The End of the Line

The first signs of economic recovery last year did not come soon enough for some of the industry’s midsize holding companies and advertising agencies.

Cash-strapped Cordiant Communications Group was acquired by WPP Group in August in a bizarre takeover battle that pitted the British holding company against French rival Publicis Groupe and, to a lesser degree, Grey Global Group, as well as U.K. and U.S. hedge funds and a mysterious Syrian chess promoter. At the same time, 82-year-old Bozell was absorbed into sister Interpublic Group shop Lowe; Toronto’s Envoy Communications Group closed down Hampel/Stefanides, New York; and London-based Leagas Delaney sold its San Francisco outpost to its local management. (The shop is now known as Buder Engel and Friends.)

Twenty-two U.S. ad agencies shut their doors or were absorbed into other shops last year, according to Adweek reports. The American Association of Advertising Agencies says 13 of its members shut their doors, compared with 17 in 2002. (The annual average since the 1980s is 8-10.) Most were small-to-midsize shops.

The shuttering and consolidation of small and medium-size shops has long been part of the industry’s ebb and flow. But the demise of CCG—whose Bates Worldwide network had once been the Saatchi brothers’ most expensive deal—is a cautionary tale, particularly for another debt-ridden peer, Havas, which has been scrambling to restructure its finances. Building the critical mass to compete with the larger global holding companies, while necessary, can be a risky business, given the limited number of decent acquisition options left and the inflated prices fetched at the top of the last economic cycle. In the downturn of the past three years, CCG was unable to generate enough organic revenue growth to service the loads of debt it assumed in buying marketing services groups such as Lighthouse Global Network in 2000.

And yet is there much reason to operate publicly held holding companies if their resources don’t match their global ambitions? “The first lesson we can learn from CCG is that the right model for a midsize holding company is it should have multiple networks,” notes Maurice Lévy, CEO of Publicis Groupe. Lévy wonders if Grey Global Group and Havas, with just one network apiece, will prove to be exceptions to this rule.

“Finance is key,” Lévy says. “What we’ve also learned from CCG is [that] positioning has to be clear. Bates didn’t have clear positioning and had not won any new business. Its marketing services were not strong enough to save the whole thing.”

The experience of Bates, whose name is largely disappearing within WPP, is familiar to many struggling midsize networks which are losing their relevance—or their “unique selling proposition,” in the words of legendary Bates copywriter Rosser Reeves. It’s become an industry, after all, of large networks offering the global reach and resources that big marketers require and boutiques providing distinctive creative or focused service offerings. Those stuck in the middle need a compelling point of difference.

Such was the case with D’Arcy Masius Benton & Bowles, in Lévy’s view. His reference to Bates’ lack of positioning echoes his rationale for folding D’Arcy after Publicis’ acquisition of Bcom3. The October 2002 announcement of D’Arcy’s closing sent shock waves through the industry, and with the final dismantling last year, the 96-year-old packaged-goods shop disappeared into history.

Small-to-midsize agencies with one office have always proven vulnerable in downturns, and last February, two established shops fell victim. Hampel/Stefanides, a 10-year-old shop with clients such as BASF, Steve Madden and Aer Lingus, was shuttered after parent Envoy ran into its own financial difficulties. Envoy bought the agency in 1998 to help it expand beyond a reputation for design offerings. As the economy faltered, the shop failed to negotiate a sale to suitors.

Another casualty was HDC (formerly Harris Drury Cohen) in Ft. Lauderdale, Fla. The 23-year-old shop had its heyday in the late 1990s, when billings rose to nearly $100 million from the likes of sport-boat maker Sea-Doo, Levitz Furniture Stores, Color Tile and Celebrity Cruises. But after moving into bigger offices, the agency lost those large clients and was unable to replace them. At closing, it claimed less than $60 million from clients such as the Florida Marlins, Alabama power and a project from Hershey International.

Last year also proved to be the end for a one-time regional powerhouse. In May, Doner closed its Baltimore outpost, which peaked in the late 1970s and early 1980s. The 48-year-old office created taglines such as “What would you do for a Klondike bar?” (still in use) and campaigns for Colt 45 that featured Redd Foxx. Until 1998, it shared agency headquarters status with Southfield, Mich., which absorbed Baltimore’s remaining clients: Tyco’s ADT Security and Aegon Insurance.

The reduction in closings of 4A’s shops is a hopeful sign that the worst of the downturn is over. “A lot of our members are telling us they see the light at the end of the tunnel. 2004 is going to be better,” says Bob Linden, vp of the 4A’s membership division.