Possible Dentsu Investment Offers Acquisition Fuel
CHICAGO–The alliance between Dentsu and Leo Burnett signals that the pace of consolidation and acquisitions in the advertising world will likely only quicken in 1999.
Both agencies have made it clear that they see a way to work together in pursuit of the same goal: to be among the handful of global superpower agencies handling multinational clients.
The two are discussing an alliance that could give Dentsu a minority stake in Burnett, which sources said could run as high as 20 percent. A memorandum of understanding guarantees Burnett’s continued independence; the talks will not result in a merger, they said. Both sides said they expect to reach a deal on at least the financial investment by March.
Nobuo Momose, executive vice president of Dentsu in Tokyo, made it clear that he views the potential relationship with Burnett as complementing his agency’s ties to Young & Rubicam and their Dentsu Y&R joint venture.
“There are a number of clients who would like to utilize Dentsu’s services not only in Japan but also outside,” Momose said. “And in some countries there are strict rules about account conflict, so we need three separate channels: DY&R; our own network of agencies; and, if all goes as we would wish, our new relationship with Leo Burnett.”
Burnett and Dentsu share clients including Coca-Cola, McDonald’s, Nintendo, Philip Morris, Procter & Gamble and Walt Disney. But the alliance is intended to gain new business for both as well as to service existing clients, said Rick Fizdale, Burnett chairman and chief executive officer.
“We will try to find as many mutual interests as we possibly can,” Fizdale said of the negotiations. “Most certainly it will include a financial investment in Leo Burnett on their part. Hopefully, it also will include ways in which we can open up our geographies where they are not and [include] cooperation with each other over clients and prospects.”
But the key for Burnett clearly was the opportunity to gain capital to fund aggressive global expansion. “If that’s all there was,” he said of a Dentsu investment, “I would still do this deal. I could stop there.” Burnett likely will gain more than just money, making this route more attractive than merely building lines of credit with a bank.
“We can do that, too,” Fizdale said. “[A Dentsu deal and bank loans] aren’t mutually exclusive. Frankly, we have a sizeable warchest” for acquisitions, he said.
Most acquisitions will be outside the U.S., he said, and could encompass increasing the agency’s media buying scale in Western Europe, a goal the negotiations with MacManus Group’s TeleVest would have met.
“With the exception of Starcom [Media Services], we do not have established global brands in specialty services, and we have to have that,” Fizdale said. Burnett wants to build global units specializing in healthcare/pharmaceutical advertising, direct marketing and promotions through acquisitions, sources said.
Fizdale also reiterated Burnett’s intention to remain privately held. He dismissed speculation that Burnett needs cash to bankroll the impending retirements of top executives, including himself. “That’s not our problem,” he said. “I’m the largest single shareholder in Burnett, and I own far less than 1 percent. There will be no problem cashing me out.”
Dentsu in 1997 had global billings of $14.3 billion and revenues of nearly $2 billion, ranking it fourth among global holding companies. Burnett’s billings were $6 billion and its revenues $878 million, ranking it ninth.
Dentsu dominates Japanese advertising, buying about 25 percent of all media, including 40 percent of prime-time TV. Its overseas business, however, accounts for only about 15 percent of its revenues–a figure it wants to double by 2010.
Burnett now gets about 60 percent of its revenues from overseas, but knows it needs to continue to expand globally–and will use Dentsu capital to do so–if it hopes to continue to compete globally.
Informal talks with Dentsu began two to three years ago, Fizdale said. Formal talks began a year ago, overlapping the failed MacManus negotiations. Burnett could have done both deals, Fizdale said, and likely would have completed a TeleVest media buying merger deal covering Europe “a year ago” if the talks’ scope had stopped there.
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