Why Naked Sold to Australian Unknown

Holding Co. Photon Beat the Bigs by Promising to Keep Hands Off Hotshop

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NEW YORK (AdAge.com) -- As a hot independent with blue-chip clients, Naked Communications had its share of suitors -- everyone from private-equity firms to Big Four holding companies. So when the communications-planning network picked Photon Group, an Australian holding company that's little-known outside its home, there was more than a little head scratching.
Naked Communications: Principals Paul Woolmington, M.T. Carney and Neal Davies rejected several big-name and private equity suitors.
Naked Communications: Principals Paul Woolmington, M.T. Carney and Neal Davies rejected several big-name and private equity suitors.

What on earth were they thinking? Well, it's all about avoiding integration with a host of other agencies -- or so Naked hopes.

When a WPP or Omnicom scoops up an agency, part of the hope for the deal is that it helps make the whole greater than the sum of its parts through cross-selling services or other synergies. What stands out about the Naked deal is that the founders did it with the expectation that they'll be left alone inside their new parent company.

'Complete autonomy'
Here's how Naked put it in a release: "Unlike the large multinational networks, they respect the individual businesses within their portfolio and steer away from consolidation, choosing instead to let each business operate with complete autonomy."

Or as founding partner John Harlow put it: "We haven't met any of the other Photon companies, and there is no pressure on us to do so. [Photon] is not trying to build an integrated model; they are just building interesting companies around the world."

Time will tell whether this turns out to be the case. The effort will be helped along if Naked stays hot and profitable. The history of business is littered with examples of companies that sell with the hope of retaining independence only to lose themselves in a much larger beast.

But you can see how Naked might become a believer in this case. By all accounts, Photon, which owns 40 companies in field marketing, research, and integrated and digital-marketing communications, helps its companies out with money but stays out of direct operations. "We work for the businesses we own," said CEO Matt Bailey. "We're not a hierarchy or corporate structure where companies report up to us."

$37 million up front
Photon ended up paying $37 million up front, but with deferred payment the total package could be more than twice that. Naked had revenue of about $30 million in 2007. While the companies aren't disclosing Naked's earnings, some investment bankers interviewed said the sales multiple likely is in line with other recent agency deals.

Naked has more than 30 partners, but a key management group of eight stands to make the most from the deal. As for the risk that the newly rich partners will shuffle off to the nearest beach for good, one executive familiar with the matter said that scenario is doubtful, because they are relatively young and still believe in the mission of the agency.

WPP Group, Publicis Groupe, Interpublic Group of Cos. and private-equity funds were among players said to have been in talks with Naked about an acquisition in recent years. The most advanced conversations appear to have been with Interpublic about 15 to 18 months ago. The deal didn't happen because Naked was unsure where it would fit within the holding company, and Interpublic developed reservations about Naked, according to an executive familiar with the situation.

A traditional holding-company model doesn't really fit the Naked business proposition, anyway. London-headquartered Naked, which opened in the U.S. two years ago, is designed to operate as an impartial adviser to marketers on their communications strategies. So Naked might recommend diverting money from TV commercials or print buys into, say, making store displays more eye-catching or investing more in customer service.

Keeping impartiality
That could create tricky political situations if Naked were part of one of the big holding companies, which for all their attempts to diversify still make a lot of money off traditional ad buys. Naked has grown an international, profitable business -- one big enough to be a thorn in the side of larger shops -- by approaching all marketing problems without being predisposed to one solution. Continuous attempts by Naked to recommend a particular service within its own holding company could undermine its point of difference.

The relationship no doubt will be mutually beneficial for an agency that wants an investor that will leave it alone and a holding company looking to grow its global reach. The plan for Naked, which operates out of eight countries including the U.K, the U.S. and Australia, is to move into China, India and Brazil in the next two years, areas in which Photon is strong. Photon, meanwhile, will benefit from Naked connections here and in the U.K.

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Contributing: Normandy Madden
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