What lies behind 26m Fitch buy?

The UK design agency will head Lighthouse’s offensive into the European and Asian marketing arena

The 26m acquisition of UK design agency Fitch by US marketing services agency Lighthouse Acquisition Company (MW March 25) is the beginning of a European onslaught by the cash-rich acquisitions vehicle.

The deal comes during a period of marketing industry consolidation and mirrors the recent acquisition by another independent US conglomerate, Snyder Communications, of London-based advertising agency Partners BDDH.

While above-the-line advertising is not on Lighthouse’s agenda, it is currently in negotiations to acquire two further European promotion and integrated operations. It has about $400m (250m) to spend on European acquisitions.

A further acquisition of a US sports marketing group is also imminent.

The company is principally backed by US private equity funds Frontenac Company and GTCR Golder Raunser. No further financial details will be made available prior to the deals being signed.

The Fitch deal comes just six months after marketing guru Terry Graunke set up Lighthouse in Chicago, and is the company’s third, and by far its biggest acquisition to date.

“We are focused on acquiring and growing a cohesive services platform with related and complementary marketing communications offerings… Our prime targets are companies with solid management and recognised brand names,” says Lighthouse founder and chief executive Graunke, who will join the Fitch board when the deal officially goes live in two weeks’ time.

Lighthouse has also bought Fantastic Sports, the San Diego sports marketing consultancy, promotion and merchandising outfit, and International Sports Marketing, the Pittsburgh-based specialist in direct and database marketing, promotions, sports marketing and event management.

These groups have a combined client list that includes Deutsche Bank, MCI and Visa, while Fitch clients include BT, Tag McLaren Audio, Sainsbury’s, WH Smith and De La Rue. The planned portfolio will eventually include branding and identity, public relations, sports and event marketing, promotions, direct and database marketing, and ethnic and healthcare marketing.

Fitch will be Lighthouse’s sole branding and identity agency and its flagship operation.

“We see Europe and Asia as particularly good growth areas, especially in marketing consultancy, and we would like to move Lighthouse into those areas, mainly through the development of Fitch. But it is Fitch which will make the decisions,” says Mark Scott, Lighthouse UK director.

Despite Lighthouse’s claim to be a mere holding company, the history of its chief decision makers suggests they have more than a financial interest in the business.

Scott, for example, joined Lighthouse after fours years in mergers and acquisitions at WPP Group and also has a Harvard MBA under his belt. He is based at the company’s Mayfair office, which officially opened earlier this month.

Other top managers have a wealth of experience on both sides of the client/consultancy fence, including Procter & Gamble, the Fox TV network and Apple Computer. But in the words of Amy LaBan, vice-president of marketing/strategy: “Terry [Graunke] is the big cheese of the group.”

Graunke, 39, has been in marketing since the age of 20, when he dropped out of his economics course at the University of Wisconsin-Madison to set up his own company.

Since then he has set up and sold a number of marketing companies, including direct marketing and promotion group US Communications, which Omnicom bought in 1991 for $100m (63m) and merged into WWAV Rapp Collins. He also sold Eagle River Interactive, the Web agency he founded, to Omnicom. This was merged into its Agency.Com division.

But whatever Lighthouse’s input into Fitch – and it would seem a waste not to harness the board’s valuable contacts and experience – the bottom line is whether the deal provides genuine opportunities for both companies.

For Fitch, the deal will take the international product, branding and retail specialist back into private hands and give it an opportunity to grow into a major global outfit.

The three other major design players are WPP-owned Enterprise IG, Omnicom International’s

Interbrand and Young & Rubicam-owned Landor Associates. Enterprise has just listed a global fee income for 1998 of 75.8m and Landor of 53.9m, compared with 29.3m at Fitch.

Fitch communications director Zuilmah Wallis also says that a cash injection will enable the group to “diversify geographically and to enhance and broaden the range of services.” She will not be any more specific at this stage.

Observers say its geographic ambitions are similar to those of Lighthouse – to strengthen US presence and move further into Europe and Asia. But those same observers say the consultancy needs to address a number of internal issues first.

“In my view Fitch is nowhere on the corporate identity front. It should use the money to build that up and bring in some big names,” says one senior Fitch employee.

Another former senior employee adds: “There is a skills shortfall in London as well as tremendous cultural differences between the US and UK operations. Clients and employees don’t feel they are working for a unified company. This needs to be addressed.”

Fitch currently has 500 employees based in offices in London, Michigan, Ohio, New York, Boston, Paris, Singapore, Osaka and San Francisco. Its output is split fairly evenly between new product development, retail and leisure environments, brand development and communications.

Just six months into business and Lighthouse is an unknown operation, on both sides of the Atlantic. A number of question marks hang over its strategy of concentrating on small, non-advertising marketing agencies.

One marketing consultant says: “I don’t see the logic of getting into design, but not advertising. I wonder if it is a question of finance – after all, $400m might sound like a lot of money, but you can’t buy many ad agencies with that.”

Abbott Jones, managing director of New York investment consultant AdMedia Partners, backs this view: “The notion of putting together a group of small companies to make a strategically strong entity is going to be challenging, to say the least.”

Meanwhile, Lighthouse’s LeBan admits it is extremely hard to find good quality independent companies to buy.

Could it be that in five years’ time both Fitch and Lighthouse will be restricted by their smallness, relative to the top five major marketing networks?

Maybe, but then, if Graunke’s track record is anything to go by, it will be time to sell it on to them anyway.

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