Quest to cash in leads small shops, major players to seek mergers, IPOs
It's mating season in the interactive agency business.
On one side are the major agency holding companies looking to build interactive expertise. On the other side: leading new-media shops, looking even more aggressively for a chance to cash in, either by going public or selling out.
Now, the two sides are coming together, and the mutual attaraction is money.
The failed merger of independent shop Modem Media and Bozell, Jacobs, Kenyon & Eckhardt-owned Poppe Tyson earlier this month (AA, May 20) would have brought together two interactive powerhouses to form an agency with revenues of more than $36 million.
TRUE NORTH-MODEM MERGER?
Modem is now talking to True North Technologies, a joint venture of True North Communications and R/GA Digital Studios, executives say. Both Poppe and TN Technologies plan an initial public offering this year.
"People are realizing there is a lot of benefit in [size]," said Mark Kvamme, president-CEO of CKS Group, the Cupertino, Calif., interactive agency. "There's a lot of money to be made, and now's the time to do it."
Following in the path of skyrocketing technology stocks like Netscape Communications Corp., agencies specializing in interactive media have successfully positioned themselves as technology companies with investors.
CKS, with $1.4 million in net income last year, went public late last year, shortly after Interpublic Group of Cos. invested $15 million for a minority stake.
The agency is now worth about $540 million--more than either True North Communications or Grey Advertising, both of which have roughly 20 times the agency's profit and revenue.
CKS SUCCESS SPURS INTEREST
"The success CKS has had [in the stock market] has generated a lot of interest in IPOs at other interactive companies," said Abe Jones, managing director at AdMedia Corporate Advisors, a New York investment banking and consulting company.
Others are openly aping the CKS money-generating model.
> Magnet Interactive Group, a Washington interactive developer, is in talks with WPP Group and two other agency groups to sell a minority stake in the company, said Basel Dalloul, Magnet's chairman-CEO. Magnet already has an informal alliance with J. Walter Thompson USA, a WPP agency.
Magnet would use the investment to acquire other companies and fund an IPO by yearend, Mr. Dalloul said.
"We are looking to have a more solid relationship with a bigger agency, similar to what CKS did with IPG," he said.
`LOOKING AROUND FOREVER'
"The holding companies have been looking around forever," said Jonathan Nelson, CEO of Organic.
BJK&E's Poppe is courting other partners in the wake of the failed Modem deal; WPP says it has already made a small investment in one new-media agency, which it won't name, and is scouting for others.
IPG said at its annual meeting last week that it is close to a deal with an interactive company. CKS is also seeking acquisitions.
One interactive agency chief estimated Modem's value at $100 million to $125 million, a figure the acquisition-minded agency groups would find extraordinarily high. Modem generated an estimated $20 million to $25 million in revenue last year; a typical agency would go for at most one to two times revenue.
If Modem were to go public, its value in the public market could be far higher.
"We feel there's an opportunity to develop ownable, leverageable marketing systems and ways of doing business on behalf of clients that are going to take a lot of investment," said G.M. O'Connell, partner in Modem, Westport, Conn. "We thought the Poppe deal would give us a better way to execute that strategy."
FEAR A FACTOR
What Mr. O'Connell and others probably feel is another factor driving all this market activity: that age-old motivator, fear.
As hot as the Internet has been for the past two years, it's an amazingly risky venture. Although consultancy Jupiter Communications, New York, predicts online advertising will be a $5 billion market by 2000, up from $54.7 million last year, there's still plenty of skepticism.
Traditional agencies are still grappling with how to handle interactive work; interactive developers are looking for ways to build their business.
Some agencies like Leo Burnett Co., which recently spun all of its interactive work into a subsidiary called Giant Step, are realizing what clients want is not the two-ton elephant, but the tiny mouse that sits on the elephant's back.
"Everyone thought they could do this: two-person shops, big agencies. As we move into phase two [of the Web], the shakeout is happening," said Kyle Shannon, partner in Agency.com. "Are we getting approached? Yes. Are we interested? Under special circumstances we might be."
Copyright May 1996 Crain Communications Inc.