Accenture Acquisition of Droga5 May Be Inflection Point for Madison Avenue

May 3, 2019

By Matthew Schwartz

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Spring is in bloom, but there's a serious chill swirling down Madison Avenue.

Accenture's acquisition of independent ad powerhouse Droga5, which was announced in early April, could be a game-changer for the advertising agency business writ large. (Droga5, whose clients include iHop, Prudential, and Under Armour, among others, will become part of Accenture Interactive.)

Sure, management consulting firms such as Deloitte, Ernst & Young, IBM and KPMG — in addition to Accenture — have been snapping up digital and marketing services shops for the last several years. However, Accenture's acquisition of Droga5 signals a much more aggressive approach among the management consulting firms when it comes to eating into the ad-agency business.

 

A New Calculus

Whereas many of the previous marketing services acquisitions probably cost the management consulting firms some walking-around money, Droga5 likely fetched several hundred million dollars.

The calculus does not stretch credulity: In 2013, William Morris Endeavor (W.M.E.), the mega talent agency, acquired a 49 percent stake in Droga5 estimated at $225 million, according to the New York Times. Since 2013, the ad agency's footprint has only expanded, commanding marcomm budgets from a veritable who's who of global brands and collecting numerous industry accolades.

The scale of the Droga5 acquisition is a stark reminder of the increasingly competitive challenges the advertising holding companies face — both creatively and financially — from the management consulting firms.

As David Droga, founder and chairman of Droga5, told Fast Company soon after the deal was announced: "I feel the symmetry between what Accenture brings to the table, which is second to none as far as scale, expertise in digital and experience, and what we bring to the table from a strategy and creative level, is something that will be in high demand by clients."

 

More Rollup

The Accenture/Droga5 deal is likely to spur the ongoing consolidation on the agency side and alter the creative landscape among the ad holding companies.

Earlier this month, for instance, Publicis Groupe SA announced its $4.4 billion acquisition of data and email giant Epsilon and late last year Interpublic Group of Cos. acquired data firm Acxiom Corp.'s marketing services unit.

Both deals were in the works before the Droga5 deal was announced, of course. But they signify a larger trend: In order for the ad holding companies to stay viable in a post-digital age they must cultivate business models based on data management, content creation and other nontraditional types of business.

And while individual deals may vary in size and scope — whether bolt-on buys or strategic acquisitions — the ongoing consolidation within the ad field seems proportional to the management consultancies purchasing digital and marketing agencies. An "arms race" between the management consultancies and Madison Avenue may ensue.

But it's not just the holding companies scrambling to consolidate their portfolios and bolster their products and services. It's the equity they're willing to part with that underscores how dramatically the business is changing.

Last fall, for instance, WPP merged multiple agency brands into new entities Wunderman Thompson and VMLY&R. So long "J. Walter Thompson" and "Y&R," two of the most storied advertising agencies in U.S. history. In 2017, WPP merged two major media agencies — Mec and Maxus — into a single agency WPP rebranded Wavemaker.

As Madison Avenue seeks additional cost efficiencies, how many other onetime household names in the advertising business will fall by the wayside?

Other key questions abound: Will the ad holding companies make additional buys purely based on strategic need? Or will the deals be more defensive in nature? Will the management consultancies — sensing that the traditional ad shops are vulnerable — start to pluck from Madison Avenue what were once household names and create generic one-stop-shopping that more and more clients seem to prefer these days?

The main takeaway: Madison Avenue is contracting just as the management consultancies are spreading their wings and offering clients the kinds of creative services that not too long ago were strictly the domain of the advertising and marketing sectors. No longer.

Watch this space carefully.

For more on the repercussions of the Accenture/Droga5 deal, check out this interview Bill Duggan, ANA's group EVP, recently conducted with Brian Whipple, CEO of Accenture Interactive.


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