CMO Connections

$250 mil is good deal

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Did interpublic overpay? Most analysts believe the answer is no.

Wall Street analysts were positive overall about the deal, regardless of whether the ultimate price tag on the all-stock deal is closer to $200 million or $250 million. Deutsch, they noted, is one of the last premium independents of good size, reputation and quality clientele, which makes it a prize buy.

Merrill Lynch & Co. analyst Lauren Fine estimated Deutsch's current revenue at $145 million to $150 million. This would put the price tag in a range of 1.3 to 1.7 times revenue, a multiple in line with most recent agency acquisitions.

The price tag will determine if the acquisition is a good thing, or a very good thing, said Michael Russell Jr. of Morgan Stanley Dean Witter & Co. Deutsch is "one of the last great independents," and it makes the overall portfolio stronger at Interpublic Group of Cos., he said.

Deutsch Chairman-CEO Donny Deutsch, who owns 87% of his agency, becomes a major shareholder of Interpublic, though he'll get some of the shares and options over a five-year payout tied to performance.

It is conceivable that Mr. Deutsch could end up as Interpublic's largest individual shareholder if the agency meets performance goals and he exercises all his options over the five-year term.

Based on the expected price of $200 million to $250 million, Mr. Deutsch could wind up with $174 million to $218 million in Interpublic stock. Using Nov. 30's closing price, that would be 4.5 million to 5.6 million shares-well over twice the holdings of Interpublic's chairman and largest individual shareholder, Philip Geier.

Securities and Exchange Commission filings before the company's annual meeting in May showed Mr. Geier held about $77 million in Interpublic stock and options (based on its Nov. 30 closing price), while President John Dooner had about $38 million worth. Like most public companies, Interpublic compensates top execs with packages that include stock and options annually, and most of them choose to cash out part of their holdings regularly.

The ultimate price paid with the all-stock deal depends on how Interpublic shares perform. Mr. Deutsch's final take could rise as Interpublic's stock appreciates; Ms. Fine's analysis sets a $50-per-share target over the next 12 to 18 months for a stock, which is still below the all-time high of $58.38 set last December.

It's conceivable that Mr. Deutsch's holdings could drop in value if the economy slows and Interpublic's share price falls during the five-year period of Mr. Deutsch's payout.

Interpublic stock dropped $1.06 to $39.06 on Nov. 30, the day of the Deutsch announcement, as the agency segment took a hit from a 215-point drop in the Dow Jones Industrial Average. Interpublic recovered the next day to close at $40.63, rising $1.56, or 4%.

"Donny has always made very clear that he would remain independent as long as he felt it was to his advantage," said Abe Jones, managing director of investment banker AdMedia Partners. "Certainly, he must have gotten a very attractive offer to make him change his mind."