Why Omnicom Is Looking at LBi as an Acquisition Target

Having Long Trumpeted Power of Integration Over Bolting-On Shops, U.S.-Based Holding Company Now Mulling a Big Digital Deal

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The second-largest ad holding company in the world, Omnicom Group, is in talks to acquire LBi, one of the last large-scale digital agencies, Ad Age has confirmed.

The talks are in the early stages and the companies are not close to inking a deal. To that end, LBi issued a statement acknowledging talks with multiple parties are underway: "Such discussions are at a very preliminary stage and there can be no certainty that an offer will be made for the company."

LBi did not respond to requests for comment beyond that statement, and neither has Omnicom.

Ad Age reported last week that LBi was seeking buyers. But new reports out of the U.K. putting LBi's price at a lofty $580 million will undoubtedly throw a wrench in those discussions, especially given Omnicom's conservative reputation in the M&A market.

Big -ticket deals are definitely out of character for Omnicom, which has stayed on the sidelines as competitors WPP and Publicis Groupe have made flashy acquisitions to beef up in digital. Deals like WPP's majority stake in AKQA last week, which came with a $540 million price tag, are done in part to send a clear message to clients and investors alike: "we are prepared for a more digital future."

While both WPP and Publicis have long touted their digital acquisitions as a demonstration of their ability to evolve, with their CEOs regularly setting higher and higher goals for the companies' overall percentage of revenue from digital marketing, Omnicom has taken a decidedly different tack. It has instead focused on making its big traditional networks -- BBDO, DDB and TBWA -- more digital.

But that tack has its own risks. As Ad Age reported last fall, one of the company's biggest clients is still not sure whether Omnicom -- or for that matter, any company -- is really there when it comes to digital integration. Said Shiv Singh, global director of digital for PepsiCo beverages and former Razorfish exec, at the time: "I love the promise of [the integrated agency]. I love the idea in theory.' But, he added, "I don't think anyone is truly there in reality."

"The challenge for Omnicom has always been telling their digital story without having large acquisitions to point to as evidence," said Daniel Salmon, equity research analyst, BMO Capital Markets. "The company has been more forthright in outlining their strategy of 'digital in all things we do' and as Wall Street 's understanding of digital marketing grows, that 's starting to resonate better and I hear fewer questions like 'is Omnicom falling behind in digital?' than I did a few years ago."

During Omnicom's most recent earnings report, CEO John Wren reiterated the company's digital strategy, which is "built around the core idea that all of our agencies must have the strong digital talent and capabilities in order to compete in the future."

What, then, could cause Omnicom to step outside its comfort zone to snap up one of the last global digital shops on the market? Likely, it's the need for strong pure-play digital brands to meet clients' marketing needs. While Omnicom is financially healthy overall and has long been a darling on Wall Street in the ad space, among its collection of well-regarded agencies, digital-only brands like Tribal DDB and Organic are shrinking.

Consider Tribal. The network's revenue dipped almost 9% last year to $183 million largely because U.S. revenue fell nearly 40% year-over-year, according to Ad Age DataCenter. Once a thriving agency brand that at one point was even named Ad Age 's global agency of the year, Tribal's recent stumbles are hard to ignore. They're not isolated either. Agency.com, an early Omnicom digital agency acquisition, foundered after its integration with TBWA and, most recently, folded entirely.

Omnicom's Organic , too, is U.S.-only and has seen declines. Annual revenue dipped almost 5% to $123 million, while peers at other holding companies continued to grow. There are bright spots. Proximity Worldwide, part of the BBDO network, is one, with double-digit growth both in the U.S. and abroad to amass $504 million in global revenue. Critical Mass, too, has grew 20% to $116 million in global revenue last year. But, all in all, Omnicom lacks the breadth of shops that can compete with the big digital behemoths within WPP or Publicis Groupe .

LBi is not a surefire solution.

With under $250 million in reported 2011 revenue and $22 million in net profit, LBi's reported $580 million price tag is in line with revenue multiples on recent deals like AKQA or Publicis Groupe 's acquisition of Rosetta last year.

But LBi makes much of its money in Europe, a region suffering from uncertain economic times and stagnate ad spending. Not to mention that LBi's creative reputation lags far behind that of AKQA, which WPP recently acquired for an estimated $540 million on $189 million in 2011 revenue. Its client roster includes Sony, Neutrogena, Macy's , Puma and Volvo.

Outside its ties to the Euro Zone, which is expected to see a slight decline in ad spending in 2012, according to ZenithOptimedia, LBi has been growing in the U.S. despite little brand recognition in the market. Annual U.S. revenue grew 16% in 2011 to $53.5 million, according to Ad Age DataCenter.

The network also has 16 offices, including outposts in growth markets such as Brazil, India and China, as well as youth-marketing hotshop MRY, previously known as Mr. Youth, which LBi acquired for about $40 million late last year.

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