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By Published on .

Direct marketing companies have been feasting on each other in a series of acquisitions and mergers in the industry during the first of 1998.

The sheer number of deals rose to 991 for the first half of 1998 from 651 deals for the same period in 1997. Those transactions were valued at $23 billion, a 59% increase over the same period last year, according to investment banker Gruppo, Levey & Capell.

Most recently McCann Erickson Worldwide, New York, is expected to acquire direct marketing agency Gillespie, Lawrenceville, N.J., for an estimated $20 million.

This purchase is one example of a trend to consolidation that is beginning to put the squeeze on middle-size agencies. Marketers may find it easier to one-stop shop at marketing services companies and direct agencies that can offer multiple services.

"The market increasingly demands larger companies," says Jack Clarke, senior VP-business services analyst at PaineWebber. "The largest firms in database marketing are not more than $200 million in sales. That drives the consolidation process. The market has really made it increasingly difficult for those firms to go public and so it leaves them no other choice but to be acquired."

Great Universal Stores successfully fought to acquire Metromail Corp., Lombard, Ill.DraftWorldwide, Chicago, bought Kevin Berg & Associates Marketing, also of Chicago. Genesis Direct, Secaucus, N.J., bought Atlanta-based Cox Enterprises' Carol Wright Gifts in a stock swap deal. Rivertown Trading Co., a catalog marketer, was acquired by Dayton Hudson.

Everything else that wasn't nailed down seemed to be snatched up by Snyder Communications, Bethesda, Md., including direct agency Barry Blau & Partners, Wilton, Conn. Other agencies picked up by Snyder include Arnold Communications, Boston; Publimed Promotions, Paris; Clinical Communications Group, Greenwich, Conn.; and Sampling Corp. of America, Glenview, Ill.

"Part of it is a natural process of a maturing industry," says Bob Wientzen, CEO-president of Direct Marketing Association. "It's a broader business than it was 10 years ago."

Mr. Wientzen says he gets two calls per week from investors and companies looking for direct marketing operations.

"The direct marketing industry is growing at a rate faster than traditional marketing," he says. He stresses that technological advances and the Internet fuel that growth.

Database management will continue to grow far faster than traditional media channels, as marketers put more emphasis on customer-based and relationship marketing, says Mr. Clarke.

The acquisition fervor has been fueled by a strong economy and by well-capitalized consolidators looking to expand their presence, according to Mr. Clarke.

"It's been essentially an entrepreneurial business until now," says Don Schultz, professor of integrated marketing communications at Northwestern Medill school of journalism and president of marketing consultancy Agora Inc.

"There's a perception of a rosy future, but it's also time to take the cash for some folks," says Mr. Schultz. He also suggests economics have changed, allowing less opportunity for smaller, more entrepreneurial companies to compete.

"Economies of scale are very different now," says Mr. Schultz.

"Consolidation makes good client sense and really good financial sense," says Mr. Clarke. "The market increasingly demands larger companies."

Some believe the economics of the market itself are a factor in the feverish activity.

"Most of the acquisitions are being done with very inexpensive stock," says Howard Draft, chairman-CEO at DraftWorldwide. "Companies are trading at high multiples, and you can go in and buy these companies at a very good price these days."

Mr. Draft notes his company will complete four more acquisitions before the end of the calendar year. Mr. Draft has not announced the names of the shops.

"You have significant amounts of equity capital coming into the industry," says Harry Chevan, Gruppo's senior VP. "There's a strong future ahead, but you have to weigh it in the larger picture of what the economy is going to do. Direct marketers have an advantage because they have a tighter contact with the customer."

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