Deal-Making to Continue as Agencies Bolster Digital

NEW YORK Recession or not, holding companies, agencies and private equity firms are expecting another busy year of deal-making, as they scramble to bolster their new media capabilities and digital shops try to capitalize on relatively high valuation rates, according to a new survey from AdMedia Partners.

More than two-thirds of the 3,300 top executives who participated in the survey of Merger & Acquisition Prospects for Marketing Services and Internet Marketing Firms said they’d be approached or approach someone about a deal this year and 39 percent said they’d get at least one done. The group included both buyers and sellers, ranging from marketing services shops and digital agencies to holding companies, ad agencies and private equity firms.

Those percentages declined from last year, when the survey showed 87 percent and 49 percent, respectively—but it’s clear that although 2008 M&A activity may not match 2007’s breakneck pace, a drum beat of deal-making is continuing. AdMedia described the respondents’ outlook as “surprisingly optimistic,” given the current economic downturn in the U.S.

“If you’ve got to have it, you’ve got to have it. It doesn’t matter if times are tough,” said Seth Alpert, a partner and managing director at AdMedia. “You don’t want to make it tougher by not being able to fulfill all the needs of your clients.”

AdMedia, which last year booked 20 transactions, including aQuantive’s purchase of Razorfish and G2’s acquisition of Refinery, is currently experiencing its busiest quarter in its 17-year history, with six and as many as 10 deals that could close by March 31, according to Alpert. In the first quarter of 2007, AdMedia completed nine deals.

“Major buyers have not shown any signs of lessening interest, changing their valuation multiples or worrying about credit issues that they weren’t worried about before,” said Abe Jones, another AdMedia partner and managing director. “And that includes private equity firms as well as strategic buyers.”

The topline findings from AdMedia’s 14th annual survey, which the firm conducted in December via an online questionnaire, jibed with those from another survey released earlier this month. Gridley & Co., another New York M&A firm, reported that in the next 12-18 months, 68 percent of its 100 respondents plan to buy a private company in the financial technology, marketing services or Internet services sectors. Fifty-two percent of those surveyed expect to be buyers and 28 percent both buyers and sellers. The buyer-seller figures are even higher than what AdMedia found: 37 percent of its respondents expect to buy and 20 percent expect to both buy and sell.

As for agency valuations, AdMedia’s respondents expect them to hold steady at 2007’s expected levels: 8 times earnings before interest and taxes for digital agencies, 6-6 1/2 times EBIT for marcom shops and five times EBIT for ad agencies. But Saul Berman, strategy and change leader in the media and entertainment practice of IBM’s Global Business Services division, is less bullish about valuations this year. “The multiples may not be as great as they have been, but they’ll probably be on the high side or [at] a premium. But as general market multiples go down, I would expect it to have impact on the multiples on this segment of the business as well,” Berman said.

Like the survey respondents, Berman anticipates a vibrant marketplace in ’08, given macro trends such as the need for new revenue streams and the speed by which the industry is transforming.