The independent digital agency in South Africa is fast becoming an endangered species. In the space of two weeks the acquisitions of three local digital agencies were announced and rumours of a fourth about to go the same way confirmed.
In late November, WPP – the world’s largest advertising group – acquired a majority stake in local social media communication and social business specialist Cerebra. This was followed a few days later by an announcement from Publicis – the world’s third largest player – that it was acquiring local digital agency Synergize.
South African media company Caxton then announced its acquisition of digital media sales house and Facebook sales partner Habari Media on 9 December. Rumours of a further Publicis /Zenith acquisition of local company Applied Media Logic were confirmed by a highly placed source with the deal likely to be officially announced early in the new year. AML’s twitter profile positions the company as the only 100% locally owned South African media independent in the top tier. Not for much longer…
Acquisitions chase access to skills, cost rationalisation and a foothold in Africa
The flurry of activity is the local manifestation of a broader international trend of industry consolidation. This is evident in the $35 billion merger of Publicis with the global number two agency, Omnicom, announced in July. Number five agency, Japan’s Dentsu, recently completed its acquisition of British media buyer and planner Aegis.
Strategic media and communication consultant Virginia Hollis, pleads the fifth when pressed for her view on these mega-mergers and acquisitions. As former managing director of The MediaShop (Sandton) she’s been through the experience herself. “It’s an opportunity to amortise costs – they can consolidate work and increase their client base,” she says.
She also sees the Africa agenda as an important underpin. “Africa is an important continent in terms of future growth, especially in the current context of low growth in Europe and the US. South Africa is seen as the foothold into the rest of Africa and there’s still growth in this market, so acquirers feel they’re likely to be able to generate some kind of return. Merging of assets can also strengthen networks across the African continent.”
Standalone digital agencies are an anomaly
Branding and advertising expert Andy Rice is chairman of brand strategy consultancy Yellowwood, part of the TBWA group. He sees the acquisition of local digital agencies as the beginning of the end for the era of the specialist digital agency. “I believe the principle of digital agencies was flawed to begin with. When radio advertising started, there were no radio agencies. The same is true for television. The idea of a single channel defining an agency suggests that it’s a different business. New channels are simply another means of reaching the same audience – the brand should look the same across all channels. The best campaigns integrate the novel with the traditional. Digital does call for a certain set of skills, so these acquisitions represent a fast tracking of expertise for the acquirers.”
Integration is likely to be painful
The press releases announcing these deals trumpet their benefits, including the marriage of local success with global thought leadership, the ability to leverage complementary strengths and exploit synergies across media platforms. But Rice and Hollis cite concerns that go beyond the usual worries of conflicts of interest in the client base and staff disruptions.
“These deals bring lots of complexity,” says Hollis. “What do they do with competitive brands and competing clients? If you continue to run agencies separately to accommodate clients this affects the ability to amortise cost that helps the deals make sense.”
Local conditions are a further wrinkle that offshore companies may not have fully considered. “We do things differently in South Africa – we’re not a homogenous society like the US and Europe. Our markets are unbelievably different, so a merger or acquisition might sound like a good idea at the time, but it’s difficult to just take what the acquirer does in Europe and apply it here.”
Part ownership in the various markets across Africa is also likely to make it difficult for international companies to enforce their strategy if there is resistance from their local partners, says Hollis.
How will the international agenda affect the local market?
Rice sees similar challenges ahead for the industry. “This general consolidation trend in the industry is nothing particularly new. What worries me is that international acquisitions impose the demands of a global parent on to agencies that have previously flourished in a less controlled environment. The focus on quarterly reporting prevents agencies from taking a longer term strategic view and being less risk averse. Bean counters in New York ultimately affect the decisions made in the local market.”
Hollis believes media agencies can’t survive if their new global owners are going to dictate what they’re going to do and what they’re going to charge. “It’s already an overstretched working environment – hiring freezes, headcount reductions and salary cost containment is likely to create a lot of unhappiness. Training and mentoring of new blood is tricky when there’s no seniority or mentors left to do it.”
The change also brings huge opportunities
But it’s not bad news for everyone. Hollis sees these industry developments as offering great opportunities for entrepreneurs. “This opens a whole new avenue for young start-ups. Locals know the market better than the internationals – nobody does South Africa and Africa better than we do. And there’s a lot of talent and senior staff leaving the big agencies. There’s scope for a smaller agency that offers a better service to make more money – clients are happy to pay as long as they get the right quality of work.”
Rice’s biggest concern revolves around one of the key assets of the industry – creativity. “I’ve never heard anyone say that an acquisition liberates creative capabilities – it’s much more likely to strangle creativity. With all of these structural changes, I worry that as an industry we’re losing our mojo, our creativity, the one thing that makes us different from management consultants. I’m worried that the smaller agencies being acquired may lose their innate creativity – the thing that they did well – if they are absorbed into a mainstream group and that group is then absorbed into a big international group.”
Rice sees the same process ultimately playing out as Hollis. “Creativity is a slippery concept – it’s hard to sell to hardnosed management and accountants. But as an industry we can’t allow the value of innovation and creativity to be destroyed or undermined. It’s the young turks that take the risks and that are innovative and creative. That’s why a new round of breakaways eventually happens.”
While these mega mergers and strategic acquisitions may make sense on a spreadsheet, how they ultimately play out remains to be seen. It’s not clear that what’s good for an international parent is necessarily good for the local agencies or the broader South African industry. But it opens up huge opportunity for entrepreneurially minded players and its certainly going to be interesting to watch as the process unfolds.