Survival of the fittest

Merger and acquisition activity has returned to the marketing services arena. Deals are being brokered, vulnerable agencies are seeking protective mergers and the multinationals are being selective in their buys.

The story of Barker & Ralston could be the story of so many UK advertising agencies. Reliant on two main clients, it tried to do a deal with McCann-Erickson last year to provide both long-term security and access to an international network. At that time it had billings of 33m but it was not negotiating from a position of strength.

McCann was attracted by the 8m Saab account, a part of the General Motors business that it had wooed for two years, and 18m of Abbey National business.

But according to sources, the deal came to a grinding halt after chief executive Ben Langdon joined McCann last June. Barker & Ralston lost the Saab account in August and ten days ago Abbey National moved its business into EURO RSCG Wnek Gosper – in neither case was there a pitch. Barker & Ralston now has billings of 12m, and after more than six years, an uncertain future. A source at McCann says: “Any decision (on a merger deal) has been taken out of our hands by Sara Weller (director of consumer marketing) at Abbey National.”

It brings to mind the cliché of being “three phone calls from failure” but also highlights the vulnerability of many agencies at a time when there is more merger and acquisition activity than at any time since the recession.

“It turns on a sixpence,” says chairman David Barker. “You have to develop structures with an in-built survival mechanism. We will be smaller but still interesting and profitable.”

Although the circumstances are different in each case, Barker & Ralston could be the third agency to disappear since the start of 1997. Simons Palmer Clemmow Johnson is being absorbed into TBWA (lured by the Nike account) after a deal valued at about 5m (MW January 24), while K Advertising finally succumbed to the inevitable and was folded into sister agency Saatchi & Saatchi (MW February 21).

There is renewed speculation that ad agencies, including HHCL, Bartle Bogle Hegarty (again after its split with 10m Häagen-Dazs), Duckworth Finn Grubb Waters, corporate identity specialists Newell & Sorrell and the direct marketing agency Brann, are all either takeover targets or seeking merger deals to protect their independence.

Bob Willott, partner at accountancy firm Willott Kingston Smith, and adviser to a number of agencies says his company is involved in brokering as many as ten deals at the moment, involving advertising, direct marketing, PR and design agencies.

“There is a lot of activity – more than at any time for 18 months,” says Willott. “More deals will be done but I do not believe we will end up with only big agencies and equally big clients.

“The good performers can remain independent; for them it is more a case of being approached, but other agencies feel the need to merge and are out there looking for a partner.”

There are various reasons for the heightened selling activity: there is the perennial mid-sized agency squeeze where growth can only be found through acquisition or merger; the globalisation of accounts; and agencies with senior managers who, having built the company and survived the recession, want some financial reward – Wally Olins at Wolff Olins is a case in point. Greater optimism in the economy is also cited, along with client demand. Some even suggest it is being fuelled by the impending general election and possible Labour victory.

On the buying side, the motivation is even more clearcut. Build volume to compete for more global accounts while also bringing in the specialists – especially from the corporate identity side – whom ad agencies believe are stealing the high-margin work that they once considered their own.

Rupert Howell, partner at HHCL, reports that his agency has been approached by three multinational networks in the past six months.

Others say the partners are themselves seeking a deal that values the agency, which in the past four weeks has lost 15m of business – Homepride and Mazda – to global realignments, at 7m.

“Agencies have to have a point of difference,” says Howell. “Without that they have little option but to sell when they get to a certain size – we are playing a long-term game which does not include selling to a multinational.”

If there are quite a large number of targets, buyers are few. Omnicom, WPP and Interpublic head the list but the French duo, Publicis and EURO RSCG, are also believed to have cash to spend. Cordiant would have to sell one of its networks, Bates or Saatchi, to pay for any purchases – a prospect not as ridiculous as it may seem.

Grey has also been linked with deals. Last year, it investigated buying BDDP to reinforce its French arm but lost out to GGT Advertising which is now seeking shareholder approval for its 105m deal to buy the French group. But it has run into staff and client problems. Any deal could also see a merger between GGT and BST.BDDP, thereby taking another top 30 agency name out of the market. GGT also came close to buying the direct marketing agency Payne Stracey for an estimated 3m.

Interpublic bought US corporate branding agency Diefenbach Elkins to unite it with its McCann-Erickson network. The design agency will open in the UK later this year via another acquisition. The reason for the deal in the UK is to stem the loss of strategic advice work, which McCann and others believe is leaking to such agencies.

“There is no doubt that there is more activity,” says Michael Birkin, president of DAS International, the Omnicom division which houses all its non-advertising interests. “The market is buoyant, there are good opportunities and the commercial logic means that for DAS, which is in many markets and wants to be number one or two in all of those, it is good.”

Among the deals Omnicom has bankrolled in the past six months are TBWA’s purchases of both Simons Palmer and the direct marketing agency Payne Stracey, the takeovers of the design groups Gerstman Meyers and Zintzmeyer & Lux in the US, and it also had a firm deal on the table to buy Wolff Olins. Birkin now has a shopping list that includes field marketing, recruitment and healthcare agencies.

