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Does MDC's Miles Nadal Have A Chance?

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Miles Nadal is in his next phase of his reinvention: The one-time teenage photography entrepreneur who, at age 22, parlayed those instincts into creating one of Canada's largest printing companies is shedding most of those assets in an effort to refocus his MDC Partners as a pure marketing-communications company.

The 46-year-old college dropout, who now has his name attached to various Toronto institutions, from a Jewish community center to a York University management school to a patient-relations unit at Mount Sinai Hospital, has left his chilly hometown to become a sun-tanned advertising magnate based on the tax-free beaches of Paradise Island in the Bahamas. Never mind his self-made fortune, the story of Nadal's corporate metamorphosis is even more improbable: The industry's newest holding company comes from Canada—not a country known for its brand building—and is the brainchild of a man who's never worked in an ad agency and yet these days finds himself rubbing shoulders with some of the industry's best-known creative people.

It's been a breathtaking year for the MDC CEO: He has done nine deals, paying a total of about $50 million for stakes in independent ad agencies like Kirshenbaum Bond + Partners and Cliff Freeman and Partners. Nadal brought in Steven Berns as vice chair from Interpublic Group in September to instill the kind of financial sophistication expected of an industry holding company. MDC began using American reporting standards this year and, with a recently opened New York office, is becoming increasingly U.S.-centric in its operations. (Nadal says 85 percent of MDC shares are in the hands of American investors.)

All of this is in preparation for what Nadal predicts will be MDC's move into the big leagues: Within five years, he expects MDC to generate $2 billion in revenue and have investments in 100 companies—quite a leap from the $314 million rung up last year from the 21 firms the company included within its ranks of partners. It will be tough for Nadal to achieve such lofty goals, given the scarce amount of attractive industry independents of any reasonable size left to buy.

If Nadal's high-flying ambitions seem implausible, his rationale is not. MDC wants to be JetBlue to Madison Avenue's lumbering jumbo airlines. Where others see limits on what kind of holding company can be built today, Nadal sees opportunity: He wants to assemble a group of businesses that are nimble enough to react quickly to customers' changing needs and unencumbered by decades of dated baggage.

"Most of the other networks are focused on the past. We're focused on the future," he says. "[Building MDC] satisfies a need in everyone's self-actualization. It's not like putting food on the table. It's like we have something to prove."

Indeed: Skeptics, unconvinced by that new-age business philosophy, question the long-term prospects of MDC's model. By their very nature, MDC's partner companies are subject to the roman-candle vagaries of hot-shop celebrity and challenged with the need to institutionalize corporate cultures beyond the dominating personalities of their founders. If big networks are saddled with corporate layers and industry convention, they're also protected by size and long-term client relationships—characteristics not typically found within MDC's ranks.

MDC's marketing operations, in a previous incarnation known as Maxxcom, almost imploded three years ago as the unit piled on debt to fund an earlier wave of acquisitions. Maxxcom was a return to MDC's roots: Nadal used $500, charged to his Visa card, to start Multi Discipline Communications in 1980, with the intent of building a marketing-services company. Finding other opportunistic acquisitions, he diversified into printing, with MDC specializing in secure documents like checks and postage stamps. Nadal took his company public in 1986 and, in 2000, spun out Maxxcom, in which MDC was the controlling shareholder. Maxxcom embarked on a buying spree, acquiring 13 companies at the heady top of the last business cycle and racked up $720 million in debt in the process. After big write-downs and a loss of $153 million in 2001, Nadal in January 2002 replaced Maxxcom's president and CEO, Beverley Morden, with Harold Reiter, from Tyco Capital (Canada). Reiter's mandate was to restructure the company's finances.

As part of that process, Nadal recapitalized MDC, divesting four of his lucrative printing businesses, paying down debt and, last June, buying back Maxxcom's outstanding shares. Maxxcom ceased to exist, and Reiter, his job done, left the company in September 2003. Nadal took over day-to-day control of MDC. Armed with a $120 million war chest, he renewed MDC's acquisition strategy.

