Is A Digital Storm Brewing?

It’s the economic version of the perfect storm, and it’s brewing just over the horizon. Just as marketers are wising up and beginning to question the high fees charged by digital ad shops, a feeding frenzy has erupted among panicked traditional shops, and they’re paying outrageous multiples for tech companies and digital specialists. Hear that clap of thunder in the distance?

The Wall Street Journal says the recent spate of acquisitions has driven up targets’ sales prices relative to profits in a manner reminiscent of the ’90s tech-stock boom. And then there came the bust. So why is this happening?

The good folks at Forrester, who earn their livings studying stuff like this, say traditional agencies are awakening to the fact that they are desperately behind the eight ball when it comes to technology. We all know what desperation does to judgment. It’s not good. So the shops with the financial wherewithal—mostly giant holding companies like WPP and Publicis—are snapping up the digital darlings at multiples of up to 44 times earnings and making instant gazillionaires out of the sellers. And guess what that means? Those rates clients are beginning to balk at are about to go higher—at least at the newly acquired shops. Hey, somebody has to pay for the yacht.

But storms—perfect or otherwise—don’t make for smooth sailing. And when the seas get rough, my guess is these high-priced acquisitions are going to sink. The smartest agencies will continue to develop their in-house capabilities and work on bringing costs in line with changing client expectations. In the end, the market dictates what it will and will not pay for services. My guess is, yachts aren’t on the list.