For Holding Companies, Downturn Will Slow Already-Slow Deal-Making

Smaller Shops in Need of Capital Might Wind up Losing Independence

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NEW YORK ( -- Megadeals such as Publicis Groupe's buy of Digitas and WPP Group's purchase of 24/7 -- already few and far between -- are set to become even more of a rarity in the coming months, thanks to the financial-market meltdown.

Smaller agencies seeking to grow on their own are going to find capital scarcer, and they could be forced into the arms of a larger agency or a holding company. And along with the collapse of investment banks, most recently Lehman Bros. last week, the private-equity sector is growing more cautious. That means struggling shops could also increasingly show up on the doorsteps of strategic buyers such as Google and Microsoft.
Philip Palazzo, managing director AdMedia Partners
Philip Palazzo, managing director AdMedia Partners

"If you are a bigger company, there's probably not been a worse time to sell in a while," said William Blair & Co. analyst Troy Mastin.

"There are very few large deals out there in the marketing and agency space, but certainly any large deal requiring any significant amount of financing is very difficult to do today," said Bruce A. Eatroff, partner at private-equity fund Halyard Capital. Halyard last year helped launch Rapp Collins co-founder Stan Rapp's marketing-solutions company Engauge.

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The largest deal on the table at the moment is WPP's $2.2 billion hostile takeover bid for London-based market-research giant Taylor Nelson Sofres, though industry watchers are predicting that one will ultimately go through.

"It's clearly a volatile period, but deals are still getting done," said Philip Palazzo, managing director AdMedia Partners. "Even with the Wall Street volatility [last] week, we have a number of deals that are still in progress that we expect to complete in very short order."

Valuation gap
Indeed, deals may not come to a screeching halt, but most observers agree that given the unstable climate, inking them may take longer, with both buyers and sellers thinking twice and thrice before shaking hands. A key reason negotiations are becoming murkier is a growing buyer-seller valuation gap; pricing expectations have sunk over the past six to 12 months due to a slowing economy and a shrinking number of bidders.

"Clearly there are a lot fewer participants in any sort of option that might take place for an asset or an agency," said Wachovia analyst John Janedis, adding: "Private equity seems to not have much of an interest here any longer, at least for now."

Small and midsize agencies in areas such as interactive, search marketing and direct will continue to be desirable buys, observers said. "Strategic investors are in a much better position, at least as far a pricing is concerned, but the smart ones will not be looking to buy distressed agencies regardless of price," said Alan Gottesman, Consultant at West End Communications.

Along with the big holding companies, companies with cash and healthy stocks -- such as Google, which has zero debt and some $13 billion in cash, and Microsoft, which has zero debt and nearly double that much cash -- will have the advantage going forward.

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Contributing: Abbey Klaassen, Brad Johnson

What the meltdown means

For marketers ...

For many package-goods marketers, the most recent financial turmoil probably doesn't make things any worse than they already were. In recent weeks, both Procter & Gamble Co. Chairman-CEO A.G. Lafley and incoming Unilever CEO Paul Polman called the current economic environment the worst they've seen in more than 30 years.
A.G. Lafley

Procter & Gamble Co. Chairman-CEO A.G. Lafley

Players have already faced a combination of more-frugal consumers, rising commodity costs and impending price hikes that threaten to push more of their consumer base over to private labels. Though commodity costs are challenging food marketers, sales are up as people eat at home more often. The events of last week won't help already-hurting restaurants, automobiles, travel and tourism, and high-ticket electronic goods, either. How much worse can last week's market gyrations make things for even recession-resistant businesses? "Logic tells you it has to hurt consumer psychology," said one senior package-goods marketer. "We just don't know what impact it will have on our business."

For agencies ...

Wall Street's woes will be another headache for Madison Avenue execs, many of whom have managed to maintain reasonable numbers in the face of all kinds of challenges. Even with some marketers noting that this is a great time to increase ad investments and gain share, reality must prevail at some point and put pressure on agency revenue and margins. In particular there will be further retrenchment in the financial-services and automotive sectors, with some expecting telecom budgets to be hit hard, too. Across the board, the pressure on shops will intensify to prove return on investment. Expect less-brand-based and more-sales-led metrics. The marketing-services conglomerates so far have been somewhat sheltered from the storm by their diversification into nonmedia-based disciplines and rapid growth in some of their global outposts. It seems unlikely there'll be quite so many bright spots shining through the clouds in 2009.

For media ...

By now, if you are in the media, you know the story: fewer dollars to broad-scale media and more for targeted, accountable media and other marketing disciplines, such as direct and customer-relationship management. Some marketers will double down with their most trusted media partners to create big, provable multimedia programs while abandoning the media sellers lower on the totem pole. The meltdown will also, of course, mean more wheeling and dealing for advertisers demanding price cuts. And it will create crushing comparisons next year, which won't have 2008's presidential election or Olympics to prop up the numbers. Many media sellers will see revenue crater in 2009. But the financial meltdown also means opportunities for those institutions still on solid ground, according to media sellers who argue that now is the time to put your best brand face forward.
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