Open the window of opportunity’

There are signs that economic slowdown in the US is affecting sale prices of consultancies. Mike Exon looks for evidence

The economic slowdown in the US may or may not be directly affecting the UK economy. But one thing looks clear. It is affecting design consultancies with operations in the US.

Most of the large networks have hedged against a slowdown by diluting the mix of advertising in their operations. WPP Group and Omnicom now have less than 50 per cent advertising/ media buying within their portfolios and the Interpublic Group of Companies is following close behind.

Pundits are confident that the network model offers its members some protection during cyclical downturns. But for independent design groups that are perhaps looking to join them, there is evidence that prices paid for these groups may be falling.

US recruitment and design management specialist RitaSue Siegel is not sure if the problems evident on the ground are affecting these price levels in the US.

“From the outside looking in, seeing the lay-offs and hearing the stories from those that have been released from the great proposals that are out there – and the fact that clients are not signing on the dotted line in a timely fashion – the answer is I don’t know,” Siegel says. “I think you would have to answer this question on a case by case basis.”

She is more confident that merger deals in progress are not being affected. Having herself put the question about prices for consultancies to “a partner in a prominent company that is in the midst of such a negotiation”, his reply was that “the figures being discussed had not changed since negotiations began several months ago”.

If there are signs of price pressure it is only at the general level. On the UK side, opinion about whether it does or does not exist is divided and qualified.

Results Business Consulting managing director Jim Surguy says, “Buyers will pay less than they did last year for everything except top quality consultancies and agencies. Premiums will always be paid for true, recognised quality. Elsewhere, prices have come off the levels seen over the past 18 months or so.”

Lewis Silkin Solicitors senior partner Roger Alexander agrees. “There is some evidence of softer prices [in the UK], but this does not apply to quality companies, which are being acquired for their strategic fit, not just their earnings,” he says.

Alexander’s point is that since design consultancy valuations and earn-out arrangements are based to some degree on future revenues, expectations are an important component in calculating the value of a group.

“If you were a purchaser, would you be a little cautious at the moment?” Alexander asks. “Then again, if you have someone making a strategic purchase, they will be thinking much more long-term,” he adds.

Surguy suggests that overall, “in an oversupplied market with not enough real differentiation, prices have definitely come off the top”.

Another person with wide experience of making deals in the marketing services sector is Robert Mogford, director of accountant BDO Stoy Hayward’s corporate finance division.

“In our experience, the turmoil in the equity markets over the past few months and uncertainty about the US economy are slowly filtering down to sub-£50m deals,” says Mogford.

“While we are not yet seeing any downward pressure, prices have certainly levelled out. The big advertising groups are also becoming more choosy about the companies they acquire, preferring to focus on niche players when looking at smaller acquisitions,” he advises.

How buyer and seller demand has changed recently is another question, and one which will have its own effect on sale prices.

While Mogford’s suggestion about the caution of the ad sector makes good sense in a period when advertising growth has seen a levelling off, other industries appear more buoyant in terms of acquisition.

Enterprise IG chief executive officer Dave Allen, who has considerable experience of international deal-making inside WPP Group, says demand from the seller side is still strong.

“We are still seeing strong interest from companies wishing to join our network,” he reveals. He remains optimistic about future merger and acquisition activity within this sector.

“I would expect acquisition activity to continue this year, as each of the major groups continues to build their networks,” says Allen. “That is still very much the case within Enterprise IG, however, I am not sure about the competition.”

If sale prices have dipped generally within the UK marketing services sector, is there any cause for concern? Many take exception to the “window of opportunity” approach, by which there are deemed to be a number of optimal months over the business cycle within which to sell your consultancy. Market prices fluctuate in any sector, so timing a sale to coincide with an upturn can potentially maximise your spoils, goes the thinking.

“Companies that are aiming to sell within a ‘window of opportunity’ will find it very difficult to make everything coincide so that they not only attract a high up-front payment, but also maximise the value of their earn-out,” suggests Alexander.

Nevertheless, there is undeniably a good reason for quick thinking in the present climate, particularly if the UK does show some response to the US situation. Those playing very safe will no doubt seek to avoid this risk by acting quickly on a planned sale.

This is certainly backed up by research soon to be published jointly by Willott Kingston Smith and Results Business Consulting.

It reveals that across the marketing communications industry “an overwhelming majority (82 per cent) of respondents believe that both buyers and sellers should “act now rather than delay”. The danger with trend-spotting, however, can be that you miss what is right for your individual circumstances.

No doubt those that are still desperate to sell will be revealing themselves in these pages in the near future.

Maintaining the value of your business

Consultancies should strive to retain their value in spite of the business cycles. On the above evidence this is best achieved if you can offer a premium or specialist service

Prices have dropped significantly for digital media-based design consultancies, one reason for which is because only a few have demonstrated the business management skills to grow a professionally run and hence profitable business

Future prices are influenced by expectations, but ensure these are formulated using hard facts, not disinformation

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