The Butterfly Effect of failed mergers

Jorg Borgwardt's picture

Edward Lorenz coined the expression of ‘The Butterfly Effect’ to describe the consequence that a seemingly minor action such as a butterfly’s wing flapping could have on triggering a hurricane in another part of the world.

One cannot help but be reminded of this when reading recent news about the departure of key executives from Publicis Groupe and Omnicom. In the case of Publicis, the group’s Chief Operating Officer Jean-Yves Naouri left while Razorfish and Rosetta were merged at the same time as the group predicted a difficult year.
In the case of Omnicom Randy Weisenburger, group CFO announced his departure last week. Commenting on this Noreen O’Leary wrote in AdWeek: “The unexpected departure comes four months after the failed merger between Omnicom and French rival Publicis Groupe, following difficult negotiations to create the world's largest holding company, in a deal announced in July 2013.”
Big holdings such as Omnicom or Publicis have sufficient depth to fill the void that key departures leave. But for smaller agencies the loss of a key executive or a strategic client will have a much bigger rippling effect; a substantial loss of value is an overnight result. If you were thinking of selling your agency or had already embarked on such a mission don’t be surprised that potential buyers will turn their back on you. Even worse, they may not return to the table for many years to come.
If you want to avoid The Butterfly Effect consider these steps:
1. Be close enough to your strategic clients to understand their intentions of working with your agency in future.
2. Tie your crucial people to your business by making their departure unattractive for them.
3. Ensure a good client balance whereby no individual contract exceeds a value of 20% of your total revenue.
4. Run regular relationship assessments that measure relevant KPIs and compare those to industry norms and benchmarks overtime.


Peter Linnell's picture

As Jorg rightly states a client portfolio dominated by one or two clients can be considered as a discount factor by potential buyers as they represent a higher risk. However, in some cases they can be the reason the buyer is interested in the first place for example if those clients are a strategic target to gain access to a large group or business sector. From the owners perspective large clients usually mean larger margins and may be why the agency has reached critical mass. Often without such clients the agency results and profile make it unsellable.

By Peter Linnell