Building Blocks

In the annals of deal making on Madison Avenue in the 1980s, the acquisition of specialized communications companies was largely relegated to footnotes, obscured by the headline-grabbing shuffle of advertising networks. Healthcare marketing, direct marketing, promotions, corporate identity, public relations, media buying, new media: Today companies in these fields are growing faster and, in many cases, boast higher margins than sister firms in mainstream advertising. But because they lack the kind of Hollywood sex appeal of 60-second spots aired during the Super Bowl, they have been overlooked as thriving components of advertising's biggest holding companies.The benefits of diversification through such companies are becoming impossible to ignore. Like the agency mergers and consolidations that characterized the '80s, the advertising industry's embrace of nontraditional communications companies is fast changing the face of the business. WPP Group may be best known by its high-profile agency networks J. Walter Thompson and Ogilvy & Mather, but a full 45 percent of the company's business still comes from its specialist communications roots--a percentage larger than any other holding company.More dramatic has been Omnicom's transformation due to the rapid growth of its Diversified Agency Services unit. DAS, initially a catchall for the smaller agencies and below-the-line shops owned by Doyle Dane Bernbach, BBDO and Needham Harper Worldwide, was almost scrapped 11 years ago. Instead, Omnicom's then chief executive Bruce Crawford and DAS architect John Wren kept the unit alive and built it up. Today, it rings up 40 percent of the company's revenue. Expected to reach $1 billion in revenue this year, DAS has become bigger and is growing twice as fast as the company's star networks, BBDO Worldwide and DDB Needham. Perhaps the most telling sign of Omnicom's continuing commitment to building DAS is Wren's own ascension as Crawford's successor.'I give Omnicom a lot of credit,' says Interpublic Group of Companies chief executive officer Phil Geier. 'Their timing was excellent. The reason you're seeing a lot more deals now is because of the success of DAS.'That success has provided inspiration for other holding companies looking to boost their bottom lines and service offerings. In fact, IPG has emerged as one of the industry's most aggressive deal makers in search of opportunities for its new Allied Communications division. Created in 1995, Allied is expected to generate $350 million in revenue this year. The rivalry of pursuit can be fierce. Not everyone can win. Consider the sale of St. Louis public relations firm Fleishman-Hillard in April. IPG's Geier had been talking to the company and earlier this spring was in negotiations. Subsequently, a reporter heard the public relations firm was in play and put in a call to Wren late on a Friday afternoon to see if DAS was the rumored bidder. A surprised Wren said he had not heard Fleishman-Hillard was up for sale. He wasted little time getting inside the loop: A few weeks later, Fleishman-Hillard principals had reversed themselves and inked a deal with Omnicom, mainly because they offered a deal that would group Fleishman together with DAS public relations shop Porter Novelli. Wren reportedly paid $85 million in stock for Fleishman, which posted estimated revenue of $107 million in 1996. By pairing the agency with Porter Novelli, Wren is creating the industry's largest global PR operation, ahead of the long dominant Burson- Marsteller, owned by Young & Rubicam.'There's an unusual amount of activity because some people are playing catch-up and the stock market is at an all-time high,' says Wren, now Omnicom's president and chief executive officer. 'Below-the-line companies have a growth rate in excess of mainline agencies. They're smaller and easier to grow. We've been doing this for the past 10 years. There are no areas we are not involved in that we want to be.'For competitors like IPG, it's a great time to be in the marketplace. Industry holding companies have benefited from robust growth following the recession of the early 1990s, bringing rising cash flow and higher stock values. In addition, after corporate downsizing earlier in the decade, clients are looking to the outside for many of these specialized services. 