Dated agencies due for takeover

The writing is on the wall for many Japanese agencies. So says an article in July’s Nikkei BP, Japan’s leading business magazine: “Japanese advertising agencies now stand at the crossroads, either they must attempt to survive under the umbrella of a giant foreign-owned company or hasten to restructure themselves.”

This downgrading of the entire industry was prompted by Omnicom’s merger of Japan’s eighth ranked agency I&S with BBDO at the start of July. Though Omnicom currently owns only 20 per cent of I&S, it has the right to increase this to a majority.

This first takeover of a major Japanese agency was welcomed by its clients, to the consternation of the agencies. The move puts Omnicom third, behind Interpublic Group and WPP Group, among Western agencies operating in Japan.

Most Japanese agencies do little more than act as commission sales people for media owners and have failed to perceive that, after seven years of economic gloom, advertisers’ needs are changing. Nobuo Momose, executive vice-president at Dentsu, one of the handful of Japanese agencies which have kept up with the times, says: “Advertising has to be part of a highly integrated marketing plan. Advertisers need agencies which can develop such plans, but it is difficult for many small to medium- sized agencies in Japan to meet such needs.”

Many agency owners are looking to sell, or at least attract a foreign equity partner. Sam Yoshida, a director of Recof, a Tokyo mergers and acquisitions company comments: “The environment has changed for Japan’s ad agencies. There are a number looking for fresh capital and management know-how, mainly among those ranked from 11 to 30.”

Japanese advertisers are encouraging the trend. TBWA, which currently works with a subsidiary of Hakuhodo for Apple Japan, is trying to enter Japan through acquisition and is reportedly in talks with two other Nissan agencies, Standard Advertising and Nippo Ad. Nissan is also a TBWA client in Europe, where a Hakuhodo/TBWA joint venture, TBWA-NETH, handles Nissan’s corporate advertising.

But buyers still need patience to handle the unrealistic expectations of some Japanese agency owners. One Western negotiator recounts: “After we had valued the business, they asked us for a premium because Japanese agencies aren’t often for sale. They then demanded more for goodwill and media relations. And they topped the whole thing by asking for 70 per cent of their estimate of what it might cost us to build an agency from scratch to their size.”

Agency joint ventures or acquisitions were once seen as the only route into Japan’s advertising industry, but times have changed. With the top three – Dentsu, Hakuhodo, and Asatsu – as the main exceptions, nearly all Japanese agencies are past their sell-by dates. And as they fade from the scene, new opportunities to build agencies organically will emerge.

Business is so bad for many Jap-anese marketing companies, that many feel they have nothing to lose by taking the once unthinkable step of working with a Western agency in Japan.

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