Anatomy of an M&A deal: The story behind Phoenix Equity’s investment in 1000heads
Jim Houghton, Partner at growth and corporate finance advisory firm, Waypoint Partners, comments on the complexities involved in brokering marketing M&A partnerships.
For as long as anyone would care to remember, Mergers & Acquisitions (M&A) have been a core characteristic of the global marketing business. Last year alone, M&A activity in the sector totalled $33 billion.
Reasons for engaging in M&A activity vary deal by deal, but the best marriages are a way of driving international growth, building the talent pool, adding capabilities at speed and bolstering client rosters. For the buyer or investor, M&A can mean acquiring the best talent; for the seller, it can deliver a support structure that unlocks individual potential.
In the case of Phoenix Equity Partners’ recent multi-million-pound investment in London-based word of mouth agency 1000heads, they were attracted by two things. Firstly, the unique nature of 1000heads’ offering to clients. Secondly, the strength of the agency’s commercial performance and its potential for further international expansion. At a time when a new breed of data-powered agency is helping brands combat an inexorable trend towards media fragmentation, Phoenix was convinced by 1000heads’ track record in delivering social media-led data & insights, strategic consultancy, and multi-disciplinary creative services to some of the biggest brands on the planet.
As for 1000heads, the deal was a way of accelerating the expansion of its international footprint and services, supported by investment in operations and infrastructure. With 150 people already based in London, New York, Sydney, Dubai and Berlin, support from Phoenix will allow 1000heads to maximise its market opportunity and momentum.
Why Private Equity?
One obvious question from the agency’s perspective is why it chose to link up with a private equity firm as opposed to a ‘strategic’ investment partnership. The simple answer is that it is the best fit for the needs of the agency (its people, clients and owners) at this stage of its development. In my experience, the post-deal benefits of M&A deals that are ostensibly described as ‘strategic’ (agency network, ‘tech giant’, management consultancy, etc.), as opposed to ‘financial’ (private equity), inevitably demand a greater level of post-deal operational compromises on the part of the acquired firm. A private equity firm investing in an agency is backing its leadership team to deliver against its own business plan based on its own strategy and providing the financial muscle to accelerate this in parallel with a financial de-risking of its owners. By definition, a ‘strategic’ buyer is acquiring a business to enhance delivery against its strategy and inevitably, if not in the short term then over the medium to longer term, its agenda will take precedence. This might commonly manifest itself in business operations or real estate, but ultimately over time can be more pervasive around brand and culture.
None of the above are necessarily problems for entrepreneurs that view M&A as a way of unlocking business potential and wealth.
The difference with a private equity backer, however, is that it is an enabler and an accelerator, not an ultimate destination. It is not seeking to impose strategy, but to support a vision that it believes can generate an equity return for all owners. These are professional investors entrusted by large institutions such as pension funds with money to be invested wisely over the medium to long term. Their sole purpose and duty is to deliver a return, and there’s only one way to do that when investing in an agency; back the management.
Private means private
An added benefit, as its name implies, is that private equity is private funding, which means it can foster company growth away from the spotlight of the public markets. Transactions are always personally tailored for each individual deal participant, rather than bound to be one size fits all. This is a huge advantage when there’s still a lot of prospective growth ahead in an agency, with future equity participation used as a hook for senior talent.
At the same time, Waypoint Partners’ experience suggests that although volumes of private equity investments in agencies have been steadily increasing in recent years and indeed successful investments realised with exciting exits for the agencies involved, even the most experienced private equity firms are still learning the nuances of the marketing services industry and appreciating its complexity and breadth of opportunity. As a result, the process of getting to know each other and establishing mutual trust is critical and needs to be carefully managed. This was the case in the Phoenix/1000heads context, with 1000heads founder Mike Rowe observing that: “We wanted a partner that shared our vision and would enable us to grow rapidly while preserving our independent culture and identity. From our first conversation, it was clear that Phoenix understood our ambitions and is best placed to help us realise them.”
Attracting Private Equity
For other agencies that want to follow 1000heads down the private equity route, what is the key to a) attracting their attention and b) doing the right deal? Well, the first thing to note is you shouldn’t believe everything you hear - private equity is smart and discerning money, deployed by experts. The oft-reported “wall of money” is a fallacy and although this route can be the best one, it is not the easy option. As guardians of their clients’ investments, private equity firms expect to see a great business plan, articulated by a passionate and committed leadership team with skin in the game and backed up by real client momentum, with a distinct and defensible market position. These are minimum requirements in securing and making a success of this kind of backing.
Likewise, it is important to do ‘due diligence’ on the partner you are about to invite into your boardroom. Not all funds are built the same; they have different investment and return criteria, varying risk appetite, different investment timescales and quite diverse personalities in the deal process, around the Boardroom table post deal and at Exit.
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It took a while for private equity investors to build up the confidence to invest in marketing services, largely due to concerns about agencies being so dependent on talent and a perception that client marketing budgets could be turned off at the flick of a switch. But these days, there are many examples of private equity firms generating healthy returns for investors – management teams included. In the first half of 2019, for example, five of the seven most active marketing M&A movers were private equity. All told, there were close to 200 private equity M&A deals across marketing services and technology in the first half of 2019, and every sign that this is set to continue.
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