By Arun Sudhaman

If the headlines are anything to go by, mergers and acquisitions have well and truly returned to the agency world. Recent months have brought a lengthening roll-call of firms that have jettisoned their independence in favour of selling out to a network, casting the 2009 recession as a brief pause in the relentless pace of wheeling and dealing.

Amid the torrent of new deals, though, is enough evidence to suggest a lingering sense of caution on the part of buyers. Several independent agency sources contacted by the Holmes Report expressed disappointment with the terms of typical offers, posing a particular quandary for highly-rated firms that have waited for conditions to approach those that characterised the M&A market prior to the recession.

The sense of frustration is compounded by some of the blockbuster deals that went through before economic turbulence struck. None were more eye-catching than Australian group Photon’s acquisitions of communications firms such as Naked, Frank PR and Hotwire.

“A lot of agencies want to sell but they are looking at deals from three to four years ago and saying ‘that’s what I want’,” says one agency source who sold out before the recession.

Those deals typically involved the full payment of the agency’s profit multiple upfront, followed by an additional earn-out based on future earnings growth. Even if the Photon buys have ultimately proved somewhat ill-fated, sellers will be hard-pressed to find such generous terms on offer in the current economic climate.

“I think sometimes people overestimate what the offers were really like for to five years ago,” says Charles Fallon, partner at M&A consultants SI Partners. “What’s different is the proportion of the value upfront is less. The risk is more equally shared and deals are constructed over a long period of time.”

A look at the deals that have been made since agencies began acquiring again, roughly nine months ago, shows that they are disproportionately weighted towards emerging markets and disciplines. MSLGroup, for example, has bought agencies in India, China, Taiwan and Brazil, while Next Fifteen, Publicis Groupe and Edelman have invested in digital shops.

These trends do not necessarily mean that publicly-listed groups are not interested in large independent firms from mature markets. Earlier this month, the Holmes Report learned that at least two holding groups had held talks with one of the UK’s biggest consumer firms, Shine.

Shine founder and CEO Rachel Bell said that her agency is “regularly approached” but dismissed the prospect of a sale, saying the agency was “currently happy revelling in our independence.”

Bell added: “I would never say never, especially if an opportunity arose that took the agency in an interesting direction, but that’s not something on the cards at the moment.”

If Bell is unimpressed with the typical deals on offer, she refuses to say as much, declining comment on this question. The head of another of the UK’s biggest independent firms – tech shop Brands2Life – confirms, however, that buyers are much more “savvy” these days.

“We occasionally get approaches,” says agency co-founder Giles Fraser, who adds he has no plans to sell. “My impression are that the deals are much tighter to tie management in for longer. Buyers are very very savvy. The days of a free-for-all are gone.”

Not only are terms less generous, but the idea of a typical deal itself is probably also extinct. One of the most aggressive buyers of recent times has been Engine Group, which has used a combination of stock and cash – without earn-outs – to integrate such firms as Hogarth and Penrose into its flagship PR brand Mandate.

“Engine is quite a unique case as they want everyone sharing the same vision and ideals, so they use equity to do that,” says Fallon.

“You definitely have to sacrifice much more of your independence these days than you did before,” adds the agency source. “Some people like that. Some don’t.”

A more complex landscape is also indicated by the decision of two big agencies – Freud and MWW – to buy back their independence. Fraser is not alone in thinking that “many of the arguments as to why scale is helpful” have been nullified by the internet and more open-minded clients. “It’s easier to pull teams together for clients than it might have been in years gone past.”

Fallon believes that a good agency can always price itself at a premium level. “But that comes down to the acquirer having a very specific need and there being in turn a strong management team on the vendor side.”

These days, it appears to be digital firms that are able to dictate terms in this manner. “If you are in the digital sector you can command a great price,” says Matt Neale, European MD at GolinHarris, one of many PR agencies that is hunting acquisitions. “For good agencies, it’s a sellers market.”

Perhaps so, but the twin engines of global growth and digital expansion mean that some successful independents may be less attractive to the holding groups than they once were. “The thing that increases your multiple is an international footprint,” says the agency source. “For someone buying you, there’s less risk as you’re more diversified.”

Or, as Fallon suggests, perhaps tighter terms will force independent agencies to ignore the hype that often accompanies agency sales, and be more selective about their prospective bedfellows.

“There is a lot of myth around how these deals are constructed,” says Fallon. “Multiples are very dangerous things to quote – they are just one part of the process. And good buyers are always cautious. This should force people to think hard about whether the acquirer is likely to help them meet their growth plan.”