France's Publicis Group here has dramatically increased its presence in the U.S. through the acquisition of independent creative agency Fallon McElligott, Minneapolis.
Publicis President Maurice Levy termed the acquisition "an important, and even decisive stage" in the Paris-based group's international development, and promised to put Fallon at the heart of a new, second agency network "completely structured for the Internet Age."
Fallon -- a 650-person agency with offices in Minneapolis, New York and London -- will form the core of a new network slated to roll out in 10 to 12 countries during the next three years. Publicis will spend $30 million to $50 million developing the new network, to be especially focused on the Internet needs of major advertisers, principally through acquisitions of "small, like-minded" agencies whose business and creative philosophies fit with Fallon's.
Fallon will retain its name and management.
Fallon Chairman Patrick Fallon, speaking from Minneapolis, said: "This is a new kind of network for the 21st century. It's not about an outdated business model, where more offices in more places or more people thrown at an account is better. This is a global network based on the marriage of branding and creativity and technology."
Terms of the sale, which gives Publicis 100% control of the agency, were not disclosed but Mr. Levy said the deal was "at the high end" of Publicis' customary acquisition price range. That range fluctuates between six to 12 times net profits. The acquisition will be financed entirely through cash reserves, Mr. Levy said. According to a source who declined to be named, the agency was sold for an estimated $120 million.
The acquisition of Fallon will dramatically improve the position of Publicis, the world's 10th largest advertising organization, in the U.S. market. The U.S. is regularly cited by analysts as Publicis' weakest geographical area.
In 1998, the U.S. generated 24% of total Publicis billings while France accounted for 26% and the rest of Europe 42%.
According to Advertising Age figures, Fallon was the 50th biggest ad agency in the U.S. based on 1998 figures. Mr. Levy said Fallon reported net income of $80 million in 1999 on billings of $700 million.
Mr. Levy said the purchase should be viewed as part of a wider U.S. strategy launched in mid-January when Publicis acquired marketing services specialist Frankel, Chicago, which reported net income of $95 million in 1999.
The two acquisitions will more than double Publicis' net income in the U.S., to more than $400 million in 2000, Mr. Levy said. The group will see U.S. billings comprise more than 30% of global billings this year and North American billings make up more than 35% of the group's total.
"In 1998, we said we would meet this goal by 2001," Mr. Levy said, but the Frankel and Fallon acquisitions mean that "the percentage of U.S. billings in the group's total billings will be superior to 30% from this year."
The Minneapolis-based agency has garnered an impressive amount of awards and creative accolades since its founding in 1981, including two mentions as "Agency of the Year" from Advertising Age.
Mr. Levy describes Fallon as "a brilliant little jewel."
Fallon's client roster includes BMW of North America, Holiday Inn, jeans marketer Lee Co., music video channel MTV, pet food marketer Ralston Purina Co., Starbucks Coffee Co., watchmaker Timex and United Airlines.
Its Internet roster includes: online shoe retailer Nordstromshoes.com; LifeMinders.com, a leading provider of free, personalized e-mail messages; and Switch2.net, an entertainment portal launching in 2000, as well as Internet counseling to many of its corporate clients.
Mr. Fallon will continue to hold all day-to-day operational control over the agency, Mr. Levy said, adding that Publicis' new network will be "completely independent" and thus "capable of managing advertising budgets in competition with those held by Publicis."
The network's existing U.S. operations include the Publicis agency (formerly Publicis/Bloom), and Publicis & Hal Riney.
While Mr. Levy was waiting for Mr. Fallon to first tell his staff of the sale, he announced strong 1999 preliminary financial results.
Publicis recorded consolidated revenue topping $6.85 billion in 1999, up more than 25% on revenue in 1998, according to early estimates of financial data to be released later this year.
Growth in 1999 was split evenly between new business and acquisitions, according to Mr. Levy.
He predicts the group will see billings grow by at least 20% in 2000, while growth during the 2001-02 period will hover at or above 10%.
The news of record growth will likely add to frenzied buying of Publicis shares on the Paris Bourse, or stock exchange, where the company is now valued at more than $4.3 billion.
Mr. Levy predicted that Publicis would focus its future goals on rolling out the second network specialized in Internet work, as well as improving the group's profile in Japan. Publicis should be "among the agencies capable of handling big Japanese budgets, and not just those of European advertisers."
Copyright February 2000, Crain Communications Inc.