Agencies Sweat As Clients Look Less Liquid

Media Sellers, Shops Brace for Possible Fallout From Canceled Buys

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NEW YORK ( -- When a top marketer such as General Motors Corp., the fourth-largest advertiser in the U.S., has its share price drop 31%, as it did last week, to $4.76 -- its lowest closing price since the 1950s -- and analysts sweat about its ability to generate enough cash to stay solvent into next year, media sellers and media agencies brace for any possible fallout that will leave them responsible for millions of dollars' worth of media time.

The tricky part is going to longtime marketing partners and suddenly saying you don't trust them to pay anymore and suggesting that maybe they'd like to pay cash up front. While GM's Mark McNabb, VP-premium channel brands, said no media outlet has asked his company to switch to cash-up-front status, agencies and media sellers are nonetheless doing what they can to limit their liability and avoid cancellations.

"If a client came in now that has been in the headlines wanting to do a deal to make customers feel good, you might ask for prepayment," one cable TV executive said. "But especially for an advertiser you've been doing business with for a long time, it's kind of an insulting question to ask."

"Logically, and unfortunately with categories like banking, you have to really work with your partners you've been doing business with for a long time," the executive said. "You have to try and weather the storm with them and give them as many opportunities as possible. But obviously we're running a business too, so you can only do so much."

One magazine publisher isn't yet asking for prepayment, although that's not because its clients are all in perfect health. "I don't think we're looking at anyone paying cash, simply because we are so loath to show distrust," the publisher said.

Not many cancellations
Most media sellers were already stepping cautiously, given conditions that were uncertain long before the Wall Street woes of September and October. The same may be true for marketers, who at the moment don't seem to be dropping out of ad buys any more than before. "Surprisingly, the cancellation rate has not increased in the last month," a magazine group publisher said.

As for TV buys, most marketers that bought fourth-quarter spots in the upfront can't cancel them now without having to still pay for them. Look for the first real fallout to come in 2009's first quarter, especially among financial, automotive, retail and travel marketers. "The first quarter will be really scary," said one media-agency executive, adding that it would be especially bad for TV. That's because sales of scatter, those ad spots the TV networks sell on a quarter-by-quarter basis, have already slowed down and rendered that inventory "dirt cheap" right now, the executive said, which may tempt marketers to drop their upfront commitments and switch to more-flexible scatter buying.

Media sellers are holding their breath to see if advertisers hold firm on their first-quarter commitments, one network TV executive said. Typically, marketers are supposed to firm up their orders in early October, but networks may grow more flexible because of the economic climate. "I think we'll see cancellations probably higher than normal," the executive said, while noting that cable and broadcast seemed to be weathering the storm better than digital and other emerging media.

And while media sellers are watching closely, media agencies are actively taking steps to avoid getting stuck with the bill.

"The big questions are going to be in the media arena. Those are the companies that are most exposed, because you are talking about huge sums of money and agencies committing on clients' behalf," said the CEO of a large creative agency. All agencies are being more vigilant, especially about accounts receivable. "We are looking at accounts that are overdue, and if clients haven't paid up in time, it's not just a finance person calling them; the CEO will call them up and say, 'C'mon!'"

"You really have to watch and endeavor to have clients prepay major expenses," a PR-agency executive said.

Delicate situation
Another agency is already asking "at risk" clients to pay up front through escrow accounts. But that strategy might be difficult to suddenly put in place with long-standing partners.

"You have to look at this client by client and look at the situation they're in and what are the payment terms you have," another media-agency executive said. "Everyone's going to be playing it close to the vest," said an agency hand. "You're a fool if you don't."

The current economic crisis reminds many of another bursting bubble. After the dot-com bust in 2001, most media agencies took steps to avoid being responsible for clients that might lose the ability to pay. Most moved to a payment standard known as sequential liability, meaning the agency was responsible for paying for media bought on behalf of a client only if they had already been paid for it. But most media sellers prefer "joint and several liability" payment terms, which allow them to hold both the media agency and the marketer responsible for money owed.

The changing terms mean media contracts have become increasingly complicated. One media agency's contracts went from just three pages in 2000 to up to 40 pages today. But even with all the extra language in there to protect agencies, in practice, vendors can force payment.

'Leverage game'
One media-agency executive said even with sequential liability, media agencies can still get hurt due to the fee structure most have.

For now, sequential liability "will be tested more," said one media-agency executive. "Imagine this: We lose a piece of business and go to a media seller and say the money's not going to come in. They say to us, 'We understand that's your problem, but we need to get something out of you guys or else we are not going to place your other clients.' It's a leverage game."

One executive at a major radio company said that media sellers never like to put media agencies in the position of being responsible for payments if they have not been paid by their marketer clients. "It's just bad for future business," the executive said. Ultimately, no one wants to sour a relationship with a major marketer, no matter how low its share price currently is. "The holding companies and large media sellers will go to great lengths to protect this relationship. I expect many to either ask marketers to prove credit or request cash up front in some cases. ... This will become much more magnified in the coming months."

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Contributing: Michael Bush, Jean Halliday, Andrew Hampp, Nat Ives, Rupal Parekh, Brian Steinberg

M&A activity won't be big, but it will abide

Unless the credit market loosens up, big corporate takeovers will be difficult. But watch for a flurry of smaller M&A deals as cash-rich media and technology companies look for bargains among start-ups running out of capital, and firms with depressed market valuations.

Who's got cash? Google ($7.5 billion), Microsoft ($23 billion) and IAC ($1.4 billion), along with some major publishers and broadcasters. CBS, for example, may be struggling with a 20% late-week drop in its stock price but was sitting on $800 million cash as of June 30.

"You've got companies with good management, cash on the balance sheet, making a product that's counter-cyclical," said Dennis Miller, a partner at Spark Capital, who said media has tended to be a popular consumer product during recessions. He said he expects to see a series of smaller, sub-$100 million deals.

Already the trend toward smaller transactions is playing out. According to analysis of third-quarter mergers and acquisitions by the Jordan, Edmiston Group, total transaction value is down 70% year to date, but the number of transactions is within a few percentage points of the same period a year ago, suggesting there have been more but smaller deals.

One M&A executive at a New York-based media company said just this past week he's had a half-dozen companies call him up to ask if he'd like to take a look.

There's reason to believe the trend will accelerate. Several major venture-capital firms spent good chunks of last week warning their portfolio companies they should close rounds soon, squeeze an extra several months out of current funding through internet cost-cutting measures and consider deals when opportunities arise.

The busier-than-usual M&A exec put it this way: "Even though a lot of these folks were around in first bubble, they didn't learn their lesson. Venture capitalists emphasized traffic growth and audience acquisition above revenue generation. Now you've got lot of companies out there that hadn't given any thought to selling ads or having subscription models. They're looking at series Bs, and the VCs have gone away, and there's no credit, and they have no mechanisms in place to make money."

Warren Lee, principal at Canaan Partners, said a half-dozen ad networks could be acquired, particularly those with unique technology and/or scale.

"Companies that have cash will be picking up ad networks cheaply in the next few years," he said, adding that his M&A contacts at IAC and Microsoft have been fielding more the usual number of inquiries from companies looking to sell.
-- Abbey Klaassen and Michael Learmonth
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