Direct marketing services consolidation heats up

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Acquisitions in the marketing services industry cost money-lots of it. From 2001 through the beginning of last year, client belt-tightening left few extra dollars for intra-industry purchases. But now, with the industry on the rebound, the number of acquisitions is on the rise.

In the first half of this year, there were 275 transactions in direct marketing and marketing services, with an estimated total value of $14.1 billion, according to investment banker Petsky Prunier. The number of deals was up 10% from the first half of 2003.

"The M&A environment for direct marketing, marketing services and marketing technology companies is as buoyant as we have seen it in years," wrote Mike Petsky, CEO of the direct marketing M&A firm, in an August deal note.

Still, it's more than just fattened wallets driving the latest wave of consolidation. Technology advances, operating efficiencies, private equity activity and efforts to accelerate bottom-line growth are other reasons why direct marketers and marketing service companies are gobbling each other up.

However, it's not a free-for-all. Industry insiders say the current consolidation has little in common with the "buy anything and everything" mentality of the late '90s.

"The people financing deals today are making sure the acquiring company has a plan that makes sense," said Vin Gupta, CEO of data giant infoUSA. "Sure, right now money is cheap with interest rates being so low; but if someone buys without a clear-cut strategy of acquisitions, they will be in trouble. It's more well-thought-out and makes more sense these days."

Some of the bigger deals so far this year include:

n Deluxe Corp.'s acquisition of New England Business Services (more than $700 million).

n Experian's purchase of CheetahMail (terms undisclosed).

n Ripplewood Holdings' acquisition of Shaklee ($310 million).

n Newport Corp.'s acquisition of Spectra-Physics ($300 million).

"I think part of what's happening in the direct business is an awful lot of marketers are saying what we're doing doesn't work anymore. So the agency networks are saying, `Let's look at what might help them or at where we might have a potential weakness,' " said Chuck Porter, chief strategist for marketing services company MDC Partners and chairman of ad agency Crispin, Porter + Bogusky. "When advertisers get skeptical, direct response gets hurt less than anyone else."

Another possible reason for buyouts is the continued uncertainty of the public markets. That is, companies that thought going public would raise significant capital may still be wondering about the risk. Petsky Prunier noted, for example, pulled out of its pre-IPO road show and instead sold to America Online for 3.6 times revenue, while well-known catalog brand Cabela's went public and got just 0.9 times revenue at its offering.

"Public markets offer the promise of super-charged valuations; however, the results are never as straight-forward as they appear," Petsky wrote, adding that values similar to those for companies that went public (such as Cabela's, Blue Nile and Intersections) could have been achieved through M&A transactions.

So what will happen over the next six months to a year in direct marketing consolidation? More of it, many experts agree. The latest trend shows more comparatively small acquisitions versus billion-dollar mega-deals. That's in part because this wave of consolidation is not about getting to some kind of critical mass.

"Big is not very important to marketers right now," Porter said. "The most important thing is fresh thinking and new ideas, and my hunch is the people who are looking to acquire just want different thinking."

Gupta predicts that as consolidation continues, the direct marketing services industry will eventually come down to five to 10 "decent-sized" players that will run the lion's share of the marketing services business. "The industry is getting more and more sophisticated in regard to technology, with Web marketing and e-mail marketing. A lot of old-time suppliers just can't compete," he said.

Some see the consolidation as a harbinger for the overall advertising industry. A recently released study by AdMedia Partners found that specialty marketing services will set the pace for industry deal-making, based on responses last December from 1,000 senior advertising and marketing executives. Forty-seven percent of respondents said they expected to be approached by a prospective buyer in 2004, compared with 39% who thought that in 2003.

The study also listed as the top reasons respondents gave for buying an advertising, marketing services or interactive agency: enhance revenue and add critical mass; improve profit margins; complement existing business; diversify line of business; and add new skills or services.

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