M&A: Boon or Bust?

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While agency chiefs were hopeful the recent surge in mergers and acquisitions is a sign of good things to come, insiders also pondered whether consolidation among marketers could mean shrinking revenues for agencies and media companies.

"It has the potential to squeeze agency fees," said David Beals, president of consultant Jones Lundin Beals. "It could ultimately lead to the examination of all kinds of costs, including advertising."

Merging clients typically want to leverage larger accounts into lower media rates and lower fee arrangements with agencies, said Arthur Anderson, managing principal of Morgan Anderson Consulting. But agencies can take advantage of that consolidation, he said. Since handling one large account tends to cost an agency less than handling two smaller ones, agencies can turn that efficiency into a larger profit margin on the account, he said.

It's been a good year for M&A among marketers, even before Bank of America Corp. chased Fleet and R.J. Reynolds and British American Tobacco's Brown & Williamson made their deal. In the last quarter alone, Procter & Gamble Co. spent $5.7 billion to acquire hair-care marketer Wella AG; Oracle Corp. launched a hostile bid for software rival PeopleSoft; and BellSouth Corp. ended its faltering pursuit of AT&T Corp.

Executives see the M&A surge as a sign of the economy's recovery. M&A volume dropped from a peak of $1.7 trillion in 2000 to $432.1 billion in all of last year, as the economy tanked. It has already reached $405.7 billion year-to-date, up from $355 billion the same time last year, according to Richard Peterson, chief economic strategist at Thomson Financial.

"The recent merger activity we're seeing, if it sticks, will be good for some segments of our business that have been very quiet for these past two years," said Omnicom Group President-CEO John Wren. Speaking to analysts after reporting third-quarter results, Mr. Wren noted areas such as financial services advertising and public relations are showing signs of life. (See story, P. 8.)

The M&A surge is "emblematic of a change in view by some of our clients," said WPP Group Chief Executive Martin Sorrell, who counts BAT among his clients. After spending the last two years cutting costs, marketers are now focusing on growing revenue either by acquisitions or sales increases, he said.

"This indicates a greater degree of confidence and ... that greater degree of confidence will be reflected in spending in 2004," he said.

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