The company kicked off this year by taking stakes in New York-based KB+P (60 percent) and Cliff Freeman (20 percent). Nadal then added online design firm Henderson Bas in Toronto, led by Dawna Henderson (65 percent); startup Mono Advertising in Minneapolis (40 percent); Bruce Mau Design in Toronto (50 percent); California interactive design companies Hello Design (51 percent) and VitroRobertson (68 percent); Toronto agency Zig (49.9 percent); and Banjo Strategic Entertainment in San Francisco (51 percent). Nadal says the U.S. now accounts for 80 percent of MDC's business, Canada 15 percent and the U.K. 5 percent. MDC's companies work for clients such as Burger King, Verizon, Mini, Ikea, Target, Molson, Honda, Godiva, McGraw-Hill, Baskin-Robbins and Snapple.

"The whole structure and strategy has changed since the end of Maxxcom and the new involvement of MDC," says John Jarvis, chief creative officer at Colle + McVoy in Minneapolis. "There's an emphasis more on creative acquisitions rather than just doing acquisitions for the sake of doing them." (As a sign of MDC's heightened creative priorities, Jarvis was also given the titles of president and CEO this year.)

To be taken seriously as an industry player, Nadal says he knew he needed a foothold in America. MDC's first U.S. investment, predating the Maxxcom era, was in New York's Margeotes|Fertitta + Partners, in 1998. But its best-known U.S. partner is mega hot shop Crispin Porter + Bogusky in Miami. While MDC had already acquired a growing portfolio of investments before CP+B, it was that 2001 deal that put Nadal's company on the map.

"No one knew us before," says Nadal. "Now we've come to be known for creating an environment where talent can prosper. Before, we were knocking on the door [of agencies]. Now people come to us."

CP+B not only gave Nadal credibility with fiercely independent entrepreneurs, it introduced him to his corporate architect, Chuck Porter. The CP+B chairman, who also serves as MDC's chief strategist, is the point man for identifying new investment prospects. Porter estimates that the company goes forward with one out of every "eight or nine" prospects.

Porter, in turn, brought aboard CP+B evp Bob Van Horn in September as a New York-based executive director, partner development, for MDC.

"MDC has given us the resources to explore the art of the possibility, whether it involves new products and services or geographic expansion," says Porter, who opened a CP+B office in Los Angeles after selling the stake to MDC. (That office, which opened on Sept. 10, 2001, struggled to gain a footing and is now focused on clients' media needs.)

"The world's changed for us. Industry dynamics are working in our favor," Porter continues. "More and more marketers are looking at what talent can deliver rather than what process can deliver. At the same time, the smart people in this business are increasingly dissatisfied with working at the big networks. The idea of what constitutes brand building is changing. We're creating a revolution. We've started a war."

Nadal is not the first to do battle on this front. In the late 1980s, Scali, McCabe, Sloves founder Marvin Sloves attempted to string together a collection of independent jewels, taking stakes in agencies like Fallon and The Martin Agency. That dream fell apart after WPP Group acquired Scali parent Ogilvy & Mather in 1990.

As MDC matures and its partners and their client relationships evolve or founder, a likely option might be to formalize some of the disparate offices into a more formal network, to realize operating efficiencies. But Porter says that is not in the plan. "As a business model, we don't believe in that," he says.

The stand-alone structure also means conflicts are not an issue, Porter says. "All of MDC's businesses operate as independent businesses," he says. "MDC doesn't manage them or own 100 percent of them."

MDC looks to acquire 50-80 percent of a company. Deals are usually paid out 80-90 percent in cash and the remainder in MDC stock. Nadal underscores the importance of not buying 100 percent of an entity, as MDC wants to make sure stock remains in the hands of those running their businesses. This also provides for a second-generation management model and keeps shares in reserve for those who succeed founders. Nadal calls this MDC's "perpetual partnership" plan. Keeping key staffers incentivized with a vested interest is a necessity at the kind of young companies MDC seeks out. "The most important [employee] contract you can have is the emotional contract," Nadal insists.

To that extent, he is opposed to industry practices like post-acquisition earn-outs, which tie part of the sellers' payout to future performance at the purchased company. "I think earn-outs are a bad thing," Nadal says. "Earn-outs drive short-term profits and starve long-term growth. Many senior key principals leave. Entrepreneurs are entrepreneurs because they didn't want to be employees. Once they lose their emotional connection to the company, they're not effective."

Nadal also dismisses conventions like imposed cross-selling across holding-company subsidiaries. "We don't believe in mandated cross-selling, but rather we encourage facilitated collaboration through partner meetings, so they can get to know each other in more non-threatening ways," he explains.

In late September, for instance, Nadal and Porter hosted a corporate get-together in Chicago, where close to 50 of MDC's growing ranks assembled to meet one another, offer credentials and show off work.

