No Sellers' Market for Traditional Shops

NEW YORK In the past month, there have been some ripples in the otherwise lethargic industry M&A marketplace. Sapient announced it would acquire independent Nitro in a $50 million deal, while Microsoft's Razorfish is said to be in play. Across the Atlantic, independents M&C Saatchi and The Red Brick Road, the shop set up by Frank Lowe and his partners to handle Tesco, have talked to other agencies and holding companies about selling, sources say (although Paul Hammersley, a partner in The Red Brick Road, denies the agency wants to sell).Within that group, digital powerhouse Razorfish, with $345 million in revenue, is in a league of its own and already is said to be getting attention from Publicis Groupe. But for agencies with more traditional roots that are looking for a buyer, the marketplace is not promising. Strategic buyers are grappling with the weak operating environment and anemic stock prices. Equity investors are faced with continuing tight credit markets and industry conditions that make the sector a less attractive option, with longer exit horizons and lower yields."The large agency holding companies have substantially completed building out their footprint in North America and that extends not only to the capabilities associated with general agencies, but increasingly to things like digital services, direct, database marketing," observed John Prunier, partner at Petsky Prunier, who allows that there will still be smaller acquisitions to fill in gaps.Prunier's investment bank, which follows the marketing, information and digital media sectors, said in the advertising and promotion segment there were three transactions in the second quarter, totaling about $70 million. Total transaction activity dropped 63 percent compared to the first quarter, while deal value was down nearly 25 percent. Sapient's acquisition of Nitro, at 1.1x revenue and 8.2 x EBITDA (earnings before interest, taxes, depreciation and amortization have been subtracted), was the quarter's most significant transaction.Strategic buyers are looking for transformational deals. Nitro, for example, adds traditional skills to Sapient's digital expertise. In December, Korea's largest agency, Cheil, which is virtually anonymous in markets outside its own, bought one of the U.K.'s most brash agencies, Beattie McGuinness Bungay, which it wants to expand internationally. A month before that deal, Japan's Dentsu unit in the states broadened its U.S. footprint with the acquisition of blue-chip independent mcgarrybowen. Gone are the days when agency principals could expect a nice payday just for selling their client Rolodex.Seth Alpert, a managing director with industry investment bankers AdMedia Partners, said, "It's a bifurcated market: a handful of good guys and everyone else."AdMedia surveyed more than 3,700 ad executives and private-equity investors last December and found 60 percent said they expected to take part in M&A this year compared to 67 percent last year. AdMedia's Alpert said he's been disappointed by the first half where his firm has only done a couple of deals as transactions were cancelled or postponed amid the credit crunch and dismal corporate earnings environment. There's one bullish executive among industry players: MDC Partners CEO Miles Nadal is currently having discussions with 12 potential acquisitions. "Multiples have bottomed out; the earnings power of the business is at a trough and now there's far more equilibrium for buyers," he said.Last month, MDC's Crispin Porter + Bogusky spearheaded its European expansion by acquiring Swedish digital shop Daddy. Nadal said in the last couple of years MDC "has generated $100 million of free cash flow and has little leverage." MDC's primary interests are social media, data analytics and mining, management and public relations. Nadal said he has no interest in agencies without digitally integrated disciplines at the core of their business.

Brand Marketing

No Sellers' Market for Traditional Shops

Noreen O'Leary

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Noreen O'Leary