How Private Equity is Reshaping Marketing

With Promise of Payout, Investor Groups Look to Create 'new Agency Model'

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Private equity isn't just buying up the marketing industry-it's on the verge of transforming it.

Private-equity funding has already swept through media, buying newspapers, radio behemoth Clear Channel and Reader's Digest, and marketing research, snatching up the two biggest players, Information Resources Inc. in 2004 and VNU earlier this year. It's changed the nature of competition for marketers, accelerating upstart brands that have rocked established players and pressuring giants as large as General Motors, Unilever and Colgate-Palmolive Co., all while poaching top marketing talent (see sidebars).

Now, private-equity players, who are highly motivated to prove a return on investment, are eyeing interactive and mobile-marketing shops. Spotting an opportunity as big-media scale loses ground to more targeted, newer venues, private funding is seeking to create the next agency model and capitalize on an "inflection point" for the marketing industry.

Money and Talent

Behind it all is a huge influx of money and cheap debt, as banks and major institutional investors shift funds from public markets into private plays. Private-equity funds raised about $300 billion globally in 2006, nearly eight times the $41 billion raised in 2003, according to researcher Private Equity Intelligence.

A conspirator in its growth is the declining effectiveness of traditional marketing, according to Gary Shansby, co-founder and managing director of San Francisco private-equity player Shansby Group. The scale advantages big players have are eroding along with media effectiveness, he said, while the big players are finding it harder to leverage scale-buying advantages in the public-relations and event- and buzz-marketing efforts often favored by smaller players.

But much of the private-equity impact still comes from infusions of marketing money and talent. PE investors such as Shansby often have marketing plans in place before they close deals and execute them within months, on the way to cashing out on accelerated growth within three years.

The fact that private-equity marketing executives are compensated based mainly on profit and enterprise value also helps solve marketing's return-on-investment problem, said Andy Whitman, managing partner of 2x Management, who both manages and advises on private-equity investments.

The PE-company managers "scrutinize every investment like it was their own money, because it is," he said. Economic incentives don't make up for the lack of money for advanced analytics, he said, but the PE marketing executives compensate by responding faster to trial and error.

Which is why private equity-even though it's thriving on the gathering chaos in marketing-is looking to fix the marketing model. Several funds have stepped up interest in acquiring interactive and mobile-marketing shops in the past year, said a consultant advising one of the firms.

"They think they're smarter than the agency-holding-company executives," he said, adding that their plan is to capitalize on what they see as an "inflection point" in the marketing-services industry, piece together "a new agency model" and cash out either through IPO or sale to the holding companies.

The holding companies may have the same assets, he said, but executive egos can stand in the way of piecing them together in new ways. The private-equity bet will be that greed trumps ego, with the lure of big potential payouts overcoming executives' reluctance to subordinate themselves to others.

Among expected private-equity targets in 2007 are publicly held Aquantive, as well as privately backed AKQA and Proxicom, he said, along with a host of micro-cap mobile-marketing shops he described as having "sales of $1 million and valuations of 20 times that."

Cost Cuts and Layoffs

Elsewhere in marketing services, publicly held Catalina Marketing, owner of the Checkout Coupon system, in December retained investment bank Goldman Sachs after receiving an unsolicited buyout offer from a private-equity fund.

Two seemingly inevitable outcomes of private-equity takeovers are cost cuts and layoffs-big ones. VNU plans to slash 4,000 of its 42,000 jobs globally and cut costs 10% under private-equity ownership. While talk of new products bubbles forth liberally from VNU, talk of long-deferred investment in computing infrastructure is notably absent so far.

Any hopes that civic pride would keep new Philadelphia Inquirer publisher Brian Tierney from issuing layoffs there were quickly dashed. No one has even briefly harbored such thoughts regarding the private-equity crowd that has begun swirling over, or within, The New York Times Co. and its properties-potential buyers include former General Electric Co. CEO Jack Welch, former AIG CEO Hank Greenberg, and former Gillette Co. CEO and Times board member Jim Kilts.

But not all private equity is alike. After Symphony Technology Group took Information Resources Inc. private in 2003, it laid off 200 to 300, or about 8% of the company's work force. But it also made major investments in both new products and infrastructure, including a $300 million investment in a new computing platform, and has been piecing together a series of technology-based marketing analytics businesses.

And funds such as Shansby or Catterton Partners have reputations for making their money mainly by providing the funds and talent to build brands up rather than making quick killings by slashing costs.
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