GLOBAL RANKINGS 2001: USA - Handle with care. Dot.com demises, changes in the White House, and mergers within the industry have all impacted markedly on the US PR industry. The future still looks bright, but caution is the watchword. Adam Leyland reports

'Anyone with a pulse made money in hi-tech,' Hoffman chief

executive Lou Hoffman once remarked in the dot.com-dizzy days of 1999

and 2000. Not any more. The palpitations of the PR industry were almost

audible in the first quarter of 2001, as the Nasdaq plunged, and

dot.coms died, leaving a trail of unpaid debts. One CEO admits - on pain

of anonymity - that his agency was left with $3m of unpaid bills

from crestfallen clients.



For a few tense weeks, the US economy almost ground to a halt. Since

technology has done so much to drive the US economy (and now accounts

for more than 40 per cent of PR agency billings), the repercussions of a

tech slowdown were felt far and wide. New business pitches dried up

almost completely.



In recent months, some of the tension of those early days in 2001 have

disappeared, and marketing plans have been taken off ice. Some had been

trimmed, others cut dramatically, others simply continued - after a

brief hiatus - as before. But the aftershocks from this sudden calamity

are still being felt.



There has been waves of layoffs. Ogilvy PR, which had embraced the

dot.com fraternity with great passion, has been among the hardest hit.

CEO Bob Seltzer had hoped to get the pain out of the way when he

announced 70 layoffs in February, but on three separate occasions since,

he has been forced to make further cuts.



Almost all agencies have made layoffs in the past seven months, with

tech specialists and tech practices bearing the brunt. Among the

specialist hi-tech agencies, two high-profile acquisitions from last

year - Middleberg and Cunningham - have received particular attention

because of the high multiples paid (by Euro RSCG and Incepta

respectively), but there isn't a hi-tech agency that hasn't lost clients

and staff.



Although hi-tech has borne the brunt of the cuts, it is by no means the

only market that has been hit by the downturn. Among the Top 10

agencies, Weber Shandwick Worldwide, Hill & Knowlton, Burson-Marsteller,

Edelman, GCI and Porter Novelli have all gone through at least two

rounds of cuts, and not only in their tech practices. Others, such as

Fleishman-Hillard and Ketchum, admit only that staff counts have

decreased through natural attrition. Many agencies claim to have used

the downturn to rid themselves of under-performing employees.



Aside from tech, IR agencies - another expensive acquisition target for

global agencies in the past two years - are also feeling the pinch, now

that the IPO market has all but disappeared. There's still M&A work

(bargains abound in corporate America) and crisis work, of course, but

easy it is not.



'Caution' is the watchword in almost every market. The healthcare market

is the closest thing to a recession-proof sector, especially thanks to

the return to power of a Republican president (Al Gore had promised to

wage war on drug prices). And with power in the Senate dramatically

returning to the Democrats after Vermont's Republican senator Jim

Jeffords switch to independent status, the public affairs industry has

received a boost, as rubber-stamping of Republican legislation has given

way to the need for consensus-building.



Indeed, despite the tech troubles, it would be wrong to suggest that the

US PR industry is about to implode. A survey by the Council of PR Firms

found that member agencies had revised forecasts down from 30 per cent

to 11 per cent. This is a fraction of the 32 per cent growth enjoyed by

the US PR industry in 2000 (and the 28 per cent growth in the previous

year), but it's growth nonetheless.



Kevin Sullivan, Lehman Brothers V-P and equity research analyst, says

the PR slowdown is to be expected as tech and dot.com firms were major

users of PR. But he adds: 'The growth rate of PR is still much higher

than traditional advertising. We're now seeing a return to a more

reasonable growth rate in PR. I expect high single digits, rather than

the double-digit growth of recent years.'



Contrary to appearances, there is new business to be won. The situation

for Ogilvy PR perfectly illustrates the contradictory nature of the

current market. In the first four months of 2001, it won more new

business ($29m) than in the corresponding period last year. The

problem for Ogilvy has been that as fast as it's won business, it has

not been enough to account for the loss of dot.com clients who went out

of business.



Not surprisingly, the pace of acquisitions has slowed somewhat, but

consolidation continues. In 2000 there were 60 domestic agency

acquisitions. In the first six months of 2001, there were 24.



Michael Lasky, a partner at M&A specialist law firm Davis & Gilbert,

says: 'I'm finding the acquisitions market still very strong. There are

fewer independent agencies left, but those that are attractive (defined

as strong growth rate, over 20 per cent profit margins), are highly

sought-after by buyers. It's a smaller pool, but it's generating similar

levels of activity.' Interest is being led by foreign holding companies

such as Incepta, Publicis and Havas, but Richard Edelman, chief

executive of Edelman - the only remaining Top 10 independent - says: 'I

get calls from Interpublic and WPP all the time.'



Healthcare firms are a favourite buy at the moment. Noonan/Russo was

bought by Havas earlier his month; Matthews Media was snapped up by

Omnicom; while Hill & Knowlton bought Promarc.



Lobbying and public affairs groups are also popular. Ketchum bought The

Washington Group in January; California public affairs shop Deen + Black

is now under the wing of Ogilvy; Texas public affairs shop Read Poland

was bought by GCI, and DC-based Greer Margolis was a F-H purchase.



