Big Deal?

An historic $1bn deal has been struck between Leo Burnett and the MacManus Group which catapults them into the top five worldwide. But observers are questioning whether consolidated agencies offer better service, or simply enrich their senior executives’ pockets.

David Benady spoke to Roger Haupt, the Burnett chief who engineered the deal

Leo Burnett’s chief executive in waiting, Roger Haupt, has spent the past six weeks flying between Tokyo, Chicago and New York. The British-born adman has been clocking up the air miles to pull off the deal of a lifetime – one which stands to make him extremely wealthy.

Haupt, 51, claims credit for driving through one of the most unexpected agency mergers of recent years – and one which signals a radical upheaval for global advertising groups over the next ten years.

Announced last week, Haupt’s deal merges his Chicago-based Leo Burnett and its media arm Starcom with the MacManus Group, which owns ad networks D’Arcy and NW Ayer and media buying arm MediaVest.

Under the $1bn (£625m) deal, Japanese agency Dentsu takes a 20 per cent, $400m (£242m) stake in the new company, known for the time-being as BDM. The business is to be floated on the stockmarket the year after next, valued at an estimated $3.4bn (£2bn) – twice combined revenues of $1.7bn (£1bn).

The deal unites two networks whose major client is Procter & Gamble. There are few serious conflicts, though D’Arcy’s relationship with Mars could be under pressure as Leo Burnett handles Kellogg – which is moving heavily into snack foods – and Philip Morris, which owns Kraft Jacobs Suchard, another snack and confectionery concern.

The merger rockets Haupt, who is due to succeed Leo Burnett chief executive Rick Fizdale in the New Year, into the hot seat of what will be the world’s fourth-largest marketing services business. The top three are Omnicom, which owns the BBDO, TBWA and DDB networks; Interpublic Group, with Lowe Lintas and McCann-Erickson; and WPP, which owns J Walter Thompson and Ogilvy & Mather.

But it raises the question of whether such deals will improve the service agencies provide their clients, or whether marketers will simply watch their advertising counterparts reap huge rewards for pulling off deals, while devoting less time to what should be the industry’s focus – creating effective advertising.

Haupt told Marketing Week how he drove through the deal, uniting the world’s tenth and 11th largest agency groups with combined © billings of up to $13bn (£8bn). “Six weeks ago, I met with Dentsu to talk about the way forward,” he says. “There was a lot of press coverage at that time about MacManus.” The agency holding company run by Roy Bostock was up for sale, and Bostock was understood to be in advanced negotiations with Phil Geier of IPG.

Dentsu’s global opportunity

“I told (Dentsu president Yutaka) Narita that our alliance would be good for both of us, but suggested to him that we bring MacManus into the deal to make it a global company. Strategically, the fit between our companies is great – we share a focus on people, clients and quality, and there are minimal conflicts. A three-way deal could turn us into a global powerhouse.

“I said to Narita: ‘Imagine if we could combine these resources, and offer them to our clients. Imagine how we can help you globally.'”

Haupt was referring to the problems Dentsu was having expanding beyond Japan where it is the biggest agency. It needs a secure foothold in the US, the strongest trading partner for many of its clients, and must head off the threat of US networks capturing accounts in Japan through the business they have won in their own country.

Haupt says: “I put it to Narita that Leo Burnett could build business with his clients and help get clients aligned for him. Uncharacteristically, Narita said: ‘Go for it, and I will support you’.”

Haupt took these few words and flew to New York to confront Bostock at MacManus. They had already got to know each other well following a planned merger of their media divisions last year.

“I reminded Bostok what a great idea the media merger was when we talked 18 months ago, and asked him if he was keen for a full merger. Six weeks on, I have got a worldwide organisation.”

The three agency groups had their own pressing reasons for pushing through a merger. Their executives all wanted to make themselves extremely rich – and such deals are a passport to El Dorado.

The MacManus Group was, in the words of a senior agency source, “going nowhere”. It had its strong global clients, but was not winning new ones.

Dentsu’s problems in extending itself outside its home market of Japan had reached crisis point, especially with the proposed flotation on the Tokyo stock market next year.

Leo Burnett knew it had to do something quickly. It was unable to offer the breadth of services needed to service global clients such as Heinz, P&G and Delta Airlines. It seriously needed access to reserves of cash to buy up all manner of marketing services agencies, particularly those specialising in new media such as the Internet and interactive.

The deal marks a turning point in the structure of the advertising industry between this century and the next. Advertising has grown up on the shirt tails of consumer capitalism. But as the big brand companies become increasingly concentrated into bigger multinationals with global brands, the ad agencies are following suit.