Ex-Carmichael Lynch executive Jim Scott, who founded Mono at the beginning of this year with two former Fallon staffers, says shared resources like The Media Kitchen have helped jump-start his agency, which works for the Sesame Workshop, producers of Sesame Street. "Being able to partner with MDC companies like The Media Kitchen has been a real benefit. I don't think we could have been able to broker our own media deals."

Like many objects of MDC's recent acquisitions, the founders of Zig, one of Canada's hottest shops, weren't looking to sell. "It's proving to be the best of both worlds," says Zig president Andy Macaulay. "We retain control, and yet we're included in this exclusive club of some of the best agencies. Since we're still new, it's great to be able to pick up the phone and ask [other MDC companies] for advice. With MDC, we get counsel and collaboration with other partners."

Zig just won the coveted Molson Canadian beer account after a hotly contested review. During that process, Macaulay conferred with CP+B, which handles Molson in the U.S.

Like MDC, Nadal is still very much a work in progress. He's come a long way from his middle-class roots in Toronto and has the creature comforts to show for it. Aside from his penthouse in the Bahamas, the divorced father of two has a home in Palm Beach, Fla., and he motors around in an Aston Martin DB7 convertible and pilots an 80-foot Lazzare motor cruiser, named, appropriately, Dare to Dream. He began his business career at age 12 at summer camp, which was subsidized by the same Jewish community center that now bears his name. He took pictures of the other kids—the snapshots cost him 69 cents to produce and fetched $5. MDC's first employees were Nadal's father and mother, whom he still calls every day at 6:30 a.m., before work starts.

Nadal may be seen as a benevolent banker among agency creative people, but he is still viewed cautiously in the conservative Toronto investment community. He is perceived as a financial wheeler-dealer who, during the past three years, was paid $22.4 million in compensation while MDC earned only about $9.6 million. MDC's share swings in recent years have given investors a rocky ride: The stock sunk to a low of $1.10 in October 2001 but is now trading at close to $11. Shareholders had other gripes as well, concerning Nadal's corporate-governance practices. His ex-father-in-law served on his board and occupied a role on key committees; Nadal and other top company execs received interest-free loans from MDC. He also benefited from a dual-class share structure that awarded him almost half of the company's voting rights, despite the fact that he owned just one-fifth of MDC's stock. "It was a company that was known as a place that was all about one person," notes one Toronto financial observer.

Following tough Canadian media scrutiny, Nadal has since ended those practices and converted his multiple voting shares into common stock, without any extra compensation to him. Those changes, coupled with his successful turnaround of MDC, are beginning to alter his reputation in Canadian business circles. "He's improved his corporate governance practices," says David McFadden, an analyst with Toronto's Sprott Securities. "Is it perfect? Maybe not. But he's made it a lot better."

Responds Nadal: "We adhere to the highest standards of corporate governance."

The entrepreneurial reflexes in Nadal that invite criticism for the way he runs a public company draw praise for the way he works with people. "As an entrepreneur, Nadal is emotionally in touch with what makes his partners tick," says MF+P CEO George Fertitta.

Nadal offers a balance of support and hands-off ownership. "If you want to have talented creative people, you can't impose control over them," says KB+P co-chairman Jon Bond: "Miles knows that."

If Nadal is the strategic brains behind MDC, Porter, 59, is its creative soul. A journalism graduate, Porter also attended law school. He spent most his career freelancing as a copywriter, but he drew inspiration from the success of his best friend from childhood, Pat Fallon. (Van Horn, Porter's partner in scouting for MDC acquisitions, was also a very close pal of Porter's and Fallon's.) Porter's creative partner, Alex Bogusky, has the cool persona of a Johnny Depp look-alike, but the Minneapolis-born Porter is known more for his Midwestern plaid shirts and chinos. Nadal gushes about Porter, calling him his advertising "guru," and voices complete confidence in his judgment. For good reason, history shows: After joining the Crispin agency in 1987, Porter helped remake the backwater Miami shop, bringing in Bogusky and turning it into one of the most-talked about, award-winning agencies on the planet.

Porter is on the prowl for the next CP+B, no matter which advertising or marketing services area it works in. He champions media-neutral marketing and looks for partners who share that view. "Big agencies, big networks have a stake in the status quo," he says. "So a revolution isn't good for them."

