Interactive M&As Are Back in Vogue

Talking to the 150 staffers at Modem Media’s Norwalk, Conn., headquarters about the i-shop’s pending merger with Digitas, David Kenny sported a bright, tangerine- colored tie, a Father’s Day gift from his 8-year-old daughter that was meant to be a good-luck charm. “She gave me [this] tie so I was never nervous,” said Digitas’ chairman and CEO last Thursday after the speech. “Today was my day to wear it, because I was a little nervous.”

Who could blame Kenny for the stage fright? The $200 million stock-for-stock transaction, due to close in the fourth quarter, will be Digitas’ first acquisition in its 24-year history. The 1,200-person, Boston-based digital and direct-marketing shop will grow by 270 staffers, or about 23 percent, and add clients including Heineken, Home Depot and Kraft. Combined, the agencies reported $270 million in revenue last year.

“Up until now, Digitas wasn’t big enough to do acquisitions,” said Kenny. “We had to make sure we had the infrastructure and the capability and the management bandwidth to do it.” The deal comes seven months after Interpublic Group divested its 42 percent stake in Modem for about $60 million.

After a year-long lull on the mergers-and-acquisitions front, the interactive sector has seen a rush of activity in the past month with aQuantive’s pending purchase of SBI.Razorfish and’s June absorption of Exile on Seventh.

The rationale behind the purchases is a far cry from that of the heady dot-com days, when aggressive growth strategies made interactive-agency consumption a matter of course. Nor does it reflect the post-bubble period, which routinely saw fire sales of troubled companies.

“The sector’s heating up from an M&A perspective because the sector’s heating up from a client perspective,” observed Mark Kingdon, CEO at Omnicom Group’s Organic in San Francisco. “Since there’s been six to nine months of buoyancy in the interactive-services market, now M&A has been picking up.”

The evolution of the Internet has been key, Kenny said. “We’re at a point where the Internet has matured to the next level of growth,” he noted. “It’s not experimental anymore-it’s central. It’s a safe investment, because you’re not speculating. … You’re merging stable, sustainable, predictable businesses, and that’s the time when you should make these investments.”

The merger will bolster Modem’s database marketing and analytics offering and Digitas’ executional skills. “Being able to marry database-driven, strategic business consulting with the ability to execute in the interactive arena, like Modem’s been able to, is a powerhouse combination,” said G.M. O’Connell, who founded Modem in 1987 and now has a consultant role there.

The deal will also give Modem scale, the lack of which has stunted its growth over the years. While many of its competitors achieved double-digit revenue gains in the first half-among them Digitas, with a 16 percent increase to $120.7 million-Modem recorded a modest 5 percent boost to $31.2 million.

“The challenge with any small agency is that one client in the short run can move things even if the trends are in your favor,” said Kenny. For Modem, that one client is General Motors, which has consolidated much of its customer-relationship-management business at, as it happens, Digitas.

“Our business with GM over the past year has declined fairly significantly, as there were pricing and volume issues, and it’s camouflaged a much more robust, strong recovery of Modem,” said Modem president and CEO Marc Particelli, who is expected to leave after the transition. (In Q1, GM’s business with Modem dropped by $1.5 million, he said, but revenue rose 6 percent for the quarter.)

Modem continues to handle some GM business in Europe; it also shares America Online, Charles Schwab and Delta Air Lines with Digitas. “We’ve ended up with more overlapping clients than archrivals,” said Kenny.

Still, some conflicts will arise. Most notably, Digitas’ Microsoft and AT&T accounts will clash with Modem’s IBM and Sprint PCS relationships. “We need to be very respectful of the companies and work with them on the best solution for them,” said Kenny.

“We’re confident that the AT&T/Digitas partnership will continue just as it has over the past 23 years,” said AT&T rep Tracey Belko. IBM, Microsoft and Sprint reps declined comment.

One way the company plans to manage conflicts is by operating as a holding company of sorts: Digitas Inc. will comprise two agency networks, Digitas and Modem. Digitas president Laura Lang will run the former, while Martin Reidy, who joined in January from R/GA as president of Digitas in San Francisco, will lead Modem.

After the latest round of acquisitions, few independent interactive agencies with revenue exceeding $25 million will remain, aside from the top two, aQuantive and Digitas. AKQA in San Francisco is one and DVC Worldwide in Morristown, N.J., is another, according to Adweek IQ’s Top 50 list of i-shops for 2003.

Organic’s Kingdon predicted continued M&A action in the interactive industry, but on the lower end of the spectrum. “When you have a bigger interactive agency, things pass your desk every day: a smaller company, maybe a boutique of 5-15 people that wants to be acquired,” he said.

“I don’t think this is going to be the end-we’re going to be opportunistic about how we look at this growth market,” said Don Scales, president and CEO of Omnicom Group’s in New York.

Added Brian McAndrews, president and CEO at Seattle-based aQuantive: “As the digital-marketing industry continues to push forward, the landscape will ultimately become increasingly competitive and consolidated.”