The Second String

The fledgling holding company’s overarching philosophy is an entrepreneur’s dream. Maxx com acts as a kind of arm’s-length banker and consultant to the businesses in which it buys stakes, serving as an alternative for growing agencies in search of capital but afraid of becoming lost in the ranks of larger holding companies. Those agencies get operational freedom in exchange for a healthy return on the Toronto company’s investment. Maxx com became the largest full-service marketing-services concern in Canada after an acquisition frenzy from 1999-2000. The $164 million company—which spun off from parent MDC Corp. in 2000—bought a stake in 22 businesses in Canada, the U.K. and the U.S., where Maxxcom is affiliated with agencies including Mar geotes|Fertitta + Partners in New York and Crispin Porter + Bogusky in Miami.

Last year, Maxxcom’s partners awoke from tha t dream to the cold realities of an unforgiving economy. Goldman Sachs was hired to shop Maxxcom around. MDC was looking for new investors to assist in a recapitalization effort. At the time, Maxxcom was deriving 70 percent of its revenue from the hard-hit U.S., carrying $57 million in debt and $32 million in earn-out liabilities. The company failed to bring in that new investment, leading to the abrupt departure of CEO Beverley Morden last month.

Morden, a human-resources executive who had risen to the top of a trade-show division at Canadian publisher Southex, was replaced by Harold Reiter. Formerly an executive at Can ada’s Tyco Capital, a top commercial-finance company, Reiter is now in the process of meeting executives from Maxxcom’s partner companies. He notes that while it’s too early to detail his plans for a financial turnaround, he has ruled out a sale of Maxx com or any of its assets, saying the key is to drive revenue at Maxxcom’s affiliates.

“Our focus is on operational issues to streamline Maxxcom and get us back on track to where we had started,” Reiter says. “This is a good company. It just needs to return to its original strategy. ”

Maxxcom was the brainchild of Miles Nadal, 43, who began his entrepreneurial career while a child at summer camp, selling photos of other campers to visiting parents. Some 21 years ago, Nadal started to invest in small marketing companies. He wanted to float a marketing-services concern, but investors were interested only in asset-based businesses. So Nadal turned his focus to check printing and credit cards, establishing MDC—which originally stood for Multidisciplinary Communications.

Within the last few years, Maxxcom purchased PR firm Brat skeir & Co. and a direct-marketing company then known as Pav lika Chinnici Direct for Margeotes, and also helped CP+B open an Los Angeles office. The holding company’s other U.S. holdings include Colle + McVoy, Min neapolis; Fletcher Martin Ewing, Atlanta; and direct and database firms such as Accent Marketing Services, Louisville, Ky.; TargetCom, Chicago, and Source Marketing, Westport, Conn. Among the Canadian companies Maxx com invests in are Toronto’s Allard John son Communications and Ambrose Carr Linton Carroll; Cor mack MacPhee Communications Solutions in London, Ontario; and promotions house Accumark in North York, Ontario. Last year, Maxx com expanded its holdings to the U.K., buying a stake in London marketing-services company Interfocus Network.

Reiter, 48, inherits Morden’s frustrations with the company’s depressed stock price. Because MDC has held on to 75 percent of Maxxcom, the company has little market volume and sparse investor interest. Its shares are trading around $1, down from a 52-week high of $6.14. But Reiter is not overly concerned about MDC’s large stake in Maxxcom. As Maxx com’s balance sheet improves, he says, investors will buy into the company’s business proposition.

“Our stock price is more of a longer-term issue,” Rei ter notes. “We just have to develop a business plan and do a good job communicating our fundamentals. We have financially strong operations. We’re being affected by current issues that are affecting the industry throughout the world.”

When Mary Baglivo joined Panoramic as president on Sept. 4, its majority investor, Swiss company PubliGroupe, coincidentally issued an earnings release that had ominous overtones. The publicly held communications concern reported a sharp drop in profits in the first half, due largely to its stake in the new holding company (formerly known as Earle Palmer Brown). PubliGroupe admitted it had underestimated Panoramic’s market risks and had only “belatedly” identified internal problems, assuring investors it would eliminate the sources of the American losses. Panoramic’s management had just been strengthened, the company said, and a restructuring plan was in place.

Exactly a week later, the attacks on the World Trade Center shattered an already depressed industry environment, adding greater urgency to the need for change at Panoramic.

