Can MDC succeed as the anti-network?

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Miles Nadal is becoming a fixture on the ad scene. The chairman-CEO of holding company MDC Partners can be seen around town lunching with independent agency chiefs, pitching his wares at an Interpublic shop he believes might be sprung from the beleaguered holding company, or holding forth to potential acquisition targets from the podium at an ad conference.

Anyone who has heard him in full flow knows Mr. Nadal is a natural-born salesman, but the fast-talking Torontonian, who now calls the Bahamas home, is still an unknown quantity to many in the marketing world. His company, depending on whom you talk to, is either a fast-growing home for today's hottest agencies, or a piffling financial play-it is less than 5% of the size of Omnicom-that happens to have made headlines by buying into Crispin Porter & Bogusky, and, last month, the Zyman Group.

Mr. Nadal is tireless-employees say he can call at any time of day or night with an idea-flamboyant, and more prone than his rival holding-company chiefs to displaying his wealth. During the Cannes ad festival he moors his luxurious yacht in the marina; he is said to give his two teenage daughters Berkshire Hathaway stock for their birthdays (he refuses to comment on this rumor), and, in Toronto, he helped fund a Jewish community center that bears his name.

The Canadian press has savaged him on several occasions for taking a healthy remuneration package for his role at MDC, even when the company itself was ailing. And, since he took it public in 1986, through a reverse merger of mining company Branbury Explorations, MDC's financial performance has been patchy.


Last week it finally announced results for 2004, following a couple of delays that were blamed on the more stringent reporting requirements the Nasdaq-traded company has to meet having recently become a U.S. registrant rather than a foreign issuer. The results? A loss of $2.2 million on revenue of $317 million, compared to earnings of $12 million on sales of $279 million in 2003.

The weak performance was blamed on one-time charges and increased corporate expenses, however, and the bullish Mr. Nadal sounded upbeat about the future. "We feel we are in the second inning of a nine-inning ball game," he told analysts during last week's conference call. "We are proud of our performance but still think there's a lot more to do." MDC is projecting earnings per share of $1.41 for 2005, an increase of 248% over 2004.

Opinions on MDC's potential to deliver in the next seven innings differ as much as opinions on its CEO. Some say the MDC model is operational genius, because it allows a smart entrepreneur to realize some of the value of his business, without losing that entrepreneur to an earn-out down the road. Others, and admittedly they are rivals, say it is operational suicide, because MDC's partial acquisition stakes don't give it full control of the businesses in its portfolio, which the other holding companies have tended to see as essential to turning a portfolio of agencies into more than the sum of their parts.

"Miles has positioned MDC as an attractive place for very creative people to work, an anti-network," said Mike Dolan, former chairman-CEO of WPP Group's Young & Rubicam, now a member of MDC's advisory board. The selling point to prospective acquisitions is its Perpetual Partnership (yes, that's trademarked) model, which basically guarantees that company founders will maintain equity in their firms as well as operational independence. Quips Mr. Dolan: "Miles has differentiated himself from the big chains by saying, like Bill Clinton, `I feel your pain.' "

MDC's purchase of 61.6% of the Zyman Group will likely prove key to the future of the group. It should allow MDC to tap into the expertise-and Rolodex-of its founder, a famous ex-Coca-Cola marketing chief and author of several best-selling business tomes ("The End of Marketing as We Know It"; "The End Of Advertising As We Know It"; and "Renovate Before You Innovate").

Not only does Zyman have a roster including ConAgra, Aspen Skiing Corp., MedTronic and Televiso, but it operates upstream of most ad agencies, playing a more strategic than tactical role. Mr. Nadal calls Zyman Group's staff "marketing practitioners, not theorists, with tremendous track records." He hopes buying the group will raise MDC's profile, and provide opportunities to cross-sell services between the Zyman Group and other MDC partner firms.

Zyman joins a group of 11 agencies, smaller and creatively driven, that have since early 2004 bought in to the MDC model. These range from Kirshenbaum Bond & Partners, New York, which sold 60%, to Canada's Zig and Bruce Mau Design, which both sold 50% stakes, to MDC's existing portfolio, which since 2001 has included 49% of Crispin Porter & Bogusky.

But the Zyman deal is by no means a certain home run. Structured as $52.4 million in cash and $11.4 million in stock, the Zyman acquisition is MDC's biggest yet, which makes it riskier. Said one industry observer: "It has to be right, and it has to be accretive." A positive for MDC is that management-consulting firms are typically very profitable, with margins far higher than ad agencies. The risk is that consulting is a project-based business, and its long-term success calls for rainmakers such as Mr. Zyman who can reel in clients. Under a multiyear succession plan that is part of the MDC deal, Mr. Zyman will transfer a portion of his shares to Zyman's management team, which will ultimately own 15%.

Since 2001, Mr. Nadal has striven to change MDC's performance and perceptions about the company. He has refocused on its core marketing-communications business-he says he will have fully divested the secure-products companies it also owns by the end of 2005 or early 2006-and has reduced long-term debt.

down the road

Last August he brought in Steve Berns, formerly of Interpublic, as vice chairman and exec VP to bring a new level of experience implementing financial controls, overseeing operational finance and expertise in dealing with capital markets.

"Miles, in many ways, has a bit of a blurry image. He's well known as flamboyant," said Rob Whittle, national president, Omnicom Group's DDB Canada. "His deals are great for their partners because they give liquidity. But from a long-term competitive advantage, what's the benefit to clients?"

MDC, counters Mr. Nadal, offers a group of creatively minded, cutting-edge agencies-there's always a reference to Crispin, rarely to some of MDC's lesser-known components, like Accent Marketing Services, or Accumark Promotions Group-linked by shared entrepreneurial spirit. He also notes that what many marketers want today is creativity and ideas rather than a massive global network with the attendant overhead.

Still analysts remain uncertain. Notes Nesbitt Burns' Jeff Tkachuk: "The majority of their growth in the past year has been bought. They've not had the opportunity to show how it creates incremental value. This year will be the validation of their strategy."

* Miles Nadal says his company is only in the "second inning of a nine-inning" game

* Promises company founders that they’ll maintain equity and independence

* Now must prove that MDC can grow business rather than just buy it

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