I knew when these groups were being put together that they weren’t necessarily a good idea. We talked to a number of them in Australia and overseas initially, and recently (with the exception of Photon) have seen all of them struggling with falling share prices, layoffs and a lack of clear direction. Here are the reasons why I think they are not the way forward: 

Most mergers / acquisitions don’t deliver

I learnt this long before TigerSpike when I worked on them at KPMG. Any management degree will also tell you that mergers and acquisitions are more about egos than exploiting synergies and driving value (which should be the only reason for them).

If you look at many of the consolidated groups, they are a combination of many companies. So how can this work? When one is hard enough, how can you get value from many?

Motive is wrong

If ego or only money is the motive for these groups then that is not right. If you are not sure if it is, I’ll give you a clue – it is if it is being driven by VCs and bankers then it probably is. The Finance guys of course need to be involved, but not the ones driving it. Blue Freeway was a good example of a company that was being run to look sweet to VCs and investors without thinking about adding value to clients. They have since changed their model, but still seem to be suffering.

Some examples of reasons for mergers or acquisitions are a good idea are:

• A company with many publishing clients buying a company with a cool piece of technology and selling that through their client network
• Two companies with complimentary geographic footprints merging to become global and sell to clients who need a truly global footprint
• An old media company buying a new media company to infuse the new technology, innovation and thinking into their company
• A traditional advertising agency with many clients asking for digital services buying a company who provides these services to expand their offering to these clients
• Two similar companies merging and saving costs by centralising support functions (if they can harmonise their processes so that the central admin guys are not just working twice as hard on each individual company’s processes) 
• There are more, but you get the idea

The motive for these things need to be that the combined group can add value to their cleints, while either cutting costs or increasing revenues, or both. Put simply, 2 + 2 has to equal more than 4.

Technology is underestimated

Originally BlueFreeway was going to combine the platforms of all the member companies into one “Blue platform”. This sounds good (to the VCs as it builds their IP), but in practice it is never going to happen. If the tech guys in each company are anything like our tech guys, they all have their theories on the direction of tech and they are all right about those (NB: we actually are right!).

Now imaging putting them all together and trying to form a consensus on:

1. which technology direction to take (people like Joost got it wrong initially, and paid for that) 
2. which base technology to use – I know that half the Blue Freeway companies used .Net, and the others Java, and others
3. how much time each tech team has to spend on the central project (our tech are fully utilised for 6 months on our own client projects. If we were part of a group, spending time on a big central project would mean that revenues would fall)

I.e its NEVER going to happen. Going back to my days overseeing technical integrations at KPMG, the banks had a really hard time integrating two of their own internal systems, and they had ten times the budget and resources that these groups do.

Building from scratch is more viable, but that takes a long time. We are on version 3 of our Phoenix platform which has been continually updated over the last 5 years. We have guys assigned to it full time. Building a new one that meets the needs of all the group companies is very very hard, and each new company purchased becomes a new complex integration project. 

People forget technology. Especially the money men or the wide boy entrepreneurs. Technology buried Boo.com. If you get it wrong you are fucked no matter how good your marketing / PR spin is.

Heart is ripped out

Most of the companies that are bought by these groups are medium sized start-ups. They are being run on the passion of the founders and every ones hearts are in it. It is “us against the world!”. When the founder cashes out, or takes orders from someone with a different direction in mind, then things change. 

When the motivation leaves these companies performance falls. Also with a larger group behind them, the long suffering underpaid staff who were doing it for the love now start to ask for more money. This is inevitable: if you are not motivated by other things, then money becomes more important, and that increases the biggest cost that these companies have. Again, performance suffers. 

Advertising is changing

But there are many groups out there. Photon is doing well, or look at WPP or any of the other big advertising groups. Why are they working?

I think that the reason is that they give the individual companies autonomy and feed them work through the other companies in the group. But to be honest, we work with many of these groups and they often don’t like each other, and often pitch against each other and try to nick work from each other’s clients. We are often engaged to help with mobile work despite the existence of a mobile company within the group.

The theory is that big global brands can go to one advertising network like WPP and get everything they need. Problem is that is not the case. The one relationship to rule them all’ doesn’t happen because the companies are not that close, and specialisms like mobile and social media are just not good enough within the agencies. We have seen many larger advertising agencies put their hand up for mobile work that they just can’t deliver, and they end up doing something stupid like QR codes when only 5% of handsets have the reader installed (creating an extra unnecessary step for consumers).

Brands are starting to go outside these big groups for 2 main reasons: 

1. the skills they need are not within the group. No matter what the bigger guys say, the smaller agile independent digital companies will always outshine the big agencies for innovative and cool work. Which is what the brands want
2. the big brands can exert power over the smaller companies. For example Brand X will get more personal attention from a medium sized agency for whom they are one of their largest clients, rather than from someone like Publicis for whom they are one of their smaller clients. This trend is also being seen in tech companies, where big dollars are flowing away from guys like IBM and towards medium sized technology outfits for this reason.

The risk in smaller companies

Ok, so before I get too down on them, bigger companies and groups do have some advantages over smaller companies. Smaller companies if they are good, are likely to grow. Smaller companies who grow fast may well be very profitable, but they will go bust if they are not careful. You don’t want them to go bust in the middle of your project.

They may seem cool, and exciting, but many smaller companies lack the controls and processes that larger companies have (that said, I am constantly surprised how many many larger companies are weak in this area). If you are their biggest client running their biggest project, then this is uncharted territory for them.

In summary

• Only merge or acquire if 2+2 really does equal more than 4. Do it for the right reasons
• If you are a brand, shop around for cool services that you want. These may well be within a group, but don’t assume that just because one group company is cool and easy to work with and do good work that the others will too
• Make sure if you go for someone smaller that they can deliver what you need. What you don’t want to do is work with a small company who goes bust or gets so busy they can’t deliver for you
• Go to a cool independent medium sized company like us (Oh jesus christ!.. don’t tell me that whole email was one big sales pitch for TigerSpike… haha…)