By January, Jeb Brown, son of Earle Palmer Brown’s founder, was out as Panoramic CEO, and Baglivo, 43, added the chief executive role. A former chief operating officer of J. Walter Thompson North America, Baglivo is partnered with Swiss ad man Bruno Widmer, who’s just joined Panoramic as chairman and PubliGroupe’s point man. Widmer was previously chairman and CEO for Europe, Africa and the Middle East at Young & Rubicam. (Brown, a minority shareholder, is still on Panoramic’s board.)

Baglivo’s charge is to rationalize the disparate companies Brown acquired in his relentless quest to launch a respectable local agency in Bethesda, Md., into the ranks of the national elite. A Harvard M.B.A., Brown is known for his deal making more than for the quality of his companies’ advertising. That’s reflected in his acquisition strategy at Panoramic, a criticism that insiders acknowledge. The company’s recent growth came at the height of the dot-com boom, and Brown gained a reputation as a bottom feeder as he scrambled to build the critical mass necessary for an IPO. In December 2000, at the time of Panoramic’s formation, Brown publicly crowed that its billings had soared to $1 billion from $300 million at the beginning of 1998. Since he left the company, Brown has not returned calls seeking comment.

Aside from EPB, Panor a mic includes sales-promotion firm BEN Marketing; design and advertising concern Creative Partners; technology company KSK; management-consulting firm Michael Allen Co.; corporate-identity company MCP; media entity RJ Palmer; and travel and leisure shop Yesawich Pepperdine & Brown. In earlier interviews, Brown devoted little time to discussing those units, preferring instead to build the holding-company brand and its shared core of clients, including Novartis, Citibank, Keyspan Energy, Com cast cable and Fiberlink. Future acquisitions would be made on the basis of opportunities for synergistic client relationships—the stated goal was to have 40-50 percent of revenue shared by two or more Panoramic companies. Brown estimated Panoramic would double or even triple its size in three years.

Given the current environment, Baglivo’s ambitions are more modest. She’s stopped the hunt for acquisitions. She’s identified four Panoramic entities as the company’s cornerstone operations: EPB, RJ Palmer, BEN and YPB. She’s folded digital units, like Odyssey, into EPB and shuttered EPB’s outpost in Stamford, Conn., and downsized its Philadelphia operation. Staff has been moved into EPB’s Bethesda and New York offices. For Panoramic companies that don’t fit long-term goals, Baglivo is looking at management buyouts. “She’s trying to retrofit a strategy into a place where none existed,” says one company insider.

Baglivo explains the shift this way. “There’s a change in strategy,” she says. “The last few years, we’ve focused on rapid growth through acquisitions. Certain expectations of performance at those companies didn’t pan out, but our supporting-pillar units have shown positive performance, and no clients were lost. We’ve had to do some serious restructuring, and now our focus is on our product or clients.”

Envoy is best known as the Toronto holding company that nearly snagged one of advertising’s last independent creative gems, London’s Leagas Dela ney. Although the deal fell through—after a downturn in fortunes at Leagas’ San Francisco office last June, a new valuation couldn’t be agreed upon—but that hasn’t de terred founder Geoffrey Gen o vese. He’s set on building the fledgling marketing operations at Envoy, known more for its design holdings, although he knows it won’t be easy.

“Growing the advertising part of our operations is the most difficult, because that segment has been consolidating,” says Genovese, 47. “There’s not a lot out there. Wieden + Ken nedy and Leagas are rare commodities: quality agencies that can compete for world-class pieces of business.”

Marketing currently generates 30 percent of publicly held Envoy’s revenue. Marking its first foray outside Canada, in 1998 Envoy acquired Hampel Stefanides, New York, with clients such as BASF. Last July, Genovese bankrolled a new ad agency, John Street, named for the trendy Toronto location of its offices. The shop has attracted work from Fujifilm Canada, Sears, Unilever and the National Ballet of Canada.

After going public on the Toronto Stock Exchange in 1997, En voy has made a stunning transformation from a small, unprofitable Toronto agency with a few dozen employees into an international business with seven operating units in Canada, the U.S. and the U.K. For Genovese, an easygoing CEO who answers his own phone, that change began modestly in 1992 when he bought the Communique Group, a Toronto company that organized promotional events and trips. He merged it with a similar company he was running, and two years later the merged company, known as Communique, started an advertising unit.

Cur rently a key client is German sportswear manufacturer Adidas-Salomon, which was formerly one of Leagas’ top clients. Adidas is influencing En voy’s growth strategy in other ways. Last year, Geno vese hired Tom Wright, president of Adidas unit Salomon, North America, as Envoy’s president. Wright handles day-to-day operations, while Genovese, concerned about his underperforming stock price, focuses on the company’s strategic direction and acquisitions. On the Nasdaq, En voy is trading at a 52-week low of 90 cents a share, off from a high of $4.56 a share (the stock is also listed on the Toronto Stock Exchange).

