Consolidation has been a major business theme in the marketing-services industry for most of the 1990s. Business is good, and the industry's larger players are looking to augment their "organic" growth by making acquisitions. The smaller companies, those in the acquisition bait pool, are also doing well, but they find it increasingly difficult to compete with the multioffice, multiservice, multinational giants. The relatively modest cost of acquisition capital, whether measured by low interest rates or high stock-market valuations, has helped sustain the deal flow. What, though, might happen if the economy were to brake or recede? If it tanks, and the ad industry suffers (as happened in the 1990s), merger activity would likely screech to a halt. The folks at AdMedia Partners agree with that assessment but don't think a full-blown recession is likely. Rather, they see a modest slowdown, which could change but not choke merger activity. For one thing, interest rates and the cost of capital will probably remain low and attractive in a slowdown. The substantial sums of money now available to fund acquisitions won't likely dry up. Indeed, in a slowdown, selling prices would probably decline, allowing the available funds to stretch further. The biggest problem may be a lack of good companies to buy. --Alan Gottesman (westendal pobox.com) is principal of West End Consulting.
THE GOTTESMAN FILE
Ad-industry merger activity will continue despite a modest economic slowdown for several reasons, according to AdMedia Partners.
-Interest rates will likely remain low, making acquisition capital readily available
-Substantial private equity remains available even to companies too small to go public
-A slowdown in the economy could put downward pressure on merger prices