A poll of agency executives found 64% say there is pent-up demand for advertising and marketing services M&A, but 82% said the price tags won't again reach the levels of the late 1990s. The survey, by merchant bank AdMedia Partners, New York, found specialist communications agencies at the top of the shopping list, with traditional advertising shops near the bottom.
"It's going to be a more niche-oriented game in 2004 and 2005, and less focused on general advertising," said Abe Jones, managing director, AdMedia Partners. Over the last two years, acquisitions had slowed, partly due to the inflated prices agencies reached in the late `90s and to large holding companies slowing down their acquisition programs, Mr. Jones said.
In a conference call with analysts last month, Omnicom Group President-CEO John Wren said his company only did one small acquisition in the first quarter, but added, "It's hard to believe that activity won't pick up from there, based on the number of conversations we're engaged in at the moment."
New buyers are also having conversations. Besides the Canadian holding company MDC-which entered the U.S. market with stakes in creative shops such as Crispin Porter & Bogusky and Margeottes Fertitta & Partners-financial buyers such as private equity firm Lake Capital have an increasingly higher profile in a market that was dominated until recently by the large agency holding companies.
The holding companies were shooed off the U.S. market by high prices, said WPP Group Chief Executive Martin Sorrell. In his call with analysts, he said his company is focusing on areas such as Latin America and Asia, where prices are more moderate.
"Pricing in the U.S. ... has not come back in line with the recession," Mr. Sorrell said.
But AdMedia's study found valuations have stabilized and are now in line with what they were before the late `90s bubble. Buyers are still willing to stretch for premier companies, but they are starting from a lower basis than before, Mr. Jones said.
The survey found prices expected by sellers have dropped to five to five-and-a-half times operating profits for traditional agencies, five-and-a-half to six for marketing services firms and six times profits for interactive shops. In 2000, the multiples expected were six times profits for agencies, seven times for marketing services and 10 times profits for interactive shops.
But buyers are shopping for different properties than they did in the late `90s. The study found 82% said there will be strong or moderate demand for specialist-communications agencies, while 51% said demand for traditional agencies will be weak.
Traditional advertising is out of favor partly because there are fewer acquisition candidates and partly because networks are full geographically and are looking at specialists in hot categories. Companies are keen on adding heft in areas such as health care, interactive and Hispanic advertising. Entertainment marketing is also an up-and-coming discipline. "We think that will be one of the dynamic sectors next year," Mr. Jones said.
Indeed, holding companies continue to look for acquisitions in those areas to compete for consolidated accounts of major marketers. Publicis Groupe CEO Maurice Levy told analysts his company is "definitely" seeking acquisitions to beef up its Specialized Agencies and Marketing Services unit and expects to close one before midyear.
"The pipeline is good," he said.