MERGER & ACQUISITION MARKET SCRAPES BOTTOM

Bleak Dealmaking Prospects; Little Incentive to Sell

By Published on .

NEW YORK (AdAge.com) -- It looks like a buyer's market for agency mergers and acquisitions, according to a new survey of agency executives.

An annual poll by investment bank AdMedia Partners, New York, found most executives believe agencies should wait until the recession is over to hang a "for sale" sign; 80% said sellers should wait to sell -- up from 14% in 2001 and 7% in 2000.

The 900 executives polled said expected price tags are down to 5 to 5.5 times operating profits for traditional agencies (from 5.5 to 6 times in 2001), and to 6 times operating profits for marketing services firms and interactive agencies (down from 6 to 7 and 7 to 8 times, respectively).

Low expectations
Prospects for dealmaking don't look good, anyway, according to the survey, taken in December 2001. Fourty-seven percent of executives expect lower merger and acquisition activity this year, 31% expect the same as last year and only 22% expect an increase.

That outlook is the most pessimistic since the survey began in 1995.

Acquisitions appear driven more strongly by financial factors than strategy: 79% named enhanced revenue and critical mass as a key factor in transactions -- up from 67% in the 2001 poll. Adding new clients went to 62% from 56% and improving operating profit margins rose to 56% from 51%. Meanwhile, adding new skills and services dropped to 32% from 52%, diversifying lines of business dropped to 28% from 39% and adding geographic markets dropped to 22% from 40%.

Stricken companies
A parallel AdMedia Partners survey of media companies also found sinking price tags, but more merger activity on tap as stricken companies consolidate.

The poll of 1,000 media executives found 57% expect merger and aquisition activity to increase -- more than double last year's 24% rate -- and 25% felt it would stay the same. Only 18% said it would decrease.

But price tags will decline slightly: newspapers are expected to sell for 1.5 to 2.5 times revenue, down from two to three times in 2001; broadcast stations will fetch 1.5 to 2 times, down from two times revenue; and interactive media will drop to 1 to 1.5 times revenue from 2 to 3 times. Prices for consumer magazines and business-to-business publications are expected to hold at 1.2 times revenue.

In this article:
Most Popular