What Rosetta Out of the Running Means for Last Big Digital Indie AKQA

Buyers Could Take Another Look at San Francisco Shop

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Now that Publicis Groupe is scooping up Rosetta, one of the last privately held digital agencies, one party to watch closely is AKQA. The General Atlantic-owned digital shop last fall was rumored to be on the block, but industry executives say potential buyers balked at the asking price, which at last estimate was pegged around $500 million.

It's been a busy two years on the M&A front for Madison Avenue's digital agencies. One by one, a number of shops -- Razorfish, iCrossing, 360i and Firstborn -- have all been acquired. Publicis' announcement this week that it will acquire Rosetta leaves San Francisco-based AKQA as the sole privately held shop in Ad Age DataCenter's ranking of the top 20 U.S. digital agencies by 2010 U.S. revenue.

Publicis CEO Maurice Levy has been vocal about the company's intention to capture 35% of overall revenue from digital services in the next years, and this deal brings him one step closer to that goal. The French holding company now owns three of the top 10 digital agencies -- No. 8 Rosetta joins No. 1 Digitas, which was acquired for $1.3 billion in 2006, and No. 4 Razorfish, which sold for $530 million plus media commitments in 2009.

As Mr. Levy continues to make high-profile deals to prep his company for what he sees as a digital future, it begs the question of whether his holding-company peers are feeling even more pressure than usual to step up their digital prowess. One holding-company executive told Ad Age he is bracing himself for the inevitable analyst calls that will ask: "What do you have planned?"

However, even with its stacked digital stable, Publicis is not that far ahead of the largest holding company, WPP, if one goes by stated revenue from digital advertising. WPP owns OgilvyInteractive and Wunderman, two of the top-five digital agencies in the U.S., according to DataCenter. It also reports 29% of 2010 revenue came from "direct, digital and interactive," up from 27% in 2009. While the figures include some direct work that is not digital, it's definitely competitive with Publicis' claimed 28% revenue from digital in 2010 vs. 22 % in 2009. Rosetta's $218 million in 2010 revenue brings Publicis' percentage up to 30%, Mr. Levy said during a conference call this week. (It's important to stress that across holding companies, these are self-reported figures and tough to confirm.)

"Publicis and WPP as early as 18 months ago said they will drive some percentage of revenue via digital, and they've done that through acquisition," said David Clark, managing director for investment bank Jordan Edminston Group. "Omnicom and Interpublic have not been as focused on that . ... Some that have less of a footprint in digital, like Havas or IPG, may be finding some pressure to do digital by way of M&A. But that 's related to being inactive in the M&A market rather than this particular deal."

"I would expect that you would see more deals coming out of this [Rosetta news], but the question is : How much is really available to buy?" said Linda Gridley, president-CEO of investment bank Gridley & Co.

That brings us back to AKQA. It remains to be seen if its private-equity backer General Atlantic will eventually use the newfound scarcity of independent digital shops in the market as prime time to renew the acquisition talks that were reported last year. At this point, however, the company says that 's not the plan. "The company is not for sale," said Anton Levy, managing director, General Atlantic. "We feel no near-term pressure."

But that also depends if any holding companies watching Mr. Levy are feeling any pressure. No. 2 holding company Omnicom has not made big acquisitions for years, but has closed a series of smaller deals for Communispace, Voce and Fanscape to expand the holding company's digital capabilities in consumer insights, analytics, and social media. It's also said to be investing in making its legacy creative shops, such as BBDO and DDB, more digital through education programs and fast-tracking digital executives. Omnicom has struck analytics and tech deals with digital-media companies Google, Microsoft, Yahoo and AOL.

Meanwhile, Interpublic is focusing efforts on improving the overall financial health of the company after stumbles nearly a decade ago. While it does not release its share of revenue from digital, it does count top 10 digital agencies DraftFCB and R/GA in its stable and has made smaller deals, including investing in now-hot digital shop Huge .

That leaves No. 7 holding company Havas as a likely candidate to at least take a good hard look at AKQA. Havas said it generated 19% of 2010 worldwide revenue from digital; while that 's up from 16% in 2009, it still trails its bigger peers. After taking a pass at the agency last year, we can likely count No. 5 holding company Dentsu out.

Last fall, General Atlantic was reportedly unable to find a buyer for AKQA, largely because of its asking price for the agency, according to one executive familiar with talks with Dentsu, the most likely buyer at the time.

Rosetta, too, had private equity backing from Lindsay Goldberg, which means, despite agency CEO Chris Kuenne being vocal about staying independent in the past, the company ultimately had one of two options: go public or sell. While Rosetta's $575 million price tag is competitive to what General Atlantic was asking for AKQA last year, some bankers point out that the two agencies are vastly different.

"It's always good for the industry when a good company trades at a good price," said Adele Morrissette, managing director of BMO Capital Markets' business services and media group. "But I think Rosetta is one of a kind and I wouldn't necessarily draw parallels between Rosetta and other agencies."

The agency's models are also vastly different. Rosetta claims a more consultative model, while AKQA is known for its high-end creative work and its new forays into digital-media buying and planning.

Regardless, what General Atlantic was reported to be asking for AKQA "remains a very large check and there are only a few buyers that can write a check that large," said Jordan Edminston's Mr. Clark. "With Publicis no longer wagging a big check around, it may make it harder for AKQA to sell."

That means holding companies or others interesting in buying their way into digital marketing may have to look to a new category altogether.

"The largest pure-play digital agencies, with the small exception of AKQA, are all gone," said Seth Alpert, managing director of investment bank Ad Media Partners. "You have to ask: What's next? An interesting place to look is newer integrated agencies that are part digital and part whatever else they're clients need. They can truly be AOR [an agency of record]."

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Contributing: Bradley Johnson

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