Acquisition fever in July: What does it mean for agencies?

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Healthcare agencies have caught a case of acquisition fever.

Earlier this month, Huntsworth Health's Evoke Group bought San Franciso-based healthcare marketing shop Giant Creative Strategy for $72.2 million, with a max payout of up to $97.2 million. It was the third network to engage in a healthcare M&A deal in the month of July, following Publicis Health's gobbling up of Payer Sciences, for an undisclosed sum, and UDG Healthcare's purchase of ad agency Create NYC for up to $58.4 million. 

It's not unusual for networks to try to expand capabilities by bringing on agencies that have a core niche, like promotional med ed or market access. That was the case when UDG snapped up rare disease firm Cambridge BioMarketing and behavioral health specialist MicroMass Communications in 2017 for up to $35 million and $75.8 million, respectively.

“I'm a firm believer that no one approach from an agency or model is sufficient anymore,” Doug Burcin, president of UDG's Ashfield Healthcare, told MM&M after UDG's most recent set of acquisitions, which also included SmartAnalyst, a strategic consulting and analytics business, for which UDG is reportedly paying up to $24 million.

Indeed, at a time when pharmaceutical companies are bringing some capabilities in-house, and consultancies are competing for marketing business, this is a good time for agencies to gain scale in complementary services. M&A also provides smaller agencies with access to capital for their own acquisitions.

At the same time, pharma is also finding it harder to differentiate brands in the marketplace, observed Blane Walter, managing partner for Talisman Capital Partners, a private equity investor. “You can differentiate by the science, by branding, by the quality of execution, and you can create uniqueness as a result of how you design your clinical development strategy. Increasingly, each of these is becoming important, and you're seeing more and more consolidation because [agencies] want to make sure they have best-in-class capabilities in each one of those areas. 

Walter knows about complementary transactions. Back in 2005, he merged the healthcare communications network InChord—which he had formed by packaging together Paleo, GSW, Blue Diesel, Y Brand, Cadent, and Ignite—with Ventiv Health to form inVentiv Health. That deal brought the science, sales, and execution of Ventiv and InChord's marketing prowess together under one roof. (inVentiv has since merged with INC to form Syneos Health.)

“The strategy, really, for many of the networks hasn't changed, which is—find capabilities, good people, and strong market position, and see if you can't bring them in to help existing clients and get access to new ones,” he said.

Add to the above easy access to capital. “I think what's driving this [M&A trend], also, is the fact that there's a lot of capital in the marketplace that's pretty cheap money,” Walter observed. “That is encouraging companies to take risk and be in acquisition mode.”

According to figures from consultancy Preqin, cited by The Economist, private-equity firms are sitting on $1.1 trillion, with another $950 billion being raised by 3,050 firms. Not to mention, public companies just got a big tax break. Ready access to capital for buyers, and higher premium valuations enticing sellers (more on that later), could sustain the trend.

Meanwhile, networks may be trying to plug gaps by “buying revenue,” one agency CEO, with experience in consolidations, told me last week. Indeed, Q2 wasn't especially rosy for healthcare. Publicis Groupe's healthcare units were blamed for a lackluster quarter in which organic revenue fell by 2.1%. Other CEOs are telling me 2018 has been a tough year so far, a real turnabout given that, when polled in early 2018, 81% of agencies told us their business was looking up thus far.

What does all of this portend? The common storyline in all three July deals is “bigger network buys smaller independent.” If you're running an independent healthcare agency, with a strong management team and client roster, don't be surprised if between now and year's end you get a call from a network offering a buy-out, if you haven't already.

If you're part of a network, you may be in chase mode. Then again, acquisitions are no panacea. There's the question of how to add capabilities in a smart way—in other words, how to maintain the indie culture that seemed so attractive in the first place. For employees, there's a big difference between working for a sprawling, network-owned family vs. an independent agency with a handful of offices. 

Execs must integrate businesses so that they synergize with each other, rather than compete for the same RFPs. How do your agency teams, for instance, leverage the payer team and forward business to them at the same time?

You also don't want to pay too much, especially if premium valuations aren't supported by underlying economics. While the most recent quarter may not have gone so well for agencies, at last look the ad holding companies had still been trading at a pretty high multiple of EBIDTA (earnings before interest, taxes, depreciation, and amortization), said Walter, a sign that, “at some point, [premium values] could become over-heated.”

Did he just predict a bidding war? If moves by upstart networks like UDG and Huntsworth, and biggies like Publicis, are any indication, something tells me acquisition fever may not cool off any time soon.

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