Celebrity/ entertainment shops such as Bragman Nyman Cafarelli and

Huvane Baum Halls also hold an evident fascination for PR agencies,

having been snapped up by WSW and Pat Kingsley's PMK respectively.



Despite the downturn, Lasky says tech agencies continue to create

interest. 'Healthcare firms and IR specialists are the most attractive

types of agencies, but tech is still an important market. Particularly

tech agencies that are working for Fortune 100 companies.



That's where the tech growth is now - providing support for the

blue-chips.' Tech agencies that have fallen under the hammer in 2001

include Texas-based Springbok (bought by Cohn & Wolfe), Chicago-based

CTC (by Ketchum), Campbell, CA-based Tsantes (by Porter Novelli), and

Boston-based LNS by Chime.



While there has been some interest in the IR market, as Lasky notes -

including Fabianne Gershon and The Hudson Stone Group, both bought by

Publicis; and Pondel Wilkinson by MS&L - the focus of attention in the

IR market has moved away from US-based IR agencies toward UK and

German-based IR capabilities.



Lasky also sees interest in agencies closely related to PR, such as

management consultancy and employee communications: 'Agencies keen to

offer a wider palate of services to their current clients are eager to

buy these capabilities.'



But these deals have been dwarfed by what has been taking place at the

top of the tree in recent months, as a new breed of acquisition-fuelled

global giants have slugged it out for the top global agency spot in the

table.



When F-H overtook both the old global behemoths - B-M and H&K - to

become the largest agency in the world last year, with revenues of

$343m, it signalled the end of the old guard's domination of the

global PR agenda, and was seen as the crowning achievement for chief

executive John Graham after more than 30 years with the company.



Even the $335m merger of Shandwick International and Weber Public

Relations Worldwide in late September last year (a move designed by

chief exeuctive Larry Weber to become the top agency in the world and

'own the bully pulpit') was not enough to topple F-H from the top of the

tree - though the agency was aided by the $40m revenues of global

public affairs agency GPC, a sister Omnicom agency which was merged into

F-H at the start of the year.



Undeterred, however, Weber has quickly fought to regain the upper

hand.



Following the IPG acquisition of True North, Weber dreamed up a merger

with BSMG, under the direction of BSMG chief executive Harris Diamond,

which creates a PR agency with income of more than $500m, with 74

offices in 19 countries and more than 4,000 staff.



While it would be easy to see these games as a battle of egos, this

massive consolidation and global expansion of PR agency capacities comes

at a critical time for the industry as a whole. PR is the last-remaining

marketing discipline to go global, but with the downturn in the economy

has come a fresh determination among corporations to examine the

potential of global PR deals.



A recent RFP issued by IBM for its global PR business seeks to reduce

the number of agencies it uses from 50 to a mere three, and its radical

consolidation is seen by many as a potential bellwether for the fate of

global PR agencies.



Reportedly, several other Fortune 500 companies are watching IBM's moves

with interest (Overview, p3).



It's in anticipation of consolidation on this scale that has encouraged

advertising holding companies like Interpublic, Omnicom and WPP to fund

dramatic global expansion plans for a host of new-generation global PR

agen-cies such as F-H, GCI, Ogilvy, Ketchum and MS&L.



The question posed by the first $500m agency must be: 'Just how

big do you need to be?'



TOP 20 AGENCIES OPERATING IN THE UNITED STATES

Rank Agency Name USA Income (USdollars)

00 00 99 % chg

1 Fleishman-Hillard1 266,831,000 181,151,558 47

2 Weber Shandwick Worldwide3 219,184,449 179,341,485 22

3 Burson-Marsteller2 182,259,000 164,851,000 11

4 Hill & Knowlton2 177,858,000 138,140,000 29

5 Edelman Public Relations

Worldwide 168,430,065 128,174,736 31

6 BSMG Worldwide3 147,380,253 122,062,663 21

7 Ketchum1 143,779,000 123,630,000 16

8 Porter Novelli

International1 135,888,000 106,606,000 27

9 Ogilvy Public

Relations Worldwide2 129,063,800 92,220,200 40

10 Golin/Harris3 107,905,495 74,199,020 45

11 GCI Group/APCO Associates4 87,520,051 65,511,811 34

12 Manning Selvage & Lee5 80,390,676 62,628,000 28

13 Incepta Group (Citigate)6 79,272,000 23,509,000 237

14 Ruder Finn 75,574,000 53,408,000 42

15 Waggener Edstrom 56,163,310 49,372,819 14

16 Brodeur Worldwide1 53,500,000 42,400,000 26

17 Cohn & Wolfe2 41,945,000 30,230,000 39

18 The MWW Group3 37,723,000 27,317,440 38

19 Schwartz Communications 33,185,571 21,043,233 58

20 Publicis Dialog7 32,646,373 23,505,716 39

Source: Council of Public Relations Firms Company notes: All companies

are independent unless otherwise noted. Ownership is noted by the

following legend: 1 Omnicom 2 WPP 3 Interpublic 4 GCI 5 Bcom3 6 Incepta

7 Publicis



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