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IQ News: The Urge To Merge

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Interactive agency consolidations are the mania of the moment.
At New York-based Rare Medium, staffers are still hearing jokes about air-conditioning. But the laughs aren't about ventila-tion systems.
Rather, they are about the company being purchased in April for $45 million by ICC Technologies, Hatboro, Pa., maker of humidity control systems. Ever since, Manhattan's Silicon Alley has been baffled about whether Rare Medium has changed its focus from interactive advertising to some unheard-of concept having to do with Internet-based refrigeration.
The humor was not lost on Rare Medium president and CEO Glenn S. Meyers, who even sent employees a joke memo announcing the company would now have the ability to receive cool air through its PCs. In fact, in a deal somewhat reminiscent of Martin Sorrell's 1980s transformation of a company that made shopping carts into the agency holding company WPP, Rare Medium was simply becoming part of a company hoping for a similar transformation, gaining access to capital in the process. No wonder Meyers says those still confounded by the move are missing the big picture.
"Here was a deal that gave us a public presence without having to go through the IPO process," Meyers explains. "The [ICC] cooling business was already sold except for one equipment division ... It's really a holding company with a lot of money in the bank."
The Rare Medium deal is perhaps the most unusual merger in a series of agency consolidations that have reached a fever pitch in 1998. In the last several months alone, Modem Media and Poppe Tyson, both part of True North Communications, have joined forces, as have US Interactive and Digital Evolution, and Agency.com and Interactive Solutions. If the pace has been particularly surprising, the aggregation overall is not, according to Abbott Jones, managing director of AdMedia Partners, an investment-banking boutique in New York.
"I think a significant reason is that most [interactive agencies] are making little or no money. They've been investing heavily in growth, so the top line is growing but the bottom [is not]," Jones says. "Some of the people who start these companies are essentially techies and not necessarily good business [people]."
Ron Bloom, chairman and CEO of Think New Ideas in New York, casts the rash of mergers in a rosier light. "It is an indication that the industry is moving out of its infancy and it is past its mezzanine stage," he says. "The demand of its clients is much bigger than any of these small shops can provide." Bloom says he seeks companies that mesh creatively, financially, philosophically and culturally.
Think and Agency.com, also New York, both part of Omnicom Group's Communicade unit of interactive agencies, have been at the forefront of the consolidation boom. Agency.com, in addition to swallowing fellow Communicade shop Interactive Solutions in recent weeks, has also completed deals to acquire New York's Spiral Media and London-based Online Magic. Think has purchased Seattle-based Herring/Newman and Atlanta's Interweb this year.
Chan Suh, CEO of Agency.com, says, "We do mergers and acquisitions kind of the same way we do our business, which is we do it in order to complement our offerings and be able to meet our clients' needs."
Cambridge, Mass.-based Interactive Solutions provided a strong technology background, he explains, while Online Magic helped the company move into the European marketplace. (He insists Communicade had no influence in Agency.com's merger decisions.) Yet, for all the insistence that the current crop of mergers is occurring mostly for strategic reasons, not enough time has passed to determine whether the new agency combinations will work over the long term. And, if the checkered history of traditional agency mergers is any guide, interactive shops that get the urge to merge should proceed cautiously. As Jones notes, many mergers consist of a financially unstable agency merging with a stronger one. For example, when Razorfish, also part of Communicade, bought and eventually merged with New York-based Avalanche Systems, the latter shop was in upheaval, having laid off some people and accepted resignations from others.
But there are entities besides top-tier interactive shops that have joined the fray. Online giants USWeb, Santa Clara, Calif., and iXL, Atlanta, have swallowed dozens of shops in the past year and continue to expand in 1998.
Some of USWeb's purchases have included technology and software companies, as opposed to agencies, while iXL has concentrated on interactive agencies and has created an entertainment-focused unit. Some in the industry view their rapid growth as being less about strategic partnerships and more about gaining mass for its own sake. But principals at both companies insist the marriages are well thought out.
Toby Corey, co-founder, president and CEO of USWeb, said the company looks at three things in a potential acquisition: strong strategy consulting, technology and creative skills. So far this year, eight companies have made the cut, including Ikonic in San Francisco. "What it boils down to is essentially acquisition of expertise," Corey says. "The market is exploding ... we did not feel that we could grow fast enough organically."
Kevin Wall, vice chairman of iXL Worldwide, cited geographic considerations as well as expertise. At the same time, he says, each company is fully integrated into the iXL culture, changing its name within days of acquisition. "There's entrepreneurial spirit in local offices, but at the same time we really have a corporate point of view," he explains.
Others believe the growth actually diminishes the strengths of the smaller company. "We don't want to be part of these huge groups," says Alan Siegel, CEO of Siegel & Gale, New York, which earlier this month bought itself back from Saatchi & Saatchi and plans some of its own acquisitions.
Not surprisingly, Siegel feels his company learned important lessons from the creation and ultimate abandonment of the Saatchi & Saatchi holding company approach of the late '80s, which promised to be all things to all marketers. "We feel that being part of a big agency network is stifling," he explains. "It's just a pure financial play. To us it looks like chaos."
And he's not alone in his skepticism. Bob Gett, CEO of Boston-based interactive marketing firm Viant, says organic growth is the only solid way to build a business. "The bottom line is mergers don't work real well. What makes one company special and what makes it good gets diluted ... I think there's going to be a bloodbath out there."