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AD AGE SPECIAL REPORT;MEDIA BUYING & PLANNING

By Published on .

In an effort to defend their turf, big advertising agencies have claimed for years that independent media buying services can't do anything their media departments can't.

This claim has sparked vigorous debate in the ad industry during the last 10 years. But there is one conclusion both sides know is true: A well-run media service can deliver an operating profit margin well above what a comparably well-run agency can.

That realization is helping fuel this year's surge in dealmaking among media independents and agency holding companies.

PROFIT MOTIVATION

"Media units are much more profitable, on a margin basis, than general advertising agencies," says Jim Dougherty, advertising and business services analyst for Dean Witter Reynolds. "Their revenue [to billings ratio] is much lower, only about 5%, but their operating margins can run 25% or higher."

In contrast, typical ad agencies generate revenue of 10% to 15% of billings, and profit margins generally from 5% to 15%.

Through the first six months of this year, Omnicom Group had agreed to acquire Creative Media, New York, one of the top 10 independent media services. Interpublic Group of Cos., which first bridged the chasm between agencies and media independents two years ago with its purchase of buying behemoth Western International Media, Los Angeles, had agreed to acquire Media Inc., New York.

Meanwhile, French holding company Euro RSCG had held talks with SFM Media, New York, the largest remaining independent. Western had considered acquiring KSL Media, New York, and Focus Media, Los Angeles.

INTEREST VARIES

The specific roots of the buyers' interest varied in each case. But the same climatic factors nurtured those roots.

While profitability was the leading specific influence, the growing appetites of Omnicom, Interpublic and other holding companies was the biggest general factor. In 1996, they have been buying all kinds of marketing communications companies, from ad agencies in the U.S. and abroad to direct-marketing agencies to PR shops.

"Maybe they ran out of agencies to acquire," remarks Larry Miller, president of Corinthian Media, an independent New York buying service. "I think it's just fashionable-it's like [initial public offerings], it'll go in and out of fashion."

FEVER HEATS UP

This acquisition fever isn't new, but it has heated up in 1996 because of the bullish stock market. Holding companies' stock prices are high, making it easier for them to afford acquisitions.

"With their stocks trading at high multiples, they have a pretty inexpensive currency for making purchases," Mr. Dougherty says.

Another factor contributing to the interest in media independents is a shift in client attitudes toward conflicts, say agency media executives.

Marketers' rules about agencies working for competitors used to be less stringent in a media context than on the creative side, but that is changing. Holding companies increasingly are limited in what media accounts they can compete for and handle.

AVOIDING CONFLICTS

As a result, having an extra media-buying service under the roof can help holding companies avoid conflicts.

A recent example involved Omnicom's interest in a $300 million buying assignment from AT&T Corp., formerly at N.W. Ayer & Partners' Media Edge unit and headed to Young &*Rubicam, New York.

Omnicom's BBDO Worldwide, New York, probably wouldn't have been able to compete for the account against other AT&T agencies without the Creative Media

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