It's a Rollup World

Art Stevens

“Rollup” is a phrase that has gained prominence and recognition in the PR agency world. One of the early rollups was created by Peter Gummer, now known as Lord Chadlington. Gummer, a UK businessman and entrepreneur, “invaded” the U.S. and offered to buy up any PR agency that came his way. He succeeded wildly.

Many prominent PR agencies succumbed to his will and financing and became wholly owned by a company he named “Shandwick.” For a long time, Shandwick consisted of many agencies and was considered to be part of a rollup, defined as the acquisition of a number of agencies generally standing as separate, autonomous units under the umbrella of a holding company.

But then Gummer did something unusual. At a certain point, he notified all the agencies that he acquired that they would no longer be known by their original names but would become Shandwick. All of the agencies that had operated under their own names would now become field offices of Shandwick. Shandwick was then acquired by Interpublic, which also acquired Larry Weber’s former firm Weber. The two were merged to become Weber Shandwick, which is now the second-largest PR agency in the world.

This rollup, which it originally was, gave rise to many more rollups as the years passed and added to the enormous growth of such present-day agencies as Finn Partners, Real Chemistry and Stagwell Group. Given the success of these organizations, many smaller agencies began to find a way to grow exponentially by finding funding partners and acquiring agencies. Real Chemistry, founded by Jim Weiss and formerly known as w2o, now does around $500 million in revenues by virtue of both organic growth and acquisitions.

So, who’s doing the funding and taking some equity in PR agency rollups? Private equity firms and PR agencies themselves. At one point, private equity firms wanted very little to do with professional service firms, including public relations. The premise was that the assets of a service firm go down the elevator each night and the company is bereft of assets. They preferred manufacturing and industrial companies, which made things and had machinery.

But Weber Shandwick made a lot of private equity heads turn. They began to see the continuing growth of PR agencies, and one—Edelman—that topped a billion dollars in revenues. No small potatoes. PR agencies could demonstrate EBITDA of more than 30 percent, in some cases, and the use of agencies by the corporate, government and non-profit worlds were spending more of their budgets on public relations.

There are more private equity firms supporting the growth of PR agencies than ever before. And, consequently, there are more acquisitions of PR agencies taking place than ever before. No longer is the sole exit strategy for the founder of a PR agency to close up shop and go fishing. No longer is the option of selling to employees at discount prices a second option. If a PR agency has a record of revenue and profitability growth over a period of time, there’s a very good chance that such an agency is an acquisition target. PR has become more of a business than a cottage industry. The founders and principals of modern agencies must not only serve clients but must run their businesses with an eye on profit and loss. Agency owners rely heavily on their financial advisors in the form of highly trained chief financial officers and outside CPA firms.

Plus, PR agency owners currently make an enormous amount of money. I’ve seen agencies that do around $3 million in revenues generate more than $1 million in profits. And most of that goes to the owner. Not a bad business to be in, and the financial community has awoken to that fact.

So, where is the PR agency business right now? It’s growing rapidly. More agencies are being acquired by sources outside the PR agency world. More agencies will exceed $100 million in revenues. And agencies that are doing around $20 million in revenues today are good candidates to be the platform agencies acquired by private equity firms and could rollup smaller agencies within their universe.

And what does this trend do for someone like me, who has been facilitating mergers and acquisitions for more than fifteen years? Frankly, it means greater opportunities and a lot more fun.

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Art Stevens is Managing Partner of The Stevens Group.