Survey: M&As on Rise in ’03

Though the first four months of 2003 have been fairly quiet in terms of mergers and acquisitions, a survey released last week by investment-banking firm AdMedia Partners finds that pent-up demand and stabilizing prices will lead to a significant increase in M&A deals this year.

The nationwide mail survey of 1,000 ad-agency and marketing-services companies, conducted from December to January, found that 30 percent of respondents said they expect strong prospects for M&A activity this year. (In last year’s AdMedia survey, 22 percent of respondents said they anticipated M&A prospects would be strong in 2002.) Also, 76 percent of those identifying themselves as prospective buyers expect to complete an acquisition this year. As for prospective sellers, 27 percent anticipate selling all or part of their business this year.

“We expected that there might be continued gloom,” said Abbott Jones, managing director of New York-based AdMedia. “[But] I think there is continued optimism about the outlook, and it was based upon advertising and marketing- services companies [starting] to improve.”

Still, analysts cautioned that the time is still not ripe for ad holding companies to go on shopping sprees.

“I would hope for a similarly low level of M&A activity on the ad-company/marketing-services side, because I think the fourth quarter is the soonest that the economic recovery comes for those companies,” said Michael Russell, media analyst at Morgan Stanley Dean Witter. “And I’d rather they get their houses in order before they get back to the acquisition game.”

Companies appear to be hewing to that view, as M&A activity thus far has been close to nil, Jones conceded.

“I think [this is due to] the fact that the war and a lot of other issues came to a head in the first quarter, as well as specific, internal company issues, such as the management changes at Interpublic Group and the corporate problems at Cordiant,” Jones said. “But in general, the first quarter M&A activity was very quiet.”

While the ad economy is still in the doldrums, that creates a favorable environment for deals, especially after two years of dismal financial conditions, according to David Doft, executive director of advertising and marketing services analyst at CIBC World Markets.

“It’s reasonable to believe that M&A activity will be up over last year, because last year was so poor,” Doft said. “Plus, we found that companies that were looking to be acquired had value targets that were unrealistic. Plus, Interpublic experienced some disruption, and Publicis Groupe was digesting Bcom3.”

Regarding those looking to make a purchase this year, Doft pointed to Omnicom Group and WPP Group as likely buyers.

Among the survey’s respondents, 13 percent work for firms that have more than $150 million in annual revenue; 11 percent are at firms that fall into the $75-150 million range; 21 percent work at companies with revenue of $15-75 million; 30 percent are at companies with $5-15 million in revenue; and 25 percent are from firms with revenue of less than $5 million.

Jones noted that when the survey was taken, the war with Iraq was looming but complicated the picture only slightly. “Even given the strong possibility of war, most respondents expected to see an end to the recession, a jump in the overall advertising/marketing-services business and a median 10 percent projected growth rate for their own businesses this year,” Jones said. —DAVID KAPLAN