Digital Advertising Accelerates

According to professional services firm PwC, the current slump in traditional advertising will accelerate the move to digital marketing and advertising across all media.

PwC predicts that TV advertising in the UK, and throughout Western Europe, will reach an all-time low in 2010 with revenues of $4.82bn from $6.05bn in 2008. It expects the market to recover to $5.33bn by 2013. It is a similar story with drastically reduced projections for the newspaper industry where it is unlikely that any on-line advertising will yield the premium rates demanded by on-page advertising.

From a marketers perspective this digital shift means smarter marketing, with the potential to provide greater scope for more targeted campaigns whilst increasing efficiency of spending.

Any media marketing growth over the next five years, say PwC, will be in video games, TV subscriptions, film, and internet access. Markets that are driven by growth in Europe, the Middle East and Africa, where total spending on entertainment and media is predicted to rise at an annual rate of 2.7 per cent until 2013.

Buy and Build Strategies

There is much talk about Buy and Build strategies, sometimes referred to as Leveraged Build-up, Strategic Roll-up or Consolidation Play, but whatever it is called – what is it and does it really add value?

A Buy and Build strategy normally involves the acquisition of a Platform company, of sufficient scale, to allow the addition of complementary companies as Bolt-ons. Ideally, the Platform company should have strong management (with spare capacity) and good systems. The plan is to improve performance of the group as a whole by taking advantage of operational synergies, economies of scale and access to a wider range of financing for capital investment. There may be a significant premium paid for the Platform company as this is the bedrock for further acquisitions.

There is a further advantage of a Buy and Build strategy – that of exit valuations. The multiple of profits (equivalent to P/E ratio) paid for businesses tend to increase with size and perceived lower risk to future earnings. In a Buy and Build strategy value can be created upon acquisition, ignoring any synergies, as the acquired company’s earnings will be more highly valued when incorporated into a larger business. If the premium is substantial it can allow the acquiring group to pay higher prices than some other buyers and lends itself to, for example, partial share exchange, allowing the acquired company’s shareholders to participate in the upside.

How immediate “value” is added:

The success of this strategy however requires that the acquired businesses continue to flourish and benefit from being part of the group. This strategy has been followed by many Private Equity Groups, and although the level of debt “leveraging” is likely to fall in future transactions, the strategy itself remains a valid one.

Examples of such strategies

ICT Sector
There are numerous examples to choose – Maxima Holdings, an AIM listed business is one example. Maxima have acquired a number of companies – DXI Networks Limited and Eclectic Group last year, and Centric Networks in July 2007.

Marketing Communications Sector
Hasgrove Plc, the AIM listed marketing communications company, has adopted an aggressive Buy and Build strategy over the last few years. In 2007 the business acquired Pavilion Communication Services and AMAZE, both operating in the digital marketing space. In 2008 they also bought Politics International Limited, a Corporate and Public Affairs agency. It is understood that this strategy is currently on hold pending a fall in price expectations.