Porter and Nadal, who speak to each other seven days a week, are quick to complete each other's thoughts but short on hints about future acquisitions. They have been in touch with Amsterdam's StrawberryFrog and, it is believed, shown interest in London's Mother. (They would not comment on either shop.) Also, Porter salivates at a mention of Wieden + Kennedy. In June, Nadal brought in Harry Clark, who sold his public relations firm, Clark & Weinstock, to Omnicom Group, as a senior adviser to MDC, to look for acquisitions in PR, sports marketing, healthcare, public affairs and lobbying.

Nadal has a broad view of possibilities, saying MDC has no specific geographic or business-practice imperatives. "We like anything that's a growing business, things like branded entertainment, multicultural and Hispanic advertising, product placement," he says.

As the marketing-services industry makes a tentative climb out of recession, Nadal is bullish. "Independent companies no longer want to sell to the big networks," he says. "They feel as if they'll be emotionally orphaned or strategically orphaned within larger companies."

Supporting that view are the founders of Banjo, MDC's most recent investment. Banjo is MDC's first foray into entertainment marketing, and since selling a stake to Nadal in September, Patrick Madden and Ron Walter have been able to open a Los Angeles office. They say they have been contacted by most of the industry's big holding companies and were negotiating with one of them this summer when they began talking to Porter.

Madden says that in contrast to the seen-it-all personalities of big-network executives, "Miles Nadal seems like a naturally curious, enthusiastic person by nature."

While Nadal is eager to break into the ranks of the 10 largest holding companies—MDC currently is about 13th in size—he is determined to position his business as a distinct alternative to them. He says he has met WPP CEO Martin Sorrell, IPG CEO David Bell and Omnicom CFO Randy Weisenberger but none of the other top executives at Madison Avenue's biggest players. Nadal voices admiration for the companies that Omnicom and Publicis have built but has no interest in replicating them. "The world doesn't need another one of those holding companies," he says.

Still, argues Frank Palmer, CEO of DDB Group Canada, "he'll need to find a way to make a link [among the shops]; otherwise he's just a guy with 40 companies who have a partner on a buying spree. Down the road I think he's going to have to find a way to convert it into one network. There's no synergies or savings in it otherwise."

Nadal also denies any interest in selling MDC to one of those larger concerns, saying he is in this business for the long haul. Given the fact that he doesn't own 100 percent of MDC's affiliate companies, such a move might prove difficult anyway. "MDC's partners would have to agree to sell, and I don't think that would be easy," says Jason Helfstein, an analyst with CIBC World Markets in New York. "But I don't think MDC will sell in the short term. [Nadal] seems too excited about what he's doing, and he continues to sell off [printing] assets so he can invest in more marketing-services partners."

That enthusiasm is clearly on display these days. As he introduces himself around the industry, Nadal is, by all accounts, inquisitive and engaging. "He was more interested in hearing what I had to say than what he had to say. This is a guy who wants to learn," says Deutsch CEO Donny Deutsch, who met Nadal in New York recently. "He is very likeable, very bright, dynamic. His business model obviously is TBD, [but] I would bet on him."

Observers like Sprott's McFadden say Nadal has learned from his ups and downs and is more prudent in his acquisition approach this time around. "When he spun out Maxxcom, he acquired a lot of businesses using debt," McFadden says. "Then the economy went into recession, and it wasn't a good time to have a lot of debt. The difference now is that he's using cash, not so much debt."

Nadal still has his work cut out for him, though. The company just reported third-quarter profit of $1.5 million, or 7 cents a share, when investors were expecting 10 cents a share. "He needs to get some traction to show this model can make money," says Bob Leshchyshen, an analyst at Northern Securities.

MDC's results have been impacted by its corporate divestitures and restructuring. However, in MDC's marketing-communications segment, revenue in 2003 rose 13 percent to $194 million, with operating income up 32 percent to $29 million. MDC made no acquisitions that year. "We don't get enough credit for our organic growth," Nadal grumbles.

It's that growth, coupled with MDC's continued emphasis on acquisitions, that Nadal hopes will land him in the big leagues. Whether he can do it remains to be seen, but this year has nonetheless marked another kind of milestone.

"If you're not going to be the biggest holding company, you've got to be different, better," says KB+P's Bond. "We were important to MDC. Before, when it was just Crispin Porter, [MDC's success in attracting talent] was like an accident. Now, with us, it's a pattern. He's buying people everyone wants to buy but who don't want to sell. Miles' strategy is becoming apparent."