Some 51 percent of Envoy’s business is generated by Watt International, a plum retail branding and design company acquired in 1999. Watt created concepts and names for stores such as Home Depot, Staples and Petsmart, and it develops the retail concepts behind all of Wal-Mart’s private-label brands worldwide. It also designs shopping malls and entertainment entities such as Paramount Theaters and Imax. When Envoy acquired Watt three years ago, the company was throwing off $6.3 million in fee income; it now generates $28.3 million.

Envoy’s design operations include U.S. corporate-identity firm Armstrong. Technology holdings include Devlin Applied Design, which creates Internet, intranet and extranet sites, and Sage Information Consultants, an e-business consulting firm.

Those operations, coupled with Envoy’s marketing units and a write-down related to the aborted Leagas bid, dragged down fiscal 2001 earnings to less than a cent a share, compared with 15 cents in 2000. (The company boasted quarter-over-quarter growth for the previous 23 quarters, with last year’s revenue rising 38 percent to $50 million.) Genovese is not put off by the downturn in the marketing industry. With $14 million in cash and a $25 million credit line, the company is in a stronger cash position than it was a year ago. And Genovese is still interested in agency acquisitions that will put Envoy on the map. He says he’s focusing on major markets like New York and London, and looking for independent shops in the range of $8-10 million in fee income. Envoy’s advertising brand has not yet been determined, and Genovese says he doesn’t yet know if it’s going to be an existing brand like John Street or Hampel Stefanides, or a new one.

“We want to build our creative reputation. It’s very important to us—it’s our product,” he says. “Ultimately, our goal is to have one international brand in each of our operating groups.”

Larry Wolf’s expansion strategy has been a determined one, albeit unglamorous. Wolf, 62, was born in Buffalo, N.Y., and opened an agency there more than 30 years ago. From Buffalo’s cold, snowy shores he expanded his network—and ultimately his headquarters—into Toronto to take advantage of the city’s more sophisticated, international resources and business atmosphere. Nonetheless, his company’s roots have provided him with proximity to clients such as Kodak, New York State Tourism and HSBC. Other notable clients include Gannett, Dirt Devil, The Scott’s Co. and Canandaigua Wine.

The company’s normally low profile was elevated after Sept. 11, when its TV work for New York state, featuring New York Mayor Rudy Giuliani and Gov. George Pataki, garnered national attention. (Also, Wolf’s Toronto office produced the pro bono “Canada Loves New York” campaign starring Canadian celebrities.)

Wolf Group started out as a typical regional shop offering local marketers advertising and sales promotion. The company now bills about $520 million and has revenue of $70 million from six offices: three in New York state (New York City, Roch es ter and Buffalo), the Toronto office, and outposts in Cleveland and Atlanta. Business revenue is equally divided between media advertising and below-the-line operations.

While many medium-sized independents have chosen to be acquired rather than struggle alone, Wolf sees a niche where others see disadvantages. “About five years ago, we saw the opportunity to grow our business in significant ways,” says Wolf, chairman of his company. “On one end of the spectrum you have multinational players, on the other hand you have boutiques. We saw opportunity in the middle. We’re perfectly suited for clients with budgets under $10-15 million.”

The company founder says his strategy is to have one brand and one voice for all his units. With the exception of his sector powerhouse, National Yellow Pages, Wolf renames all his acquisitions to reflect the holding company’s identity. Among those acquisitions is the former Partners & Shevack, which serves as Wolf’s New York office. (Mickelberry Communications, which sold Partners & Shevack to Wolf, owns 8 percent of the Toronto company and has a seat on the board.)

Wolf Group is still somewhat of a family business. Wolf’s wife, Mary, focuses on human resources and corporate communications. Son David, 31, is group president of the yellow-pages operations, while son Jay, 29, works in the company’s financial area. But Wolf is intent on institutionalizing the company’s culture. Eighteen months ago he brought in Paul Kelly, Maxxcom’s former CFO, to work on taking the company public. On Jan. 1, Kelly, who was the architect of key early acquisitions at Maxxcom, was named president and CEO.

Wolf has been in talks about a possible deal with New York shop Mad Dogs & Englishmen, but he says the company is in no rush to ratchet up its acquisition strategy, preferring a more opportunistic approach. “Our primary focus at this point is organic growth, but we’re open to deals that make sense,” he says.