Earn-outs over, PR shops rejigger as founders exit

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PR agencies and their parent companies, voracious acquirers of independent shops in the late `90s and 2000, are now renegotiating agreements and restructuring their networks as earn-outs come to an end and stock prices stagnate.

Last week Omnicom Group financial PR agency Gavin Anderson became a subsidiary of advertising sibling DDB Worldwide, Paris. A few weeks earlier, Omnicom consumer PR specialist Ketchum took control of DDB's consumer PR operations in the market. Thomas Harrison, CEO of Omnicom's Diversified Agency Services Group, said "the Gavin Anderson deal is clearly an effort for efficiencies and Ketchum was based on local dynamics."

Omnicom isn't the only firm realigning its nontraditional advertising divisions. In February, Havas' Euro RSCG Worldwide rolled its health agencies, including PR shop Noonan Russo Presence, into a single entity called Euro RSCG Life. Publicis Groupe is realigning its Specialized Agencies Marketing Services division under new President-CEO John Farrell, while Interpublic Group of Cos. dissolves its Advanced Marketing Services unit in May.

savings

For the holding companies, the reconfiguring is clearly associated with cost savings, as well as the need for closer integration. But the problem is keeping the entrepreneurs whose firms they acquired as earn-outs come to an end.

Larry Weber, CEO of Advanced Marketing Services, won't comment on what the future holds for him. But, he said, "when the earn-out is over and you still have the same client responsibilities and your salary just dropped by a half or a third, you can see why some would want to work for themselves." He added, "People need to put their heads together at the holding companies and think about how to incentivize people who stay."

`on my own'

Last month, London-based Incepta Group agreed to let Andy Cunningham, founder of PR firm Citigate Cunningham, quit the firm and spin out a division. Incepta has taken a 25% stake in the venture, and is giving her office space. "I'm an entrepreneur," Ms. Cunningham said. "In the holding company you're working for someone else and I'd rather be out on my own." Incepta acquired the firm as part of a deal initially worth $75 million in July 2000. Though Ms. Cunningham failed to reach her earn-out, equity holders still shared a payday estimated at $35 million.

In February, Incepta also radically revised the terms of its earn-out with financial PR agency founder George Sard, who sold his firm Sard Verbinnen in April 2000 for a reported $58 million. Instead of paying Mr. Sard in shares, a move that would have significantly diluted Incepta's stock, it agreed to pay $12 million along with 60 million new Incepta shares in two stages. In return, the senior executive team agreed to new three-year contracts.

The moves dovetail with a renewed interest in acquisitions from the private-equity sector. First to take advantage of this is Cordiant Communications' transatlantic PR firm, Financial Dynamics, which is negotiating a management buyout, though the two parties are still locked on price.

Larry Winokur, co-CEO of Ogilvy PR's Baker/Winokur/Ryder, said his earn-out period ended this year but said he's staying put. "People have inquired about our status, but we haven't talked to anyone seriously. WPP intends to hold onto us."

While Abbott Jones, managing director of media investment banking consultant AdMedia Partners, said much of the firm's business is in restructuring debt, he does see a renewed period of M&A activity returning in the second half of 2003. "People are beginning to look for good deals and prices have come down. Companies are being marketed."

Omnicom's Mr. Harrison says he's still in the market for PR firms-potentially in the public affairs sector. "Over the next six months we'll be looking at other PR firms that get us closer to clients."

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