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Agency M&A Acid Test 4 – The Rule of Thermodynamics

Posted by Gellan Watt on 10th September 2018

Ok, I’m going to start this piece and say right now, this is not one of the three rules of thermodynamics.

It’s nothing more than a metaphor. Something that was once said to me, that made a lot of sense to a non-scientific creative thinker like me.

I get asked a lot ‘How do you know if it’s the right thing to do…?’ when it comes to merging with another agency or being lined up as an acquisition target.

And when I first heard this ‘non-rule’ rule applied to agency M&A, it struck me immediately. YES. That’s it. The intangible bit. It made a huge amount of sense – in fact, it’s something I have experienced in my own endeavours merging one of my agencies as an agency founder, later as a Group CEO on working on M&A and now consulting with agencies.

I believe this is one of the five acid tests of good potential fit for agency mergers.

For agency owners or CEO’s trying to work out if merging, selling or acquiring is a good idea or not, is, frankly, incredibly hard. Particularly for owner managers, because it’s such an emotional process, but also for larger and even network agencies.

It’s a question of fit. Not just they’re good at this and we are good at that, margins, growth, they do digital, we do content etc… this is a different type of fit. And why the metaphor is important. The type of fit I am talking about is somewhat more intangible. It’s a test of something that doesn’t sit in the P&L or balance sheet.

So, the non-rule rule of thermodynamics that applies to Agency M&A.

When something hot meets something cold, two things happen.

What’s hot cools down.

What’s cold heats up.

And the result can often be the kind of heat that can best be described as… ‘meh’! The kind of heat that you wouldn’t want to bath in.

Of course though, when two hot agencies merge where there are complementary skills and services that add to the offering and the culture of the business – there’s no loss of heat. In fact, the chemical reaction (and I taking this too far now?) can be exponential.

Any other condition (HOT:COLD or COLD:COLD) is a bad combination for a merge unless it’s just about the money for any exiting parties. Because the net resulting combination, is going to hard work and very little fun. The only upside is if the acquirer is the cold party, but even then they have to deal with the fact that what was once piping hot… is no longer.

The balance sheet doesn’t tell the whole story… because the hot agency talent will cool down to such a point that more effort is given to giving it back it’s spark, than growing the business, or any immediate growth will be short-lived… because the magic has gone.

This is what I call, chemical fit. Not cultural. Not technical. I’ll post more on these soon. This is about something you feel in your gut. And it should be listened to. Every time.

Especially if yours is the hot end of the deal. No matter what the numbers say.

Following an interesting comment from Stephen Blandamer at JP Morgan, I am compelled to add to the above that I apply this rule to all consulting. It is an Acid Test for M&A – but it applies to people and projects too.

Messi in an underpowered ‘cold’ Argentina team, is not the same footballer as when surrounded by the great and the good… the ‘hot’ at Barcelona.

Greatness needs to be surrounded by greatness, in all it’s forms to truly reach its full potential.

That’s not to say that great talent or teams cannot be paired with others. Of course not. And greatness isn’t always found in shining stars. Someone once described to me the most important part of any team is the ‘extraordinary ordinary’ – the ones who get things done. The people that make it happen daily. Not the ones who win business, innovate or create. But the ones that we cannot live without. They are equally great, or ‘hot’ in their own way.

The results of every combination we make, in business and in life, in part is somewhat predictable when considered in this manner.

The one certainty is what will never work. When hot meets cold – all that’s left is mediocrity.

And that, is the worst of all outcomes.

Tags: acquisitions, Ad Agency, Advertising Agency, agency, content, Creative Agency, Digital Agency, entrepreneur, growth, Integrated Agency, M&A, mergers and acquisitions, merges

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