are more willing than others to step out of their long term agency relationships and be more open to independent agencies coming in and doing projects for them, the networks that protect these clients' interests will, in turn, see how best they can acquire these smaller agencies.

Slice of the Action

As growth rates in European and American markets plateau and those in Asia and the emerging markets soar, networks are hungrier for a slice of this rapidly growing 'emerging market pie'. Acquiring successful agencies in the growing markets is the quickest way for these listed networks to up their value on the stock market and consequently enjoy incremental revenue.

Sam Balsara, chairman and managing director, Madison World, explains, "Whenever the global economy is down, mergers and acquisitions take place to get a leg-up especially in markets like India and China." From the seller's perspective, there appears to be a 'tipping' point, beyond which continuing as an independent becomes a limitation for an agency. Can this threshold, at which the inevitability of a sell-out is felt, be quantified? What is that exact juncture at which the 'For Sale' sign goes up?

BBH, for example, sold out to Publicis after 30 years when its global strength was around 1,000 people while Taproot sold out with 33 people after less than four years of being in the business. Arvind Sharma, chairman and CEO, Indian subcontinent, Leo Burnett, quantifies the threshold at a total staff strength of 100 people. According to Ashok Kurien, founder of Ambience Advertising, one can't start an independent agency "unless you find four or five partners, two big clients and have 12 months staying power in the bank". In the opinion of Prem Mehta, former chairman and managing director, Lintas Group, a creative agency may find it beneficial to tie up with larger organisations once its revenue crosses Rs. 50 crore.

Mehta explains the Rs. 50-crore remark. He says, "That kind of billing implies that it will have 10-12 big clients. That's when it needs to start looking for more which means managerial, creative, strategy skills and also new services in order to survive." The critical determinants that could contribute to the decision to sell can be categorised into business and personal needs.

Media vs Creative

From a business perspective, most agree with the rubber band metaphor when it comes to agencies � functioning as an independent is like stretching a rubber band; overstretch it and it snaps� unless of course it is replaced with more elastic. This is the bandwidth that a larger network can offer. For most independent agencies this proverbial elastic typically means getting 'scale'.

Scale gives an agency access to big-ticket clients that are beyond reach. Independents are pitted against the big daddies that have a global client share of over 85 per cent. Once an agency has exhausted the clients within its reach, the only way to infiltrate the region that contains the big, globally aligned MNC clients is to belong to a larger system. In fact, 'scale' can be interpreted in another way when it comes to comparing creative and media agencies: The general sense is that scale is the reason it is becoming more difficult for media planning/buying agencies to remain independent as opposed to creative agencies. This is mainly because creative agencies are more about ideas and processes - things that don't require scale to sustain � and media agencies are more about tools and technology � things that thrive on scale.

"A creative agency could stay independent for life but a small media agency may find it difficult to stay independent beyond a point," says Nikhil Rangnekar, CEO, media and analytics, Spatial Access. Secondly, for an independent agency's growth needs, such as expanding into newer geographies or diversifying by launching new arms like design, digital or activation outfits, infrastructure and funding are a must. Belonging to a network brings in that support.

Thirdly, access to global knowledge, expertise, research and managerial tools and technology are other necessities for growth are more easily obtained by becoming part of a global giant. Mahesh Chauhan, co-founder, Salt Brand Solutions, sums it up, "Most businesses can be 'IPO-ed'. But agencies can't. So how does an agency go public, raise money for growth and expand? If you are not 'IPO-able' on your own, the only way to ahead forward is to sell out to a global buyer."

Nagesh Alai, executive director, India Operations, Draftfcb Ulka Group, says, "The tipping point is when one's entrepreneurial drive reaches a level of incompetence and one cannot take the pressures of ownership business any longer." In this case, the term 'level of incompetence' is not a negative phrase. It means 'peaking' or getting to the maximum performance point. This could mean that the founder has exhausted his business connections, the growth rate has reached a plateau or has begun to dip or the agency has lost a big account and needs to cash-out simply in order to stay afloat.

Valuation Game

Mehta explains how the main business reasons for selling out have changed over the years. "The imperatives for the 'transfer of balance equity' (he prefers this term to 'selling out') to IPG from Lintas (2007) were very different from the reasons for smaller outfits wanting to sell-out today," he says. Back then, it was more a question of integration of services driven by the needs of networks that didn't have presence in India and needed to service their global clients who were finding their feet in the Indian market. Today, the sense is that a lot of the sellouts are happening because of valuation and monetary goals. "Financial considerations override everything else" he says.

However, there are some who view a sell-out as the most natural, prudent, self-preserving entrepreneurial move for an agency and not as something driven by mere monetary temptation. Srinivasan Swamy, managing director and CEO, RK Swamy BBDO, calls it 'Entrepreneurial Premium'. "If somebody can make money and get a premium from their enterprise, why not? A sell out is nothing but an entrepreneur extracting value for his entrepreneurship and getting rewarded for what he has created," he argues.

It's Personal

The agency business is a person-driven business and there are factors that have more to do with the individual needs of the founders.

A founder may decide to cash out when his personal goals have been met. This depends on the vision and pre-determined objectives that he entered the market with in the first place. In fact, the peak point is often linked to the age, motivation and ambition levels of the promoter. A founder's motivation may wane with age, he may not want to carry on with the responsibility of running a business or may simply burn out.

Selling out to a large network, especially in the absence of a succession plan of one's own, is one way of ensuring your business is sheltered after you. Subhash Kamath, managing partner, BBH India, says, "The founder's blood, tears, sweat and toil go into building a business. And as he walks away into the sunset he will want to leave his baby in good hands where it'll grow." He adds that an owner could also decide to sell because he feels the agency brand is bigger than the actual worth of the business and that with the backing of a large network it can finally reach its full potential in tangible terms. It could also be the general restless nature of today's entrepreneurs that makes them cash out. Spatial Access' Rangnekar reasons, "Many agencies are set up by brilliant people who have vision and ambition. After a few years they get bored and want to keep doing new things."

Not everyone wants to be taken over. "At Saints & Warriors," says Pushpinder Singh, founder, "we are acutely aware of this phenomenon. Hence, there is an urgency to scale up and de-risk the company with multiple revenue streams."

Moving Forward

Soon, there could emerge a new type of agency network model � 'the network of independents' - in which a large number of small independent agencies could come together and compete with the biggies. "It is 'the mid-sized independent agency' that will be an extinct species soon. Small agencies will come together, decide to pool in their resources so that they can compete with the big networks while simultaneously reaping the benefits of staying independent," says Anirban Chaudhuri of Strategic Planning & Conversation Enablers Group, a Delhi-based consultancy.

Will the independent homegrown agency die out? "We'll see people setting up their own agencies, but it'll be in the hope that they'll get acquired at the right time," predicts Ohri of Dentsu. One has to wait and watch.

With Additional Inputs from: Praveen Kenneth, co-founder, Law & Kenneth, Vivek Bhargava, founder and managing director, Communicate2, Ashish Bhasin, chairman, India and chief executive officer, Southeast Asia, Aegis Media, Elsie Nanji, managing partner, and creative director, Red Lion and former partner and creative, director, Ambience Advertising, Nagessh Pannaswami, co-founder, Curry Nation, Nick Waters, chief executive officer, Asia Pacific, Aegis Media

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