A Deep Look at the Hows & Whys Behind the Acquisition of Indian Digital Agencies

In the early millennium years, India saw the rise of several digital agencies offering specialized marketing services to brands. WWW had just gotten popular. Possessing a website, top Google rankings and an online presence were considered mandatory. A new branch of marketing had grown which was breaking away from the mainline agencies.

As the horizons of digital marketing widened, Social Media became a hugely popular part of these agencies. Brands moved towards creating strong online footprints and coped with the sudden popularity of Social Media. In the recent years, digital marketing has become an indistinguishable part of marketing.

Today industry experts believe that the advertising industry has come full circle. Young digital agencies are now being acquired by larger advertising companies as a part of client and talent acquisition. The lines are blurring between large units and smaller ones as India is witnessing a radical shift in the industry mindset.

Good News v/s Bad News

It is believed that smaller agencies stand a chance to benefit owing to the growing trend of such acquisitions. Large companies like Dentsu from Japan and Publicis Groupe from France have acquired Indian bred agencies like Webchutney, Taproot, Beehive Communications etc. in the recent times. These acquisitions are beneficial considering various factors. Ahmed Naqvi, Managing Director & Co-Founder at Gozoop, which recently acquired Red Digital says, 'In an increasingly connected world, large brands require agencies that can reach every corner of the world, harness the power of new digital technologies, create multi platform content, leverage mobile advertising and optimize media-buying algorithms.'

However, there are reasons for smaller agencies to withdraw from these deals too. The ones that are built on a fundamentally strong foundation do not want to easily give up on their culture and vision. These agencies are equally careful about diving into the right kind of deal. So what is it that drives these deals when an agency has continuously strived to achieve excellent performance independently?

Naqvi says, 'A lot depends on what their vision is for themselves, what type of deal they strike and with whom. Being part of a large network can provide support, strength & capabilities for deeper integration with a wider scope of offerings apart from opening up more career growth opportunities for its team.'

Though there are a few agencies that are built forecasting an acquisition on cards, it is not a definite route suggested by mainline folks. 'Digital agency founders should aim to build a fundamentally strong company with good profit margins, geographic market distribution and a focus on meeting the evolving client requirements using emerging technology', opines Naqvi.

However, in the case of companies creating social tools, technology is the core reason for acquisitions. Kaushal Sarda, CEO, Kuliza Technology who recently acquired Crowdnub says, 'In some cases the technology is important and is leveraged to either build a new tool or add some capabilities in an existing tool. We acquired Crowdnub so that we can integrate it with our tool MobiChirp, that helps brands build rich media cross device campaigns and microsites. But in other cases, the existing user base of the tool or its capabilities as an independent solution for businesses can be the driving force for acquisition.'

A Marriage of Sorts

It is important to first be patient and then build a relationship with acquirers. After all, once the acquisition takes place, there is a tuning that needs to be set. There are cultural changes that come at a rapid pace. Smaller agencies need to adapt to these. If there is a prior relationship with the acquirer, these changes are easy to understand and get accustomed to.

There are changes in the organization structure, setting up of new protocols and difference in product offerings too. The initial post acquisition phase is a period of significant change and a breeding ground for doubts and insecurities. To help overcome these barriers, companies need to persistently communicate with the team to avoid such insecurities.

'Synergies need to take place at many levels. Culture & value, organization structure, product packaging and costing synergies are few of the vital ones. The most critical being the synergy at the cultural level. While integrating the Red Digital team with Gozoop’s existing team, we were extremely possessive of our culture. Overtime, Gozoop retained only those individuals and processes that complimented its culture', states Ahmed Naqvi.

In case of Social Tools, understanding the technology is essential. Kaushal Sarda says, 'You need a very structured knowledge transfer of the tool. You also need to understand integration of the technology into your existing offerings.'

Framework of an Acquisition

An acquisition takes place when two successful companies are looking to fill a gap within their framework. A broader definition would be to maximize profitability by sharing each other’s resources. In the advertising industry, client or talent acquisition would be the primary reasons most acquisitions occur. 'The advantage could be a vertical or horizontal integrations or access to new geographies, proprietary products and human resources. The key motivation for Gozoop was to benefit from Red Digital’s pan India presence. We did this after a detailed build vs buy analysis', says Ahmed Naqvi.

This cost of buying an agency is often higher than that of starting a digital arm afresh, but it comes with innumerable advantages such as experience, advanced technology and an established team of experts. Industry leaders are concluding that ‘one agency – service all’ model of agencies will soon change, either to a multi specialized agency model or an integrated solutions model. While the traditional ‘one-agency’ model offers convenience, specialist agencies offer choices and possibility of better brand management.

While the framework of an acquisition are subjective to the deal, certain parameters cannot be ignored that lead to a closure. Clear articulate proposition and plan for business growth earns brownie points. Followed by growth there needs to be a flexible team and long-term clientele. Needless to mention, a consistent profitability and a good cash flow management system in place will get you to the closure.

A common mistake made by these agencies is the rush into acquisition deals without proper evaluation or paper work. Not only does this process lead to an unworthy long term goal but also threatens the mere existence of the agencies mission. Ahmed Naqvi says, 'A lot of agencies jack up their revenues without balancing profitability and cash flows just with the intention of selling the company. You got to run it as a marathon and not a sprint. Acquirers are smart and can see through all this.'

Trend as we foresee

There is enough business in the Indian market for both small and mid-size agencies. These business opportunities will only grow as the consumption goes up further. While start-ups and small agencies will continue to grow with clients’ increasing interest in digital media, mainlines agencies cannot ignore them anymore.

'Strategic M&A has evolved as a core capability and source of competitive advantage for many key players who seem to be positively insatiable. I expect this trend to continue in ’14 which will help define the new digital marketing ecosystem. Next few years look exciting', comments Ahmed Naqvi on the growing trend.

The trend can peril the smaller agencies growth if only a handful remain in isolation after a major chunk has been acquired. Fortunately for them this could also be an advantageous situation. 'One positive fall out is that it will encourage growth of better quality work from smaller companies as they will have to create a specific niche and become the best at it', says Naqvi.

'Mainline agencies are not only acquiring digital media agencies but we also see a growing trend in acquisitions of social technology companies. Social Media is a growing market and agencies are partnering with social technology companies to fulfill the demand. Many such partnerships are bound to result in acquisitions', confirms Kaushal Sarda.

He continues, 'Big agencies have their digital arms and such companies need social tools either to solve some specific campaign need or to add another tool in their comprehensive suite of solutions. Hence as we see it, this trend is inevitable.' 

'The agencies that are being bought over are happy to align with a larger agency in light of an increasingly competitive environment. The agencies that aren't evolving will die a natural death. Consolidation is a natural and needed process', concludes Ahmed Naqvi.

Takeaways for Acquirers

• Acquiring a smaller agency is beneficial considering the experience, advanced technology and an established team of experts.
• Articulate growth, flexible employees and long term clients are what you should look for while acquiring.
• Be possessive about your culture and invite only those that compliment yours.

Takeaways for Agencies:

• Be patient and careful while choosing your acquirer and begin with building a relationship first.
• Build a fundamentally strong company and not a company for the sake of selling it.
• While being acquired, maintain a direct communication with your employees and inculcate a culture where there is no scope of insecurities.