At The Digital Dance, Few Partners Remain

Publicis Groupe’s $1.3 billion acquisition of Digitas last month and reports that Havas is on the hunt has cast a spotlight on the remaining independent interactive agencies as attractive targets.

Publicis and its agencies, Leo Burnett, Saatchi & Saatchi and Fallon, are eyeing potential acquisitions in the digital space, according to sources. And Havas, whose interactive assets reside mainly within Euro RSCG 4D and MPG’s Media Contacts, has nearly $350 million available for acquisitions through a sale of bonds and plans to spend it on digital properties, executives said.

Publicis CEO Maurice Lévy recently told Adweek that his company has more work to do in building its digital businesses. “We had to have a much larger stake of our operation that was in digital,” he said, explaining the Digitas purchase, adding that he “would like to have much more than the 15 percent we’ll have” even after the acquisition is complete.

Yet for a holding company like Publicis or Havas, the prey is becoming scarce. Many of today’s top digital shops were snapped up during the first Web boom, investments that are finally paying off. What’s more, holding companies will find private equity firms and other industry outsiders vying to establish a beachhead in advertising, predicted Seth Alpert, managing director at AdMedia Partners. “What we’re seeing is that there are new competition to holding companies in these acquisition races,” he said.

Some prime candidates are not in play. Dallas-based imc2 is said not to be particularly interested in selling. The pharmaceutical interactive shop had an estimated $65 million in revenue in 2006, a 60 percent increase from a year ago. And top search agency iCrossing, which took a $15 million round of venture capital investment in July, has sought to buy other agencies.

Among independent digital agencies, the biggest and perhaps most coveted is AKQA, which sources said has been shopped by its majority owner, private equity firm Francisco Partners, for over $200 million. It has an impressive global roster of clients, including Microsoft and Visa. During 2006, it was awarded global duties from Coke, Diageo and McDonald’s. It recently opened a Shanghai office to go with its outposts in Singapore and London. Sources estimate its 2006 revenue at nearly $70 million, up 33 percent.

“There’s continued demand for these services,” said Scott Kessler, an equity analyst at Piper Jaffray. “We do expect continued consolidation in the area.”

Driving this is the sharp growth of Internet marketing services. According to the Interactive Advertising Bureau, Web ad spending grew 33 percent in the third quarter compared to a year earlier. Those figures only count spending on Web media, not including increased outlays on viral campaigns, microsites and Web customer retention efforts.

But another deal the size of Digitas is unlikely in the near term. Analysts are skeptical that the biggest independent agency, Avenue A/Razorfish, would end up as part of a holding company. AQuantive, Avenue A/Razorfish’s parent company, has a nearly $2 billion market capitalization. Moreover, its ad-serving and performance media units would not be normal fits in an ad holding company. About 40 percent of aQuantive’s revenue is derived from its ad-serving and media businesses.

“It would be tougher for a traditional agency to acquire because it’s not just an agency business,” said Kessler.

Those same concerns would inhibit deals with the two largest publicly traded Internet marketing services companies. 24/7 Real Media, which has a strong agency business in the hot search market and a top ad network, would present the same challenges, albeit at a more manageable price tag based on its $500 million market capitalization. Similarly, ValueClick runs one of the Web’s top ad networks, placing response-driven placements across thousands of small and midsize Web sites, and a lead-generation business. But like aQuantive, it would be a big bet, boasting a $2.3 billion market capitalization, and would come with ad serving and other technology assets not traditionally part of ad holding companies.

Rather than large-scale acquisitions of the Digitas kind, ad holding companies may be more likely to go after smaller, specialized firms. Such candidates would include Deep Focus, a Brooklyn. N.Y., based Web shop that works for several movie studios; Special Ops Media, a New York agency that works for Dell and JP Morgan; or a search shop like Reprise Media.

Dave Morgan, chairman of Tacoda, a behavior-based ad network, predicted more holding companies would stray into new areas outside of what are considered traditional agency services. And he suggested that despite the booming Web market, smaller specialists would see the advantages of the scale ad holding companies wield.

“There’s [only] a certain amount of growth digital-only agencies can make without being connected into a larger marketing services company,” he said.