Will M&A Activity Tank Along With Economy?

NEW YORK Last week, Martin Sorrell was quick to use Davos’ spotlight to announce three deals in 48 hours. Even as the WPP Group CEO has mandated global staff reductions and belt-tightening, he’s still adding to his corporate portfolio, buying into Web analytics’ firm Omniture, South African creative independent The Jupiter Drawing Room and Vietnamese ad agency Smart Media.

While not huge transactions, Sorrell’s predilection to spend added to fresh concerns after WPP’s $1.95 billion acquisition of Taylor Nelson Sofres last fall. Last week, Morgan Stanley Research Europe downgraded Sorrell’s stock, saying: “While WPP has the most defensive mix and is a foreign exchange beneficiary, it has by far the highest leverage, weakest growth run-rate and will likely miss its 2008 margin target. It also performed poorly in the last two recessions and is our key underweight idea.”

A tanking global economy isn’t enough to slow the industry’s most indefatigable deal maker. But are others following suit? Publicis Groupe CEO Maurice Lévy says he will continue to buy into emerging markets and technologies. (Sorrell has goaded Lévy into making a run at the Interpublic Group, which currently has a market cap of $1.6 billion, but in an interview, Levy, in a strong cash position, denied the “fantasy of a little Englishman.”)

For its part, IPG, trading at around $3.30 a share and trying to rebuild its balance sheet, isn’t a factor in the M&A market and has been primarily making small investments in digital companies. Omnicom Group has kept a lower profile than WPP and Publicis, but is “definitely out there looking,” per an investment-community source. The company wrapped 12 acquisitions last year, including three in the fourth quarter that have yet to be announced.

The one big deal that could finally happen: Vincent Bollore’s purchase of Aegis.

Last month, Havas reportedly hired Merrill Lynch to explore strategic options. Around the same time, Havas chairman Bollore, with a 29 percent stake in Aegis, was said to be preparing a formal bid. (That may be on hold after Aegis stock jumped because of Merrill Lynch’s hiring.)

On a smaller M&A scale, MDC Partners, majority owner of agencies like Crispin Porter + Bogusky, may be back in the market. Over the past three years, MDC has focused on organic growth rather than the acquisitions that have built the company.

“There are amazing opportunities because there are few buyers and little liquidity. Even the most successful firms are not getting credit,” said MDC CEO Miles Nadal. “The multiples have …  been contracting, but the issue in this economic environment is about earnings stream.”

A new AdMedia Partners’ survey confirmed that there would be continued M&A activity in 2009. It found, however, that 60 percent of those surveyed expected to take part in M&A this year compared to 67 percent last year. The survey, of more than 3,700 ad executives and private-equity investors, was conducted in December.

The New York-based boutique M&A firm closed 14 deals last year, down from 20 in 2007, and had two potential deals evaporate, said Seth Alpert, a managing director at AdMedia. Starting in August, the aborted deals involved sellers who walked away from bidders because their offers were deemed low.

Valuations are softening: Digital marketing agencies that previously commanded multiples of 7-8 times earnings before interest and taxes this year will now get perhaps 6-7 times EBIT, the survey found. Respondents, meanwhile, expect marketing services firms to sell for 5 times EBIT (versus 6-7 times EBIT in 2008) and ad agencies to hold steady at 5 times EBIT.

AdMedia’s Alpert said the volatile financial markets would shape the universe of buyers. Strategic buyers like industry companies, with their shares hammered, eroding cash positions and debt, may find it more difficult to do deals. But financial buyers like private-equity firms, sitting on large cash reserves, will be best positioned to take advantage of attractive deals. –with Andrew McMains