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Growing Up

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Where have all the dealers gone? The long-term annual growth rate of U.S. advertising is about 6 percent. For the major holding companies committed to showing above-trend growth in order to support their stock prices, that should be the floor. How can a company that's pretty big to begin with consistently beat that?

There are four main tactics:

—Work for clients with fast-growing marketing services budgets.

—Win new accounts (while averting corresponding losses).

—Establish branches in new cities and penetrate additional markets.

—Diversify by discipline, such as ad shops getting into public relations.

There's not much an agency can do to rebalance its account portfolio. A lot depends on luck.

New-business activity seems to be picking up, but the trick will be to add enough to offset the shrinkage from established but declining accounts.

The last two maneuvers are commonly achieved by acquisitions. And in the present economy, that route is coming under pressure. Acquirers need buoyant stock prices, lots of cash or ready credit—ideally all three—and these are now hard to come by.

Agency stocks, without exception, are down from their historical highs. It would now take more shares to achieve a given purchase price, in effect making deals more expensive. Cash positions, too, are diminished. As of Sept. 30, Omnicom's cash holdings were about $100 million below their year-start level, and long-term debt had risen by $245 million. Interpublic's latest balance sheet shows similar shifts—a decline of $150 million in cash, plus an additional $350 million long-term borrowing.

WPP is about to complete its acquisition of Tempus, the London-based media company, after trying for a few months to wiggle out of the deal on the basis of suddenly-poor economics. Although we won't see a third-quarter balance sheet for WPP, its net debt—where the money it owes is offset by its cash balances—is up by $245 million year over year.

Given the lower stock prices and heavier debt loads, the spark has come out of the deal market. IPG, for example, averaged around 65 deals a year in recent years, at an aggregate cost of about $750 million per annum. Most recently, it signaled that most of its spare cash would be used to whittle down its debt, which stood at over $3 billion as of Sept. 30. The deal window is closed.

Omnicom has generally taken a lower-key approach, and doesn't get caught up in the thick of an auction. (For example, rather than bid higher on True North/Foote, Cone & Belding, Omnicom picked off a few choice accounts, letting a rival take the rest.)

Likewise, WPP may tread cautiously, at least until the scars from its recent battle with an industry self-regulatory body heal and fade.

The two French companies, Publicis and Havas, are also considering restructurings in response to soft business conditions, making them more likely sellers than buyers.

Growth by acquisition is, however, a permanent feature of this industry. A pickup in merger activity, perhaps by the spring, would be a strong signal that business is getting back to normal.