Seeking scale in difficult times

Merger of independent agencies Spirit and Inhouse Communications

New partners Hani Haddad and Jihane Nasrallah (Greg Demarque | Executive)

The times are not easy, concede advertising industry members Jihane Nasrallah and Hani Haddad. But whereas growth in the Lebanese advertising market has been elusive for about three years, and while Haddad’s agency had a rare year of seeing turnover drop in 2015, the two are joining forces in a merger. The merger process formally commenced last month with the relocation of Nasrallah’s agency, Inhouse Communications, into the offices of Haddad’s Spirit.

The integration of the two businesses is currently in phase one, entailing evaluation of the team and new human capital needs. There were some redundancies or departures of staff members who did not see themselves fitting into the new organization, but, according to Haddad, these represented a small portion of the new combined team of 35 individuals. “There was some [employee] turnover but we are also recruiting and will have some vacancies that need to be filled as we are restructuring,” he says.

A common vision

A key element in their corporate plan is to use economies of scale for improved profitability and stronger positioning in regional markets. “The interesting part of the merger is not turnover but profit,” Nasrallah explains. Efficiency gains from joining their forces entail lower office costs and reduction of overheads, she adds.

The owners of 11-year-old Spirit and six-year-old Inhouse Communications say they share a history of collaboration going back almost 10 years when Haddad interacted with Nasrallah as a client of his marketing services. Discussions on joining forces evolved in 2015 at a time when Nasrallah was a nominee for an entrepreneurship woman of the year award and received coaching on ways to grow her business by regional expansion or merger.

[pullquote]Both agree that having the right chemistry is crucial for a successful business partnership[/pullquote]

The newly minted business partners tell Executive that they share the same vision of running an advertising business. Each of the two firms has been operating as an independent agency offering the full range of media planning, public relations and advertising services. As a merged entity, they will operate on the basis of the very same formula. “Both of us were working the same way, which is different from the market, and have the same vision, which is being a full-service agency. We are focused on proximity to local clients,” Nasrallah says.

Merging two local advertising companies into a larger independent agency is an alternative path to the advertising industry’s prevalent business development route, which is alignment with regional groups and, ultimately, with one of the multinational conglomerates. As shown by numerous cases in the recent and not-so-recent past, local Lebanese agencies using the latter route have found their final homes as fully-owned and controlled units of global marketing powerhouses.   

For Haddad, who started his career in the advertising and marketing communications industry more than 20 years ago, aligning his first agency with a multinational group back in 2000 was a disappointment and he reversed out of the relationship by setting up Spirit in 2004. Given that advertising talent moves easily from local agencies to multinational ones and vice versa, he says the difference is not in human capital but in the rigid corporate cultures and bylaws of the multinational organizations by which they oblige local clients to commit to a certain way of doing things. An independent agency can be more flexible in responding to client needs. “This is added value and this is what clients are telling us when they say they are comfortable working with us,” Haddad claims.   

According to him, the addressable market for independent agencies is getting larger because more Lebanese companies are expanding abroad. By Haddad’s own assessment, Spirit is the largest independent agency based in the country. He declines to say how much Nasrallah and he are expecting from the merger in terms of margin improvements but admits that growth of profitability should be double digit. 

Moving forward

The only number he is willing to disclose is also by self-assessment. Following the merger, Spirit is now a $30 million company when all assets and the Dubai office that serves Gulf clients are taken into account, he says.

[pullquote]A key element in their corporate plan is to use economies of scale for improved profitability and stronger positioning in regional markets[/pullquote]

The company will invest into capacity building, job training and business development, including travel, to explore and develop new markets in the region, but budgets have not been finalized. “We have drafted a plan but we are still testing it as we are now in phase one of the merger,” Nasrallah says.

The merger was done by exchange of ownership shares and did not involve a capital increase. Haddad refuses to say how the ownership stakes are now distributed. However, his position of chairman and chief executive of the company, and Nasrallah’s position as managing director of new business give an indication. According to Haddad, Spirit operated in the past with a perfunctory board and is now advancing to a three-member board as the strategic decision platform. Board members are Haddad, Nasrallah, and Spirit’s Regional Creative Director Maya Saab, who are all shareholders in the company.

Both agree that having the right chemistry is crucial for a successful business partnership. While sharing the same basic approach to the business is essential, “there should always be areas where one complements the other,” Haddad opines and Nasrallah notes, “That is why we are now putting proper structures in place and defining responsibilities.” She adds that the merger of cultures between the two organizations still has a lot of ground to cover, saying half jokingly, “I am realizing this today from your interview. I moved [into the Spirit office] three or four days ago, so we are still in the honeymoon phase.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.