After searching for about a year and flush with wealth from a December 1995 initial public offering, the integrated communications company reached agreement to buy McKinney & Silver, Raleigh, N.C., a midsize agency with a nationally-known creative director and two premier clients, Audi of America and Royal Caribbean Cruises.
"One of our areas of weakness is broadcast advertising," said Mark Kvamme, CKS chairman-CEO. "This gives us almost a full quiver."
Talks had started last year (AA, Sept. 30); the final price was $24 million in stock.
Positioning itself as a provider of diverse communications solutions, CKS has grown from scratch into nearly a $100 million operation in 10 years. Its core strengths are interactive marketing and corporate and brand-identity design.
In the past six months, it has acquired design agency Donovan & Green, New York; business-marketing agency Schell/Mullaney, New York; and a German version of CKS called Prisma Holding. With the addition of McKinney, which will operate autonomously, CKS will have seven U.S. offices and three in Europe.
Some observers were puzzled by the purchase of a traditional agency geographically isolated from CKS' hubs in San Francisco and New York. Although CKS wanted a San Francisco or New York agency, it couldn't find one of the caliber it wanted, executives said.
McKinney is a 28-year-old agency that gained national prominence in award competitions over the years and after former Fallon McElligott creative director Pat Burnham joined the agency. With net income of $1.9 million on revenue of about $20 million, it has turned that prominence into above-average profitability.
WALL ST. WELCOMES DEAL
Wall Street welcomed the deal because it will immediately add to CKS' bottom line.
McKinney's "margins are more than competitive for the industry," said Dean Witter Reynolds analyst Jim Dougherty. "This deal will immediately add to CKS' earnings per share by a fair amount. Also, [McKinney] has no debt."
CKS reported net income of $5.7 million for its fiscal year ended Nov. 30. The stock surged 15% to $35.50 on Feb. 3, after the deal was announced, before falling back to $33.63 the next day.
At a multiple of 120% of McKinney's revenue, the $24 million price tag looks high. A good price for an ad agency is typically closer to 100% of revenue. But analysts said CKS' lofty stock price forces it to pay a premium since it is paying in stock, not cash. Trading at a stratospheric 60 times earnings, the stock is vulnerable to a quick drop. CKS has to offset that risk by paying McKinney's owners a premium.
Immediate plans call for an injection of technology. CKS wants to enhance McKinney's creativity through better operations, systems and multimedia tools.
No additional offices are planned, although Mr. Kvamme said such growth would be a possibility in the future.
AHEAD OF OTHER AGENCIES
"This pushes us ahead of a lot of other agencies that don't have these capabilities," said Don Maurer, president of McKinney.
Messrs. Maurer and Burnham, along with Rick Myracle, exec VP-chief operating officer, form the core management team at McKinney. Chairman Bob Doherty will stay on for a year or two before making the transition into retirement. Vice Chairman Lloyd Jacobs already has started that transition.