By Published on .

The expected boom in interactive agency stocks so far appears to be a bust, with new-media agencies placing a big bet on old media and other business to boost revenues and profits.

Like many high-tech start-ups, new-media companies' initial stock offerings have stumbled after leaving the gate. Most have seen stock values fall as they faced competition from the interactive units of agency giants, which can afford to offer services at cut-rate prices to their parents' clients.

Publicly held companies-including CKS Group, Leap Group, K2 Design and Think New Ideas-are heavily reliant on operations other than new media and acquisitions made since their IPOs.


Eagle River Interactive sold its interactive agency business to Omnicom Group and chose to concentrate on computer training.

Four of five publicly owned agencies have made significant acquisitions over the last year: TMP Worldwide agreed to acquire Austin Knight, a London recruitment advertising agency; Leap bought ethnic marketing agencies YAR Communications and Kang & Lee; CKS acquired traditional ad agency McKinney & Silver and interactive shop SiteSpecific; and Think New Ideas bought Fathom, formerly Ketchum Communications' Los Angeles office.

CKS, with the highest profile of the public new-media shops, gets just 25% of its revenue from its interactive business. Chairman-CEO Mark Kvamme said CKS has long positioned itself as an integrated marketing agency steeped in-but not limited to-new media.

Think New Ideas' Director of Business Development Douglas Stone said that shop's business is split 50/50 between online and traditional advertising.

The companies still have to show they can generate profits in new media, said Jim Dougherty, an analyst at Prudential Securities. Abe Jones, managing director of investment bank AdMedia Partners, added: "These companies have to prove it isn't just an acquisitions game; it's growing your profits."


The large holding companies that backed the new-media companies have made out well, noted Mr. Dougherty. Interpublic Group of Cos. paid $9 million for a 29% stake in CKS three years ago before the IPO. It then sold part of its stake for $39 million in 1996, according to Securities & Exchange Commission filings. As of Oct. 31, it owned 13.5% of CKS, now worth about $28.7 million.

Omnicom paid $5 million for a 20% stake in Think New Ideas that has since been diluted to 17%. Today, not quite two years later, it's worth $11 million, said Mr. Dougherty.

But for investors who bought at the IPO price, many agencies have disappointed. Only two are trading above their IPO prices: Think New Ideas and TMP, a Yellow Pages and recruitment ad agency that's moved onto the Internet.

Only TMP and CKS are making money; Leap, Think New Ideas and K2 are not showing profits at this time.


"We're creating a new category overall. Over time, it settles. Either it moves to the agency side or the technology side or, better yet, somewhere in the middle. The jury is still out," said Seth Goldstein, managing partner of CKS SiteSpecific Consulting.

Like Leap's, CKS' stock took some serious punishment when the agency revised earnings expectations downward in November. CKS saw its sky-high stock tank Nov. 10, dropping 63% to $13.38 after it disclosed fourth-quarter earnings would be "significantly below" expectations. The stock has languished since then.

CKS last week reorganized operations, creating four divisions to oversee its roughly 19 scattered units.

Mr. Kvamme said it's unfair to lump decade-old CKS' stock with youngsters like Leap. He's hoping True North Communications proceeds with its plan to take its interactive businesses public, to help legitimize the category.

"We need another quality player in this space," he said.

Contributing: Alice Z. Cuneo, Beth Snyder.

Most Popular
In this article: