Here are seven reasons why a merger between a big agency and a small one may fail. Apple Lam reports.
It is not uncommon to hear about a merger where a big agency acquires a small one, often an independent agency started by an innovative entrepreneur with experience in his or her industry, whether it is public relations, marketing or advertising.
Why do some of these mergers fall apart whereas others manage to thrive in spite of the differences between the two agencies?
1. Insufficient time allowed for post-merger integration
How long should the post-merger integration process take?
“The adjustment period could take months or years. It simply depends on when you sort out the chaos,” said Aaron Lau, CEO and president of Cheil Greater China, whose boutique ad agency Bravo was acquired by Cheil Worldwide in 2012.
“It depends on whether the senior management of the acquired company can quickly reinstate the vision of the company. The let’s-wait-and-see period is critical.”
A communications professional, whose boutique agency went through a merger with a big agency, says the big agency has to see the integration as an ongoing one, rather than a process that finishes after just a few months.
“It’s a constant battle to keep people educated about why the merger is taking place,” she says.
Some small agencies can be more than a decade old and their ways of working are ingrained, meaning the actual integration process can even take a few years.
David Ko, co-founder and MD at Daylight Partnership, had sold his boutique PR agency Shout Communications to PR giant Waggener Edstrom in 2005.
After his earn-out finished over the course of two years, he stayed on at Waggener Edstrom for two more years to find and train his successor, while ensuring the entire team supported his successor.
2. Not doing due diligence for the two agencies’ differences in organisational culture from top-to-bottom
Before a large agency merges with a small one, it often conducts due diligence to investigate the financial assets of the small agency.
“But they don’t do much due diligence for the soft-side of the acquired. When the visions of the two agencies don’t tally up, this contributes to a fall out,” Lau says.
The soft-side includes the culture, vision and dreams of the people in the small agency. For example, the family atmosphere of a small agency is very different from the often bureaucratic culture of big agencies.
Even if a cultural litmus test is done before the deal is sealed, it often occurs between the CEOs of the two companies rather than the staff members.
“Because M&A negotiations are confidential by nature and the leaders are the ones making the decision, the people most affected by the acquisition – the staff – are usually the last to know,” Ko says.
“Right from the start, they don’t have a say, and as a leader, you don’t have their buy-in or emotional support.”
3. Stomping out the entrepreneurial spirit of the small agency
Because small agencies often begin as start-ups, their owners are very entrepreneurial. Owners of successful agencies are adept at finding clients and running the business, which requires stamina, creativity and a proactive attitude.
Once the small agency is acquired, if the owner chooses to stay on, they must find a way to thrive in a big agency environment.
Ko believes the CEO of the small agency should be offered the autonomy to make decisions to make sure they still have a sense of control and do not become a cog in a big machine.
“People who start agencies are very entrepreneurial and are used to running their own show, with plenty of ideas. When they become lost in a large agency, they will become very demotivated,” he says.
Lau takes a different view.
“Once you are acquired, you have to change your mindset to one where you are looking after someone else’s asset. It isn’t quite yours anymore and it’s a shared responsibility,” he says.
“You need to take the interests of the acquirer into account and realise there is a bigger agenda beyond what you want to do.”
One argument for why the small agency voice should be protected, rather than assimilated into the big agency’s, is to retain talented people.
Often, small agencies have capabilities that big agencies don’t because staff members get things done in a certain way, made possible by the culture of that particular small agency.
One example is the acquisition of digital marketing or public relations agencies by large agencies.
“A lot of big agencies acquire small ones because of their client or talent bases. Why don’t the big agencies have these digital capabilities to begin with? It’s because there is something in the company stopping them from developing,” Ko says.
“If you absorb a digital agency completely and impose the same obstacles on the small agency, it would kill the business.”
4. Not effectively empowering middle managers to communicate with front-line staff
The communications professional says that staff members often take on a completely different character in a new organisation. When a merger takes place and a new organisational culture is formed, staff members must adjust their personality and work ethic to fit in with the new organisation.
One way to communicate the reason why the two agencies needed to be merged and what comes afterwards is to empower respected middle managers to help disseminate the new mission through the culture and to front-line staff members.
“Senior managers should work with middle managers to create a new mission through discussion sessions,” she says.
This is particularly important when big agencies often have global senior management. Middle managers based locally can help front-line staff feel part of a new organisation – giving them the moral and technical support of a big agency. Planning the integration process properly is crucial.
5. Not effectively managing changes to pricing and expectations of existing clients
Big agencies typically charge more than small agencies, usually because they have more resources which can be leveraged to offer a more diverse range of services, and in many cases, to larger clients.
After a merger, small agencies may be asked to raise the fees they charge for their services. They are then presented with the situation where they need to convince a long-term retainer client why they need to charge more.
This may include arguing that now the small agency is part of a large one, it can benefit from economies of scale and, thus, offer better and more diverse services.
“It can be difficult to convince clients and you can lose some of them – that’s natural,” the communications professional says.
The new pricing of services can affect the small agency’s client base. If some open-minded retainer clients are willing to accept the higher fees and the proposal of an expanded service, the small agency will still experience the stress of needing to be extra proactive to ensure they are generating that added value.
In the beginning, the small agency must learn how to access the larger pool of resources owned by the large agency. This can present an extra obstacle to quickly stepping up the quality of services for clients.
Meanwhile, some clients choose small agencies because they believe boutique agencies produce higher quality work more quickly, are potentially cheaper and will take better care of the clients’ needs.
Such clients may be worried about a loss of focus on them after the merger takes place. Theoretically, the more clients an agency has, if the number of staff remains the same or people leave, it’s likely the small agency will have less resources and attention for the client.
Ko says the acquisition of digital advertising agencies by traditional ad agencies can be difficult financially speaking, because digital projects and accounts offer smaller profit margins.
“In the transition period, this could have a negative impact on revenue. The same could apply to PR agencies, but it’s slightly easier for PR agencies because their revenue bases are not threatened by digital,” he said.
6. The small agency’s staff may not be able to handle the big agency’s large MNC clients
Small agencies may usually take on smaller clients or just a part of a big client’s account whereas big agencies usually serve large multinational companies and big remits.
The communications professional says sometimes after a merger, the small agency’s staff may be asked to help out with accounts of big corporate clients that previously only belonged to the big agency.
While this helps give exposure to staff members, a lot of management time is dedicated to ensuring these clients are serviced properly because not every small agency has senior managers and account managers with experience serving large corporate clients.
This could also take time away from the small agency for servicing its existing clients.
7. During the integration process, you lose half of the CEO
Before the merger, 100% of the CEO’s time will probably be focused on client acquisition.
After the merger, the CEO’s time would be split between running the business and communicating with the small agency’s staff members and senior management of the big agency as part of the integration process.
“I would say that my first year after the acquisition was very difficult and I was very stressed out. I had a 150% increase in workload – I was doing my usual work and also integrating with the big agency,” Ko said.
“Many of my new bosses were in different time zones halfway across the globe and I wasn’t getting enough sleep.”
In addition, some people will leave and sometimes, the small agency’s CEO can’t help but blame themselves for it, which becomes an extra source of stress for the CEO.