As Haupt says: “Our industry is consolidating at an incredible rate. It’s not only motivated by money – it’s about resources and bringing those resources to bear. Thirty-second film clips aren’t enough any more – a broad range of marketing skills are required.

Keeping pace with technology

“Technology is moving so quickly that you have to adopt more sophisticated branding techniques in newer and smaller markets. Take China, for instance – they bypassed land lines and went directly into mobile phones.

“A lot of these emerging markets are skipping some of the more conventional marketing and moving to the newer techniques. The market is globally consolidating – and getting more sophisticated.”

One source from a rival agency networks says: “D’Arcy is a volume player of mediocre quality. Neither it nor Leo Burnett are mega-award winners, they are not creative worldwide. BDM could turn into a volume giant, though it should take care, as P&G wants to look again at ad agencies’ creativity.”

A question of motives

Another source is highly critical of the deal, and others which will follow in the round of consolidation. Such mergers are done, he says, to impress Wall Street, to combine earnings and improve the bottom line. They are driven by agencies’ greed, not by the interests of their clients.

“BDM will float and make the executives multi-millionaires. How will this lead them to improve client service? It makes no difference – it hasn’t enhanced anything. It is a distraction of management time from the real task of improving service,” he says. Still, few people go into advertising – or marketing – simply for the love of it.

The views of the world’s biggest advertiser, P&G, will be key to many future agency mergers. And one observer believes that the BDM deal could pave the way for P&G to hire another agency network, with an Omnicom network a possibility.

The merger heightens speculation about how the consolidation will be played out. It is the starting pistol in a race over the next five years that is likely to end with all the global networks buying up smaller rivals as they attempt to fill the gaps in their portfolios.

Cordiant-owned Bates is expected to be among the first to fall. Cordiant’s London share price leapt following news of the deal, as it would be the cheapest purchase of the major networks.

Young & Rubicam’s future has been called into question following the deal. Its alliance with Dentsu in Asian markets “has been blown away”, according to one source. This is strongly denied by Y&R, which says the deal makes no difference to the partnership.

The merger opens the way for Martin Sorrell’s WPP group to play for Y&R – both have a strong relationship with car giant Ford, and Y&R has strong marketing services in its Wunderman Cato Johnson subsidiary.

Uncertain future for IPG

IPG, which had come close to signing its own deal with MacManus, is left considering its options. Such a deal would have been problematic as it would have raised the spectre of conflict between IPG’s Unilever business and MacManus’ P&G work, and between its Nestlé account and MacManus’ Mars. P&G last year said it was relaxing its conflict policy, though it is unclear to what extent. If it remains relatively strict on major conflicts, this will lead to more mergers between its own roster agencies – which is why Saatchi & Saatchi is tipped to buy Grey.

IPG has just merged its Lintas and Lowe networks, sitting alongside McCann-Erickson. It made this move not only to provide greater creativity for its Unilever business, but also to pave the way for a MacManus acquisition, which has been snatched away at the last moment. Again, much management time will be diverted from their clients to bringing the Lintas/Lowe merger about. Like IPG, True North has also brought together its FCB and Bozell networks, which may presage an acquisition.

But there will also be losers. The French are likely to lose out in the battle for world domination. The Euro RSCG network is a strong candidate for takeover – it was knocked off the P&G roster last year, automatically erasing possible conflicts with a range of networks. And Publicis chief Maurice Levy missed out on cementing his partnership with True North, raising questions about how long his agency will remain unpartnered.

Advertising stocks are already riding high on the back of a cash injection from Internet businesses. Consolidation is sure to keep them buoyant over the years to come.

On the takeover trail

But it is not only agency networks which will be the subject of takeovers as consolidation increases. BDM’s flotation will give it cash to acquire marketing services agencies, from direct marketing to Web services. It will face stiff competition from Omnicom and WPP.

Critics say this is a curiously short-term strategy – a way for the giants to improve their revenues while forcing down margins in the long term. Clients are interested in integration because it is cheaper than buying services from different providers.

Nevertheless, there has never been a better time to be in marketing services – a tsunami of cash could be heading your way.

A media merger?

The share price of Aegis, which owns media buying company Carat, plunged last week following news of the deal between Leo Burnett and MacManus.

Speculators were convinced that the deal would mean a tie-up between the two agencies’ media arms was back on the cards, creating a strong competitor for the likes of Aegis. Burnett’s Starcom and MacManus’ MediaVest were poised to be merged last year, but the long-running saga turned into the media deal that never happened.

According to Haupt, media consolidation will not be hastened by the overall merger.

He says: “You might hear some day that we have merged media in Morocco, but in our major markets we have very good brands. We must be mindful of conflicts. I have to look at this merger and ask myself what the best way is to build our business, and it isn’t to smash the two together. The best way is to keep them doing what they are doing – and doing well.

