M&A outlook for marketing firms robust

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Nearly 90% of senior marketing and advertising executives expect either to approach someone or be approached about an M&A transaction this year, while just less than half of the executives expect to complete at least one deal either as a buyer or a seller, according to a recent survey by media investment bank AdMedia Partners.

The survey, conducted online in December, took the pulse of about 320 senior executives at advertising, marketing services and Internet marketing firms to get their take on prospects for industry mergers and acquisitions.

Although 87% of respondents expect to approach or be approached about a deal this year, in some respects the appetite for deals this year is not as hearty as it was in 2006. For instance, 58% of respondents said they expected to approach someone about a prospective acquisition this year compared with 64% of respondents in 2006; 51% said they expected to be approached about a deal this year, compared with 60% in 2006.

Gregory Smith, a managing director of AdMedia Partners, said the decline was immaterial. The bigger question, he said, is "whether there are a sufficient number of quality [media] assets with critical mass" to attract buyers.

Smith did note an uptick in interest and activity involving digital and interactive properties.

Median multiples of operating profits for advertising agencies have held steady in the 5 to 5.5 range since 2004. However, multiples for interactive marketing companies have grown from 6 in 2004 to 8 this year, according to AdMedia Partners.

Integration challenges

While interactive marketing companies might fetch higher prices, business media executives said there is a significant gap between buying Web-related companies and integrating them into larger enterprises.

"I looked at a number of Internet firms last year and found that they are not easy to acquire," said Cam Bishop, president-CEO of Ascend Media. "A lot of these guys have visions of grandeur and they are very independent, which is a bit of a different profile than the traditional b-to-b properties that folks like us tend to buy." Nevertheless, Bishop said he will continue to consider both online properties and traditional b-to-b properties as possible acquisition targets.

Another industry executive, who requested anonymity, said that pure-play Internet companies sometimes get lost in the translation. "There are a number of people who have tried to buy b-to-b pure plays online but have found that it's hard for them to get much scale," said the executive, who has been quite active on the M&A front.

"We're telling our clients that this is an excellent time to sell," said AdMedia's Smith. "Buyers are liquid, and both the strategic players and private equity companies have a lot of capital."

Eighty-five percent of respondents to the survey said buyers should act now, compared with 15% who said it would be better to wait; 52% said sellers should act now, compared with 48% who advised them to sit tight.

Said one respondent quoted in the study: "Buyers need to find the best-of-breed niche players to round out their service offerings, and the market of qualified experienced companies is getting smaller. Existing entities should hold off and enjoy significant growth this year."

According to the study, 17% of respondents said online video will be the top growth area this year, followed by search marketing (15%), interactive advertising (13%) and CRM (12%).

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