Despite appearances it is still a buyer’s market. “Solid agencies with good management and clients will sell for a multiple of eight (times pre-tax profits) but agencies in a lesser position will sell for a multiple of five or six,” says one source involved in negotiations. “Some deals have been made at a multiple of ten but they are all contingent on meeting growth targets.”

Barker & Ralston has been un-lucky. But its experience shows that agencies only have to be unlucky once or twice to be in serious trouble. And not just small agencies – Barker & Ralston ranked 26 in the UK last year. That vulnerability, allied to increasing globalisation of accounts, goes some way to explaining the heightened merger and acquisition activity which is going to continue to the end of the year at least.

Spotlight falls on design outfits

The value of, and demand for, design agencies has been brought back into sharp focus by the management buyout at Wolff Olins (MW February 21).

Founder and chairman Wally Olins has wanted to sell his estimated 30 per cent stake in the agency for several years. Talks with WPP and most recently Omnicom – where an estimated 10m deal was on the table – came to nothing because four of the other managers wanted to execute a buyout. Their desire to remain independent, and the threat to leave if the agency was sold, won out.

The value of Wolff Olins to the major advertising groups was based on both its international reputation in the design and corporate identity world and the fact that it is increasingly being employed to give strategic advice to clients such as Orange, Channel 5 and Goldbrand – a high margin area ad agencies once believed was their own preserve.

But Wolff Olins is not alone in attracting interest. There is renewed speculation that another corporate identity specialist, Newell & Sorrel, will soon do a deal and there is a good crop of independent design agencies which in the present economic climate could be ripe for the picking.

But few believe there will be a return to the Eighties, when many of the design agencies were snapped up as new players in the communications market. The likes of WPP and Omnicom are still looking for potential buys. But is the management’s adamant refusal to sell Wolff Olins a trend which will be followed by other potential prey?

Ian Cochrane, a management consultant for the design industry and ex-managing director of both Fitch and Landor, says: “Although there are groups out there looking to buy we are not in the same situation as in the Eighties. Agencies appear to be more cautious. Obviously financial realisations will always be attractive but many agencies are holding out for an even better time to sell.

“Many people have seen off the recession and are sceptical about mergers and how long they will last.”

Richard Watson at the European Design Register says corporate identity is where the serious interest is and the top retail and packaging companies are also giving advertising agencies a run for their money. “Projects such as 20/20’s for Bhs and jones knowles ritchie’s for the Cadbury’s Fuse bar are setting a precedent for advertising,” he says.

Simon Jones, managing director of Newell & Sorrel, admits that the agency has received many offers from communications groups. “If you already have a decent client list, independence is a good thing. For many reasons the cultural mix of the deal has never been right for us,” he explains.

But Cochrane believes that now is not the right time for design agencies to sell. He encourages patience: “The best businesses will have seen the recession through and realised that they can now build on what they have. I would encourage design agencies to hang out for a better deal.”

Helen Sage

Networks target direct marketing

Several above-the-line agencies are only now waking up to the fact that even if they still see direct marketing as a grubby poor relation, it is one they cannot live without. As a result, there appears to be more acquisition and start-up activity in DM than virtually any other sector.

That can be explained by a quick glance at the value of the DM market. According to the Direct Marketing Association (DMA) census for last year, the market is now worth over 5.5bn annually – more than twice as much as last year’s spend among the top 100 advertisers – and is increasing by 12 per cent each year.

But the fact that some agencies are waking up late means that the price of DM agencies is rising. “DM people stand to make a fortune,” says Rupert Howell, a partner at ad agency HHCL & Partners. “Everybody is realising that they need to offer clients more options.”

Jane Clark, a director of recruitment consultant Kendall Tarrant, which has acted as an intermediary in some deals, says: “There is a lot of activity in terms of above-the-line agencies considering moving into direct marketing.”

McCann-Erickson is a case in point. Following an internal restructure at the end of last year it created McCann Relationship Market- ing, which absorbed some of the clients from existing agency, McCann Communications. It is now believed to be looking at buying or setting up a direct marketing agency to add volume. And as if to prove this, it has recently joined the DMA. Publicis, too, is rumoured to be trawling the direct marketing industry for an acquisition.

News that M&C Saatchi partner Bill Muirhead is joining Claydon Heeley as a non-executive director has sparked speculation that M&C, too, is looking to set up its own direct agency. But M&C denies this, and it seems unlikely as the agency already refers clients to Claydon Heeley for below-the-line work. They also work together on the Conservative Party account.

Managing director Jon Claydon claims he is looking to expand by buying a mid-sized independent agency but is having trouble finding one. This highlights the problem facing the above-the-line players – it may already be too late to find an agency to buy.

There are only a handful of DM agencies which are still independent. Among the bigger ones are Brann, Judith Donovan Associates, Rapier Stead & Bowden and Craik Jones.

Craik Jones managing director David Watson does not rule out the idea of being snapped up by an ad agency. He says: “We could possibly be bought, but we do not really have it in mind right now.”

Barraclough Hall Woolston Gray, owned by Abbott Mead Vickers.BBDO, is taking the other route and setting up a second-string agency to deal with client conflict – believed to involve its client Volkswagen. But one source says: “Who is it kidding? Even if it sets up a separate agency it will still have the same management. I don’t think clients will be taken in.”v

Liz Stuart

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