MIDSIZERS LOOM LARGE;MEGA-AGENCIES MAY HAVE MORE MEDIA CLOUT, BUT NO LOCK ON CREATIVE, STRATEGIC POWER

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It's time to be fair to the middling.

In the era of global business, it has become fashionable to mourn the death of independent, midsize U.S. ad agencies. But those being mourned say, "Open the casket. We're not dead yet."

"There are a lot of great midsize agencies producing outstanding work, and there always will be," said Brett Shevack, CEO of Partners & Shevack, New York, an independent that had $22.8 million in gross income in 1994.

"Size is irrelevant," added Amil Gargano, who since 1991 has headed a small agency under his own name but who in 1962 co-founded the latest midsize agency to encounter problems, Ally & Gargano.

"The only advantage the big agencies have is in media muscle," said Donny Deutsch, executive creative director, Deutsch, New York. "Otherwise, I see midsize strategic, creative powerhouses setting the tone for the whole industry."

These three and many of their peers take issue with Omnicom Group CEO Bruce Crawford's prediction in a speech last April that the ad business will see a narrowing of the middle in coming years.

There are no statistics for the future, but recent history backs up Messrs. Shevack, Deutsch and Gargano. The American Association of Advertising Agencies defines midsize agencies as those with $20 million to $100 million in annual gross income. Counting only independent, general, consumer-oriented agencies, there were 26 in that range in Advertising Age's April 1995 Agency Report. That's a 24% increase from four years ago.

Midsize independents also have increased their share of total U.S. billings from 4.3% in 1990 to 5.2% in 1994.

Some of the independents from four years ago have gone out of business or been acquired by global powerhouses. Two recent examples include Ally & Gargano, a star among midsize agencies in the 1980s that is now struggling to survive as a small agency after losing almost $100 million in billings in the past year, and Ross Roy Communications, Bloomfield Hills, Mich., which recently signed an agreement to be acquired by Omnicom.

Others, such as Bayer Bess Vanderwarker, Chicago, and Hal Riney & Partners, San Francisco, have been the subjects of intense merger speculation. But other independents have grown in the past four years, moving from the ranks of the small to the midsection of the industry. And while it's true, as Mr. Crawford pointed out, that the top 10 to 15 agencies in the world are commanding a larger share of ad spending around the world than they did a few years ago, there still remain hundreds of clients who don't need-or want-an agency with offices in 50 countries.

"There are a huge number of clients who want to feel they're important to their agency," said Abe Jones, whose New York investment banking company, Ad Media, works with midsize agencies. "They fear being lost at a global agency."

Those include clients without international business, such as Southwest Airlines ( Cramer-Krasselt, Milwaukee, $26.9 million in '94 gross income), and clients with international business, such as Timex and BMW (both with Fallon McElligott, Minneapolis, $29.6 million in '94 gross income). Even Procter & Gamble Co., which advertises in every corner of the globe, has room for midsize agencies on its roster. Jordan, McGrath, Case & Taylor, New York ($47 million in '94 gross income), handles $75 million worth of P&G brands. N.W. Ayer & Partners, which ranks at the top of the midsize scale in the U.S. ($98.8 million in '94 gross income), handles almost $100 million for P&G.P&G even has a small agency, Lotas Minard Patton McIver ($8.8 million in '94 gross income), handling its $20 million Max Factor brand.

Clients who want to grow their businesses overseas can create challenges for midsize independents. Wieden & Kennedy, Portland, Ore., found that out when its marquee client, Nike, began talking to multinational agencies about Nike advertising abroad. Feeling its position as lead Nike agency might be in jeopardy, Wieden formed a partnership with McCann-Erickson Worldwide to go after Nike business outside the U.S.

Other midsize agencies have adopted similar alliances, either with multinational partners or midsize partners in other markets, to keep or lure accounts.

"There are a lot of ways to skin the international cat," Mr. Shevack said.

Bayer Bess Vanderwarker, Quaker Oats Co.'s Gatorade agency since the brand's early days, is another example. While global behemoths Leo Burnett Co., Grey Advertising and Omnicom, through its TBWA unit, handle Gatorade's advertising in Latin America, Asia and Europe, respectively, it remains loyal to Bayer Bess in the U.S.

The agency is still helping to build the business in the U.S., said Clark Hine, VP-equity communications for Quaker Beverages, North America. "We are very happy with [Bayer Bess'] performance, and our relationship with them is very strong," Mr. Hine said. "It doesn't bother us at all that they're not a global agency, although we do need agencies with global resources to manage our [advertising] in other regions."

Periodically, Mr. Hine said, top Quaker executives from each region of the world get together with key people from each of the four agencies for "worldwide summits" on the Gatorade brand. The agencies communicate together, and the system works, he said.

That system is proof that midsize independents can thrive even though clients are expanding globally, said Bayer Bess President Ron Bess. Mr. Bess said his agency is not for sale, although there has been buyer interest. "We had overtures from TBWA last year, and we talked to them, but the talks never went anywhere," Mr. Bess said. "We have not initiated talks with anyone."

Some agencies are better off being independent, even when it can limit their ability to serve international clients, said Pat Fallon, chairman of Fallon McElligott. His agency sold an 80% stake to WPP Group in 1986 but bought itself back in 1992. "Independence is better for us, we discovered," he said. "We found we were more aggressive than our partners. That slices off part of the advertising world [for us], but we still think there's enough of a market out there for us to be successful. There's nothing wrong with having to say `no' to certain clients."

Choosing independence a second time only delays a big decision for Mr. Fallon, though. For Fallon McElligott and almost all of the midsize independents are still being run by their founders. The long-term question is how to survive into future generations. Ally & Gargano is a case in point. Though the agency had problems before Mr. Gargano left in 1991, its demise seems to have accelerated after his departure.

As Mr. Crawford said in his April speech, founders of successful midsize shops want to get their money out of their companies when they retire. That involves selling their ownership to somebody, whether it be employees, the public or another advertising company. But a successful sale doesn't guarantee an agency's culture and spirit will survive.

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