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Piecing Together a New Digital Holding Company

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NEW YORK At first glance, AKQA and iCrossing have little in common. AKQA, headquartered in San Francisco and led by a soft-spoken ad industry veteran, made its name with flashy Web design projects. Started in Scottsdale, Ariz., iCrossing is helmed by a trash-talking entrepreneur with roots far from Madison Avenue in the scrappy world of search optimization.

Though coming from opposite starting points in the digital world, each company is betting it can leverage the current shifts in ad spending, along with a few well-placed acquisitions, to build the next aQuantive: a publicly traded digital marketing company (built, in large part, by acquisitions) that offers an array of services with a technology backbone.

To pull it off, each will need to avoid overpaying in a hot M&A market and getting too far afield of its core expertise, two temptations others have been unable to resist.

Naturally, fueling both companies' ambitions are the deep pockets of private equity backers. In the case of AKQA, General Atlantic in February took a majority stake in the company in a deal valuing it at $250 million, according to sources, and is now bankrolling an aggressive acquisition strategy. In iCrossing's corner, Oak Investment Partners and Goldman Sachs are part of more than $100 million generated by five rounds of financing that resulted in four acquisitions in the past year. AKQA is on pace to generate $100 million in revenue this year and iCrossing $110 million, per sources, with aggressive growth targets for 2008.

Both companies and their backers have a similar view of the future: a one-stop shop offering a variety of ways clients can reach customers through digital channels that will allow them to fine-tune their messages and determine what works and what doesn't.

"We're going to do more of what they're doing, and they're going to want to do more of what we do," said Ren Riley, a general partner at Oak and an iCrossing board member.

For AKQA, that means working from its roots as a Web design shop while building its capabilities in media, search marketing and analytics. Three months ago, it made the first of what it expects will be a series of acquisitions, buying SearchRev, a Silicon Valley company that makes software to help marketers develop search advertising strategies. It is currently in the market for companies specializing in dynamically optimizing Web sites to improve performance and reporting marketing effectiveness, said Tom Bedecarré, AKQA's CEO.

"We want to be able to do more for our clients and prove more integrated digital offerings," he said. "It's not that different from what the holding companies did 20 years ago. We think life has gotten very complicated for clients on the digital side."

Though the SearchRev deal was small—the price tag was believed to be under $10 million—AKQA is open to buying larger companies, Bedecarré said, if they brought in new services and capabilities. The idea is to marry AKQA's creative firepower and big-name clients—Nike, Coca-Cola, McDonald's, Diageo and Xbox—to a technology platform for measuring campaigns' effectiveness and making changes on the fly.

While iCrossing is striving to create a similar company, it is using its search technology as its platform to add other services. Although still mostly rooted in search optimization, the 9-year-old company has acquired four firms this year: paid search specialist NewGate Internet, British search and social media agency Spannerworks, Sharpe Analytics and, in July, Web development firm Proxicom. Earlier this month, it consolidated all the companies under the iCrossing umbrella.

"In order to be the next-generation digital marketing company, you're going to have to have that technology base," said Don Scales, president of iCrossing.

Although iCrossing boasts relationships with 40 of the Fortune 500, including Coke and General Motors, they tend to be lower in the food chain. But that is changing as more executives with digital backgrounds ascend, claims iCrossing CEO Jeff Herzog, who goes so far as to suggest the ad holding companies will be iCrossing's rivals. In his view, iCrossing is no more of "just a search-optimization company" than Google is only a search engine.

"Search is customer intent," he said. "If you know how somebody searches, you know how they think. If you know how people think, you can brand to them effectively."

Although iCrossing executives say they are concentrating on integrating their acquisitions, investment banking sources say they are still actively pursuing companies that provide technology tools and services in areas like Web video and social media.

AKQA and iCrossing's ambitious plans have their doubters, especially within the ad holding companies they seek to displace from client relationships.

One holding company executive compared the acquisition-dependent strategies to the Internet frenzy of the late 1990s that led to bloated, disparate companies that flamed out. "I've seen this movie before," he said.

Even proponents of the M&A approach admit it is fraught with challenges. "Making acquisitions successful is a lot of work," said Seth Alpert, managing director at AdMedia Partners, which advised iCrossing during its acquisition of Proxicom. "We all remember what happened seven years ago. This pair of companies is trying to be smart about the deals. But that's not to deny there are challenges."

Already, prices are high for technology companies, and other private equity firms, like The Carlyle Group in the U.K. and GTCR here, are also shopping for similar acquisitions.

"AKQA and iCrossing are by no means alone in trying to put this platform together," said Rich LeFurgy, the CEO of X+1, a site and display ad optimization firm pegged as an acquisition target.

Both companies are eyeing public offerings as soon as next year. Part of the attraction is the dearth of investment opportunities in the public market for Internet advertising businesses. Investors are also likely to embrace companies modeled after aQuantive, which Microsoft bought for $6 billion. Even a rocky economy is unlikely to scuttle an offering in an area that is forecast to continue growing in the midst of an overall ad slowdown, according to backers.

"We think [AKQA] would be a fantastic vehicle for public investors," said Anton Levy, managing director at General Atlantic and a member of AKQA's board of directors. "There would be a lot of appetite."