Sellers of Sizzle Warm Up to Deals As Madison Avenue Embraces M&A

The latest blockbuster deal among ad agencies, the $4.7 billion acquisition of Young & Rubicam (Y&R) by WPP Group PLC last May, is an example of the pressures that are driving consolidation among agencies and their clients. “The main reason for the march to consolidation among the advertising holding companies is pressure from Wall Street to show profit growth. This, combined with aggressive internal growth goals, has driven a lot of the industry’s m&a activity,” says Gavin McElroy, a partner who specializes in advertising at the New York law firm of Frankfurt, Garbus, Klein & Selz. According to Abbot Jones, a managing director at New York’s AdMedia Partners, an investment bank, the current management mantra of one-stop shopping is also driving these deals. “It is much cheaper and quicker for agencies to fill holes in their lineup by buying a company than to build the expertise in-house.” Another megadeal that has reshaped the ad industry is Publicis SA’s acquisition of Saatchi & Saatchi last June for $1.9 billion. Publicis had also been interested in buying Y&R, but never got as far as making a formal offer. Paris-based Publicis, which had been the industry’s ninth-largest agency, has been on its own U.S. acquisition spree in recent years. Conquests include Fallon McElligott, Hal Riney & Partners, DeWitt Media, and Burrell Communications. Saatchi had been the world’s 12th-largest advertising holding company. Michael Ditzian, a partner at New York law firm Davis & Gilbert, says, “If you can increase the volume of your media buys, you can become a real strategic force.” He says that the largest consumer spenders on advertising are looking for shops that can negotiate very competitive media buys. The industry is consolidating so quickly that some deals are viewed, despite the strategic incentives that may also justify them, as serving to bulk up the acquirer so that when it goes on the market it will command a higher price. This was the apparent strategy behind the $592 million acquisition of Lighthouse Global Network by Cordiant, announced in July. In press reports, Cordiant CEO Michael Bungey said that he assumed that the Lighthouse purchase would make his company a more attractive merger partner. In February, French ad firm Havas Group, a subsidiary of Vivendi SA, shelled out $2.1 billion to buy Synder Communications Inc. The deal gives the French company access to U.S. markets and strengthens its marketing services portfolio. Aggressive profit goals are not unique to advertising. While many industries are responding to consolidation pressures, advertising has an additional impetus to consolidate: The clients are merging with each other. “There’s a clear element of self-defense in ad mergers,” McElroy notes. “The supposition is that bigness is good because it gathers together more intellectual capital for clients’ needs.” The client mergers, such as the deal that created DaimlerChrysler AG, have two major effects on agencies: They reinforce pressures for global capacity and they often mean that a single agency will handle the account of the recently merged client. This makes it all the more important for agencies to be able to offer a full menu of services. This can include direct marketing, corporate communications, design, public relations, information services, interactive media services, and media buying. Developments at DaimlerChrysler illustrate why ad agencies feel that they must merge. In early September, the car manufacturer announced that it will place its estimated $1.5 billion Chrysler ad account into review. A potential outgrowth of the review might be to give its Chrysler, Jeep, and Dodge brands to one agency. The accounts are now split between True North Communica-tions Inc.’s FCB International Inc. unit and Omnicom Group Inc.’s BBDO Worldwide Inc. division. Also in early September, the world’s largest branded food company, Kraft Foods Inc., said it planned to consolidate its general market media planning and buying relationships for the U.S. and Canadian markets. Among the options the unit of Philip Morris Cos. Inc. is mulling is using only one agency for all of its media activities. The company has asked four firms to submit proposals for the business. News of reviews like Daimler-Chrysler’s and Kraft Food’s reinforces the tendency of the Big Three advertising holding companies to continue growing in order to meet as many of their clients’ needs as possible. WPP became the largest of the holding companies, with its acquisition of Y&R. The combined firm had total revenues of $6.7 billion in 1999. The No. 2 player, Omnicom, had 1999 revenues of $5.7 billion and the No. 3 mega-agency, Interpublic Group of Cos., posted revenues of $5.1 billion last year. The model for these companies is to use their clout to offer clients whatever services they require. This can include specialties such as consulting, which is far afield from what agencies have traditionally done. But within their administrative umbrella, individual