'Our companies are doing so well in part because more clients are outsourcing and using the capabilities of specialty companies,' says Tom Harrison, president of DAS.Other concerns like Bozell, The MacManus Group and True North are also scouting acquisition targets among nontraditional marketing concerns, but none of them as voraciously as IPG and Omnicom. Is this kind of below-the-line growth driven by the success at Omnicom and IPG, or is it the expectation of long-term flat performance at the major ad agencies?Says Grey Advertising, New York, president Bob Berenson: 'Crawford and Geier are looking at medium-to-flat growth in their advertising business. They have to be much more true to analysts' expectations. So their earnings continue to grow because of acquisitions rather than internal growth. Quarterly earnings go up because of acquisitions, and the more acquisitions that happen, the more they have to have happen. They need to feed the shark of public earnings estimates. At Grey, our focus is on our current clients and we don't worry about analysts, so we have much more freedom to plan our life the way we want.'Adds Roy Bostock, chief executive officer of privately held MacManus Group: 'We were definitely ahead of Omnicom in this game. We've been in this business a lot longer than Wren ever dreamed. He needs to say those things because he has public shareholders.'Abbott Jones, managing director of AdMedia, acknowledges investor expectations are a necessary evil for any public company. 'Analysts expect 15 percent growth in earnings and you don't get there from general cost-cutting or growth in general advertising revenue,' he says. 'That 15 percent is built into every plan put before analysts, and companies have to keep acquiring new businesses to support that growth.'At Omnicom, chairman Crawford, Wren and chief financial officer Fred Meyer have proven themselves savvy deal makers, building DAS into a unit of 21 marketing services and specialized advertising agency groups with revenue of $775 million in 1996. Through similarly shrewd acquisition strategies, IPG's Geier and chief financial officer Gene Beard have already built the industry's largest global company in pure advertising terms and aim now for critical mass in specialized communications. While both companies agree on that common goal, each is taking a slightly different approach.Omnicom continues to bring non-agency units under its DAS umbrella, filling in through industry line extensions and geography. Says Wren: 'Nothing happens by chance. We don't buy anything for a financial reason. At the bottom of everyone else's acquisitions is shareholder values. I'm not buying earnings. I'm very aware of and motivated by the potential of the companies I'm buying.'IPG is taking a different strategy in its investments, one more akin to a portfolio management approach. For one thing, the company is buying assets either to place within its new Allied division or to align specifically with individual IPG networks. Last month, IPG bought healthcare company Integrated Communications Corp. to pair with Ammirati & Puris. In February, IPG acquired a 'significant' minority stake in Diamond Promotion Group for Lowe & Partners/SMS. Other IPG holdings, like DraftDirect and Western International Media, are associated with Allied.IPG has also acted as a venture capitalist, buying into operations like CKS before it went public and sharing in the windfall profits generated in that sale. More recently, IPG bought into other new media-driven concerns like Tripod, which may follow in CKS's steps as a publicly traded entity. Geier and Beard have bought 50 percent stakes in agencies like Campbell-Mithun-Esty and Goldberg Moser O'Neill--sharing profits but not conflict headaches. IPG is also making profits--on paper at least--through investments in companies like publicly traded AGT, a print graphics technology company. IPG's 4 percent stake in the company has appreciated 50-60 percent since it was acquired eight months ago. IPG also bought sports marketing/sponsorship company Advantage, in the U.S. and U.K., which gives the company a whole new arena to play in. Advantage offers long-term annuity value from player endorsements and contracts for years to come--much better than the 90-days-and-you're-gone world of ad accounts.IPG executives emphasize that their primary interest in such companies involves the contributions they make to IPG's corporate mix and clients. But given the uncertainty of exactly what role new media will play in the marketing world, the short-term investment benefits of such companies offer a nice hedge against the vagaries inherent in new media's future. In no small part, such thinking is second nature to IPG's longtime financial head, Beard, who moonlights as a portfolio manager at Westport Asset Management Co., which he owns.'At Westport, we're very good at analyzing equity values. That carries over into our acquisition strategy at IPG,' says Beard, who declines to disclose the size of the small cap value fund he runs. 