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Value creation in the digital agency market


How do you realize value creation? Should you do this independently or through acquisitions? Where are opportunities for growth? There are many opportunities for digital agencies, but how do you approach them and what should you pay attention to?

Consolidation is and remains one of the most important strategic themes for digital agencies in 2021 and 2022. After Mediamonks and DEPT have struck the first blow, more and more parties seem to want to play this game, based on the assumption that adding additional services and competencies will lead to a larger share of wallet. Ultimately, the operational efficiencies and size will contribute to a better exit multiple.

“In 2020, we saw approximately 30 transactions in this domain, with by far the largest multiple deal-doer being Intracto”; says Maarten Kuil of BDO Corporate Finance. He continued: “However, in the course of 2020, we have seen more consolidation platforms emerge, whether or not supported by Private Equity. Candid has grown into an agency with over 200 FTE, and we see that Happy Horizon and ACE are also quickly achieving that number. But also, under the radar a lot happens. For example, 4NG has started its own fund, with which they manage to attract smaller parties. In the meantime, the fourth acquisition is a fact, in which entrepreneurship is an important theme. Our expectation is that eventually 5 to 6 platforms will emerge that will further consolidate the market, each in its own specialism.” A logical trend will be that more and more smaller deals will take place. The playing field of independent 50-100 FTE offices is getting smaller and smaller.

Ton Renes of 4NG responds to this handy; “We see many parties that are struggling to get through a glass ceiling. This may have something to do with the fact that they cannot attract or retain the good people on the one hand and that customers place ever higher demands on the other. The only way forward is then to opt for a niche strategy or join a larger group. We offer an enterprising structure with a clear profile and have therefore been able to conclude 5 partnerships in 18 months.”

The result of consolidation is (accelerated) realization of value growth. Value creation is fuelled by various factors, for example when the scalability of the enterprise increases. Scalable digital agencies are able to improve/retain profit margins while increasing revenue. This makes it relevant for entrepreneurs to be focused on efficiently setting up the company in addition to expansion.

Examples of variables that agencies can improve in order to achieve revenue growth and control costs are given in the following figure:

addition to higher revenue and profit margins, the quality of revenue also has an impact on the valuation of the company. The quality increases when risk elements in revenue decrease: higher recurring revenue, diversity/lock-in among customers, geographical distribution, diversity in product and service portfolio (see tree figure).

Pride Capital Partners, a private debt investor focused on IT and software companies, recognizes these trends, and sees digital agency companies from its portfolio, such as Bluefield and The Valley, responding well to this. “In the digital agency market, we recognize the growing focus on recurring sales and scalable business models and see that our portfolio companies respond well to this. This leads to increasing value creation and an attractive profile for investors.”; says Lars van ‘t Hoenderdaal, Managing Partner of Pride Capital Partners.

Bluefield, a digital agency based in Amsterdam, recently realized three targeted acquisitions. “By doing these acquisitions, we are able to complete our accountable growth strategy for our customers. A smart combination of marketing, design, technology and data contributes to the strategic ambition of our relationships. As a result, we are committed to the trend of making marketing really contribute to the business objective.” says Erik Klein Nagelvoort, Partner and co-owner of Bluefield.

Digital agencies try to increase their turnover in quantity as quality in order to realize value creation. The solution to this can be both autonomous and through acquisitions. For example, The Valley developed its own customer data platform under the banner of Nominow. This enables The Valley to offer a standardized product to customers, which is more recurring and scalable than project work. But this also brings challenges; additional FTE allocation, development hours, website development and outsourcing of resources that you do not have in-house. If all this takes shape, you must start selling the product. This also comes with the necessary challenges compared to the trusted, project-driven business models.

“In all honesty, we would have gone a lot faster if we had done an acquisition. An acquisition with a finished product, a team of specialists and a running business. Making, maintaining, developing and selling products has really turned out to be a different business,” says Auke Meijer, CFO/COO of The Valley, “However, by developing the platform in-house you can give good guidance and we now have a nice mix of customers on the platform with recurring revenue and in addition we also earn from hourly turnover.”

What considerations do you make in realizing shareholder value?

This article is the first in a short series of articles on value creation in the digital agency market. If you want to know more about this theme and how you can realize value creation, please contact Pride Capital Partners or BDO.

About Pride Capital Partners

Pride Capital Partners, with offices in Amsterdam and Cologne, provides hybrid capital solutions (‘private debt’) to companies active in the software and IT sector in the Benelux and DACH region. Pride Capital Partners supports these companies in the step to the next phase and focuses specifically on the following transactions:  growth, acquisitions and management buyouts.

For more information, do not hesitate to contact us:

Laurens Asselbergs

+31 6 11085418

About BDO Corporate Finance

BDO Corporate Finance supports with issues in the field of mergers, acquisitions, valuations and financing. Do you have questions about buying or selling a company, at home or abroad? Our advisors are happy to help you. We are happy to give you a new perspective.

Maarten Kuil

+31 6 23292879

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