Art & Commerce: A Way of Life

Like expense accounts and award shows, wheeling and dealing is a staple of the advertising industry Is there really more merger and acquisition activity in the ad agency sector than in business generally? Probably. Will the pace of deal making remain quick? Probably. Is this good for the industry? Yes. Several mega factors are driving activity. Consider this: There are relatively few barriers to entering the industry. People with some experience working at an established shop--or perhaps on the client side--can hang out a shingle and put themselves on the map. This is a business of constant startups, which rely almost entirely on the talents of people--human capital--and not, like many other businesses, on financial underpinnings. Fittingly, startups in the ad industry are also encouraged by startups in just about every other business. Out in the real world, almost all new products and services seek help composing and spreading their marketing messages, creating a steady flow of new clients and prospects. The agency business is not a zero-sum game; more accounts are won than lost. But while the barriers to entry are very low, the barriers to greatness (not the same as hotness or cuteness) are high, and rising. That explains why each of the 10 largest agencies has roots extending back more than 50 years, and only one, Ogilvy & Mather, was a post-war startup. (Quibble: The DDB in DDB Needham is also a relative upstart.) Making it to the very top is tough. In fact, as easy as it may be to start in the business, it's difficult to grow beyond certain sizes. There seems to be a hurdle at around $10 million in revenue, and another especially tough one in the $20-25 million range. The skills needed to get to these barriers are different, and perhaps rarer, than ones needed to clear them. Small companies often prefer to jump into the arms of big firms rather than fly solo to the next level and risk crashing. Interpublic has acquired about 300 companies in the past 20 years. Omnicom, the other big acquisitor, has kept a similar pace. One fascinating thing about all this wheeling and dealing is how few of these mergers have bombed. In other industries, the failure rate can be 50 percent or more. Of IPG's 300 or so deals, only about 15, or 5 percent, didn't work as planned, and half of those were salvaged. Are holding-company managements especially smart? Well, they certainly have deal experience. But a major reason for the high success rate is plain and simple parsimony. The big guys don't pay a lot. Though their own shares are selling at more than 30 times net income, they rarely pony up even 10 times net--and generally less outside the U.S., where sellers are typically less sophisticated--in their deals. While the big companies can do little deals until the cows come home, it takes a really big deal to have a major impact on their financial statements. When a company with $4 billion in revenue buys a $10 million producer, the needle doesn't move. The present trend of advertisers using fewer but larger agencies is putting new barriers in front of the midsize and even the Triple A League shops, which may well drive the next round of deals. Might Omnicom, say, buy Bates, or Interpublic take True North? The barriers to doing such deals are getting lower and lower.

Brand Marketing

Art & Commerce: A Way of Life

Adweek Staff

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