“The synergy lies in the core of the research and the systems – it wouldn’t make sense to have those companies spending money doing the same.”

Some see a media merger as inevitable. They argue that the combined force of the two media buyers – $13bn (£7.8bn) in billings worldwide – would give them the clout to club media owners into submission on price, and offer clients the best deals for TV spots and press space.

The rationale behind the deal, which collapsed last year after more than a year of negotiations, was that all the major marketing services groups are consolidating their media. In Europe, Starcom and MediaVest risk being left behind by WPP’s MindShare and IPG’s Western International Media, while media specialists such as Zenith, Tempus and Aegis provide strong competition.

But not all are convinced that mega media mergers add up.

“Merging these agencies for their buying clout is a moot point,” says one sceptic. “You don’t add any firepower after a certain critical level, when it becomes more about disciplines.” Another says it is about scale to a degree, but strategic thinking is equally important.

It is understood that last year’s deal collapsed over a clash of personalities between Starcom chairman Jack Klues and Irwin Gotlieb, president and chief and executive of TeleVest, which changed its name to MediaVest early this year. Gotlieb has since left the company for MindShare, so that impediment may have been removed.

Aegis’ share price rallied at one point last week, as it was seen as a possible takeover target. City speculators will be waiting eagerly for more words from BDM on merging the two media arms to determine the valuations they ascribe to media stocks in London.

Dentsu’s Solution

By David Kilburn

A deal with Leo Burnett alone would have been very good news for Dentsu. BDM is more than a prayer answered. Though many details have still to be ironed out, the creation of BDM solves Dentsu’s international problem.

At last the agency has a partnership that gives it a truly global reach, with strong networks in the US and Europe which it can offer its Japanese clients.

In Asia, the Burnett and D’Arcy networks will augment those of Dentsu/Young & Rubicam (DY&R) and Dentsu’s own agencies to create a formidable web of connections in competing for Japanese business outside Japan.

In Europe and Asia, where Dentsu’s own agencies are weaker and account conflicts have limited what their Y&R partnership can achieve, it will be crucial for the weaker agencies, such as CDP, to achieve more if they do not wish to be cast loose or folded.

Like DY&R, BDM has conflicts that are likely to bar it from some Japanese business. P&G would undoubtedly not allow BDM to work for Kao Corp (or Andrew Jergens, its US subsidiary). It is one of Dentsu’s top three clients at home, along with Toyota and Matsushita, and it is Japan’s leading maker of soaps and toiletries. GM might also be unhappy about BDM handling Toyota.

Thus Dentsu will continue to need its own agencies, but to a lesser degree than before.

When conflict is not a problem, Dentsu has an array of international choices for its devoted Japanese clients. But each member of the Dentsu club will find it has to compete hard for whatever Japanese business Dentsu has on offer.

Y&R Asia Pacific chairman Etienne Boisrond says: “It puts even more on DY&R to be the ‘preferred destination’ for Dentsu’s clients, meaning a network that’s not only attractive in its own right, but understands the ways of doing business with Japanese companies. No free lunch, but that’s good. Competition is always good.”

Few Japanese clients do not have strict agency alignment policies and most still do not award global or even regional accounts. One reason has been the lack of Japanese networks they felt at home with. That may now start to change quickly.

The new network will add a major burden to Dentsu’s already-stretched international management resources. Despite over a decade of trying to go international, barely a handful of Dentsu’s board members have the experience or credentials to equip them to play an active role in day-to-day BDM management.

Though Dentsu will have one, possibly two, seats on the BDM board, the task of making the merger work in practice will be one for Burnett and MacManus executives.

Not that Dentsu will sit idly by – it will be providing much of the money BDM needs. Tokyo executives would not on reports that Dentsu would be committing between $400m and $500m (£250m-£300m), but the figures look reasonable.

Indeed, if BDM needs another $500m before it goes public, it need look no further than Dentsu, whose own cash reserves are more than enough to repay all its existing bonds, and whose bankers could provide loans at about one per cent secured by a morsel of Dentsu’s real estate holdings in Japan.

Whatever the price, it will look cheap for what BDM promises. On paper at least, Dentsu’s investment in BDM could pay-back within two years because of the value that international stature will add to Dentsu’s IPO (initial public offering) in 2001.

For Japan’s number two agency, Hakuhodo, BDM brings only problems. While Dentsu struggled internationally, Hakuhodo’s own failures outside Japan were par for the course.

But now it may be more difficult for Hakuhodo to persuade Japanese clients that there is a Hakuhodo option outside the country, and for the agency to continue without an equity-based major international alliance. And for Asatsu, Japan’s number three, there is quiet applause for showing the way for Dentsu in its own partnership with WPP.

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