“You know how this works from here on out. We start with a bunch of piddly shit. Your Topaz, your White Knight cologne. We add your midsize stuff. Maybe Mohawk. We still got Vicks. That’s big. Next we worm our way into a few niche companies. Get something sexy in a good neighborhood. A pharmaceutical. Maybe if god is gracious, a car. And then, we go public, open an office in Buenos Aires and Elvis plays at Tammy’s sweet sixteen.” – Ken Cosgrove, “Mad Men”
Ah, the good old days. The 1960’s were the heyday for the agency IPO. PKL kicked it off in 1962. Grey, FCB, and J Walter Thompson all followed later that decade. David Ogilvy took Ogilvy public in 1966 and claimed Warren Buffet as an early and long-term investor. Agency IPOs continued in through the latter half of the 20th century. The renowned Saatchi brothers took Saatchi & Saatchi public in 1975 in a reverse merger. Australian agency John Singleton Advertising in 1993. Media agency CIA in 1998. Japanese agency Dentsu, a unique blend of ad agency and media agency, pulled it off just in time in 2000. The Saatchis, extraordinary in their financial dexterity, pulled off another IPO of their new agency M&C Saatchi in 2004.
That was a lark. While the occasional agency IPO has happened in the 21st century, the agency IPO has been a rare bird indeed.
Despite Warren Buffet’s protestations to David Ogilvy against conglomeration in the 1970’s, conglomeration took off in the 1970’s and 1980’s with corporate giants like WPP and Omnicom coming to dominate the agency landscape. Perhaps the final nail in the coffin of the agency IPO was struck with the public offerings of the digital agencies at the end of the 1990’s, with Razorfish and Agency.com both IPOing with valuations in the hundreds of millions of dollars before crashing in the dot com crash. Though both still survive in name, the founders lost control of their agencies and both were sold for a song during the crash.
Since then, conventional wisdom has all but abandoned the concept of an agency IPO. While growing and running my agency, it was never a realistic possibility to go public. Our advisors would explain that IPOs for service companies were rare and not generally profitable, or just not done. The shadow of the implosions of Razorfish and Agency.com loomed large over the agency landscape, especially at the digital agencies. Not one, to my knowledge, has gone public in the United States since.
When starting my agency, you heard the same refrain. Razorfish and Agency.com were widely mocked as stocks that were sent into the stratosphere on faulty fundamentals, and then plummeted and were destroyed. Razorfish peaked at a valuation of an admittedly hefty $4.7 billion on a few hundred million of revenue, an absurd amount in a heady economy. The stock plummeted in the crash and the company was sold for a pittance. It was somewhat redeemed later, however. After the company was acquired several times, it was eventually sold off by Microsoft for $530 million in 2009. Now, $530 million isn’t $4.7 billion, but nor is it zero. I would take it.
Even though Razorfish survived, grew and prospered and eventually became worth a substantial amount of money, the conventional wisdom was forever changed: services companies didn’t scale. They relied too heavily on people, talented people, rare people, and thus weren’t worthy of IPOs. This, apparently, wasn’t because they couldn’t make good money, but rather it appeared that it was because they didn’t make ridiculously large returns – perhaps unrealistically large returns.
Despite the fact that both agencies and tech startups rely heavily on the employment of thousands of hard-to-find developers, along with business development staff, one type of company, the tech startup, is considered dynamic and capable of boundless growth, while the other is considered staid, low-growth and difficult to scale. Apparently hiring 10,000 sales people at Groupon, for example, is dynamic. But an agency that needs 10 business development executives doesn’t scale. Go figure.
So, aside from me and other agency owners being thwarted in our quest for millions, what’s the big deal? Who cares? If you’re a brand, you should care. If you own any company that relies on advertising, you should care. If you’re in real estate, you should care.
Because without the IPO, agencies are unable to retain the best talent. This is most painfully felt with developers, who can not only earn hefty salaries, but are tempted with the legendary stock options in tech companies. Developers are becoming some of the most important workers at agencies, and with the rise of social media, they are becoming even more important. It’s also true for analysts, account people, and, more and more so, graphic designers. All of these positions are highly in-demand in advertising, tech startups, and finance. Only advertising has this handicap.
Worse, brands and agencies are at a crossroads when it comes to agency compensation. Compensation levels are declining, and profitibility is being squeezed out by the rise of procurement in advertising purchasing. No less an ad visionary than Lee Clow, creator of most of the Apple advertising we all know, including the legendary 1984 spot, has stated that advertising agencies are “paid like they’re doing the client’s laundry.”
I know, I know. “Advertising. Who cares.” But digital “agencies” are not just advertising agencies. They are high-end web development shops. And the same is applicable for specialized web development shops that don’t do any marketing at all. We all suffer for it. We see it in the crappy websites we have to endure when booking an airline ticket. We see it when we go to a local restaurant’s website and see a crappy flash website no one wants to use. We see it when trying to look up anything on any government website, ever. Developers are in dire supply in the United States. And developers who want to work for a company that doesn’t offer stock options are becoming virtually non-existent.
There are so many horrible websites that all of us have to use every day. They’re not horrible because people are stupid. They’re horrible because it’s impossible to find great developers when you don’t have stock options and can’t hold out the carrot of a possible seven figure payday. Because of this, our Facebook page may load in milliseconds, while our bank sites barely work at all. The more I think about it, and the more I endure the misery of poorly built websites, the more depressed I get. I’d like to say that there’s some sort of hope on the horizon, but I honestly can’t see one. The debate between agencies and clients on compensation is eternal, and holding companies like WPP and Omnicom aren’t going anywhere any time soon. But at least it helps to understand what’s going on: that the finance industry’s antipathy towards agency IPOs is directly responsible for many of the bad sites we endure today.