agencies still compete against one another for business. Thus, two WPP shops, such as J. Walter Thompson Co. and Ogilvy & Mather Worldwide, could compete against each other for an account. This competition is important because it is used to assure potential clients that they are hiring an agency dedicated to their needs. It also defuses some conflict-of-interest questions. They can arise when an agency represents two competitors. This need to ensure objectivity is a major reason why agencies want to be able to argue that within a single holding company, shops compete as fiercely as they did when they were independent. One of the concerns that prevented Publicis from going forward with a bid for Y&R, according to press reports, was the objection of a major Publicis client, Ford Motor Co., to a combination that would have put a competing car manufacturer, Renault SA and its agency, Y&R, under the same roof. “There are only a few companies big enough to block a deal,” Jones said. “Ford and Proctor & Gamble can do it, but, on the whole, the holding companies have been careful to maintain the independence of individual agencies under their control.” The consolidation craze in the advertising business extends into new media companies as well. “You see a lot of similarity between online and traditional media, with the largest brands going after the largest-reach vehicle,” McElroy says. He adds that with the top 10 online publishers attracting two-thirds of the revenue, the pressure to build bigger organizations to sell goods and services on the Internet is intense. And it’s not only under-funded dot-com startups that are making waves in online advertising. The traditional agencies have invested heavily in online shops as well. In December, Interpublic formed Zentropy Partners. This is a rollup of a number of digital firms, including Anderson & Lembke Interactive, Holliday Interactive, Shandwick Interactive, and McCann-Erickson’s Thunderhouse unit. Luminant is another online company that has embraced the acquisition frenzy among the big holding companies in the field. Formed in the summer of 1999, the Dallas-based shop put together agencies like Y&R’s Brand Dialogue, Interactive8, Align Solutions, and others. “There are a lot of interactive companies out there that have gotten one or two rounds of financing but haven’t been able to reach a critical mass,” says Larry Rice, chief creative officer at Luminant. “The barriers to entry in the business-to-business space or the business-to-consumer space are low. But the barriers to succeed are high.” Rice says that the need to create brands in cyberspace and to leverage content in multiple ad transactions is driving m&a activity among the interactive shops. “We have the ability to leverage our expertise in interactive advertising in ways that are similar to consulting,” Rice states. But he notes that internal “Chinese walls” are needed when serving clients in the same industry. The Luminant executive also points out one of the unique facets of m&a activity in the advertising business. “When you buy an agency, you’re not buying plants, you’re buying assets that ride the elevators every day.” He says that a successful ad deal has to demonstrate to employees the strategic benefit of bringing them into the new company. The move into consulting, web site design, information technology, and other services from both traditional and interactive ad organizations is blurring the line between traditional advertising and the role of agencies in the digital age. “There’s no question that these deals will take agencies into areas that were not considered strategic in earlier years,” Jones says. In addition to the movement to consulting, he notes that Omnicom and others have invested heavily in health care sites. He cites the information or data collection and interpretation functions of some agencies as another new direction that the industry is moving in. “Information will be big business, as opposed to just being an adjunct to the advertising business, he notes. The purchase of NFO Inc. by the Interpublic early this year was an effort by the company to beef up its information services. At the time, NFO officials said the deal was based on the belief that clients want expert market evaluation to become a more fully integrated part of their overall advertising and promotional campaigns. (See Mergers & Acquisitions, Vol. 35, No. 3, page 13). Whether it’s a move into web site design or the chance to do media buying more cheaply, sources said that there will be more advertising deals in upcoming months. Look for Cordiant and Grey Advertising Inc., one of the few independents left, to become acquirers or to be acquired. Even as companies gobble one another up at a frenetic pace, one advertising expert says that there will always be a role for small agencies in an industry in which creativity plays such a large role. “They’ll always be terrific smaller agencies out there because advertising people are entrepreneurial by nature. Also, not every client needs a mega-agency,” Ditzian said.