For Holding Companies, Downturn Will Slow Already-Slow Deal-Making
NEW YORK (AdAge.com) -- Megadeals such as Publicis Groupe's buy of Digitas and WPP Group's purchase of 24/7 -- already few and far between -- are set to become even more of a rarity in the coming months, thanks to the financial-market meltdown.
Smaller agencies seeking to grow on their own are going to find capital scarcer, and they could be forced into the arms of a larger agency or a holding company. And along with the collapse of investment banks, most recently Lehman Bros. last week, the private-equity sector is growing more cautious. That means struggling shops could also increasingly show up on the doorsteps of strategic buyers such as Google and Microsoft.
"If you are a bigger company, there's probably not been a worse time to sell in a while," said William Blair & Co. analyst Troy Mastin.
"There are very few large deals out there in the marketing and agency space, but certainly any large deal requiring any significant amount of financing is very difficult to do today," said Bruce A. Eatroff, partner at private-equity fund Halyard Capital. Halyard last year helped launch Rapp Collins co-founder Stan Rapp's marketing-solutions company Engauge.
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"It's clearly a volatile period, but deals are still getting done," said Philip Palazzo, managing director AdMedia Partners. "Even with the Wall Street volatility [last] week, we have a number of deals that are still in progress that we expect to complete in very short order."
Indeed, deals may not come to a screeching halt, but most observers agree that given the unstable climate, inking them may take longer, with both buyers and sellers thinking twice and thrice before shaking hands. A key reason negotiations are becoming murkier is a growing buyer-seller valuation gap; pricing expectations have sunk over the past six to 12 months due to a slowing economy and a shrinking number of bidders.
"Clearly there are a lot fewer participants in any sort of option that might take place for an asset or an agency," said Wachovia analyst John Janedis, adding: "Private equity seems to not have much of an interest here any longer, at least for now."
Small and midsize agencies in areas such as interactive, search marketing and direct will continue to be desirable buys, observers said. "Strategic investors are in a much better position, at least as far a pricing is concerned, but the smart ones will not be looking to buy distressed agencies regardless of price," said Alan Gottesman, Consultant at West End Communications.
Along with the big holding companies, companies with cash and healthy stocks -- such as Google, which has zero debt and some $13 billion in cash, and Microsoft, which has zero debt and nearly double that much cash -- will have the advantage going forward.
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Contributing: Abbey Klaassen, Brad Johnson
What the meltdown means
For marketers ...For many package-goods marketers, the most recent financial turmoil probably doesn't make things any worse than they already were. In recent weeks, both Procter & Gamble Co. Chairman-CEO A.G. Lafley and incoming Unilever CEO Paul Polman called the current economic environment the worst they've seen in more than 30 years.
Procter & Gamble Co. Chairman-CEO A.G. Lafley