'If you're going to be very astute about evaluating assets in which to buy for your investment fund, you're going to be very astute in evaluating another company's assets before purchase.'Heading the buy list for IPG, like most major companies, is the healthcare marketing sector. Thanks to a rebound in the pharmaceuticals business, consolidation among clients and the boom in direct-to-consumer advertising, such businesses are now fetching multiples of 5.5 to 7 times pre-tax earnings--a premium over that paid for general advertising agencies. Healthcare marketing companies underscore specialized communications' potential for higher margins. For one thing, such businesses are fee-based, not dependent on media commissions.Four of the remaining large healthcare independents were sold over the past year, three--Integrated, Torre Renta Lazur and William Douglas McAdams--to IPG alone. (The fourth, Cline, Davis & Mann, was purchased by Omnicom.) IPG's acquisition of one of those healthcare companies, Parsippany, N.J.-based Integrated, underscores the advantages listed companies have at the negotiating table. 'It's much easier for publicly held companies. There was interest in Integrated from other companies,' says Jones from AdMedia, which was involved in the deal. 'But none of them could compete with IPG's attractive stock deal.' Integrated, with annual revenue of $25 million, reportedly fetched in excess of $20 million in the stock and earn-out deal.'It's a smart evolution of what's happened vis a vis the '80s and '90s,' says IPG's Beard. 'In the 90s, more and more of the people we see want a stock transaction. Our stock has acquired quite a bit of currency so we can make very attractive tax-free deals.'Over the last five years, Omnicom and Interpublic stock have zoomed ahead with the bull market. Through early June, Omnicom shares had risen 294 percent, while Interpublic's had moved up 131 percent.Bostock argues that Omnicom has been aggressive in making more deals than others because of its strong stock value and says WPP chief executive officer Martin Sorrell 'would be just as aggressive if he could, but he doesn't have the marketplace strength.'WPP shares have, in fact, outperformed IPG's over the last two years. Sorrell says he's reluctant to get involved in stock-financed acquisitions because of the dilutive effect on earnings and the increase in outstanding shares. His acquisition goals remain on course. 'Our strategy is to improve what we have and add along specific functional and geographical lines, particularly in high-growth opportunities outside the U.S. and outside advertising,' he says.It's ironic that Omnicom's DAS is held up as the model for specialized communications since WPP originated with Sorrell's belief in the opportunities of 'below-the-line' marketing companies. In the CommonHealth Ferguson Communications Group, WPP has assembled the largest healthcare marketing company in the industry and with its Enterprise identity group, WPP owns the largest collection of corporate identity and design firms.A revitalized WPP and an acquisition-minded Y&R (after its expected public offering) will heat up the buying climate even more. But Beard warns that cutting deals is not as simple as it seems. 'Acquisition targets? There are a lot of good people out there--that's no problem,' muses Beard. 'The problem is making sure you find one that fits your strategy. If the cultures are not right, if the people are not right, it's never going to work.' The DealsINTERPUBLIC GROUPDate.....Company.....Specialty6/97.....Advantage.....sports mktg.6/97.....Tripod.....new media5/97.....Nicholson NY.....new media5/97.....Integrated Comm. Corp......healthcare4/97.....Thunder House.....new media4/97.....D.L. Blair.....sales promo3/97.....MCS GmbH/Munich.....healthcare2/97.....MRM World Group.....direct1/97.....Diefenbach Elkins.....corp. ID1/97.....The Weber Group.....pr5/96.....DraftDirect Worldwide.....direct4/96.....William Douglas McAdams.....healthcare6/96.....Media Inc......media buyer6/96.....Torre Renta Lazur.....healthcare1996.....ad:vent.....event mktg.1996.....Planet Design.....corp. ID1996.....Schmidlin & Partners.....corp. IDOMNICOM GROUPDate.....Company.....Specialty4/97.....Fleishman-Hillard.....pr3/97.....Cline, Davis & Mann.....healthcare2/97.....Organic Online.....new media2/97.....Gaskel Communications.....sales promo9/96.....Razorfish.....new media9/96.....Think New Ideas.....new media9/96.....Agency.com..... new media9/96.....Red Sky Interactive.....new media9/96.....Interactive Solutions.....new media5/96.....Ketchum Communications.....pr, yellow pages1996.....Clark & Weinstock.....consulting1996.....Creative Media.....media buyer1996.....Zintzmeyer & Lutz.....corp. ID1996.....Gerstman & Meyers.....designSelected acquisitions by holding cos. and affiliated agenciesCopyright ASM Communications, Inc. (1997) ALL RIGHTS RESERVEDSCROLL National

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