"Anyone with a pulse made money in hi-tech," Hoffman CEO 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 corpsed,
leaving a trail of unpaid debts. (One CEO admits - on pain of anonymity
- that his agency was left with $3 million of unpaid bills from
For a few tense weeks, the US economy almost ground to a halt. Since
tech has done so much to drive the US economy (and now accounts for more
than 40% of PR agency billings), the repercussions of a tech slowdown
were felt far and wide. New business pitches dried up almost completely,
as best-laid plans were put on hold.
Tensions ease - but only a bit
In recent weeks and 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 wave after wave of
layoffs. Ogilvy PR, which had embraced the dot-com fraternity with as
much unbridled lust as any agency, 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 the agencies have made layoffs in the last 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
Although hi-tech has borne the brunt of the cuts, it is by no means the
only market that's been hit by the downturn. Among the top 10 agencies,
Weber Shandwick, 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
Many agencies have used the downturn to rid themselves of
under-performing staffers as the tables of supply and demand turned.
Aside from tech, IR agencies - another expensive acquisition target for
global agencies in the last 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.
Moving forward - with caution
"Caution" is the new 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 the defection of Sen. Jim
Jeffords (I-VT) from the Republican party, 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 troubles in tech, 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% to
11%. This is obviously a fraction of the 32% growth enjoyed by the US PR
industry in 2000 (and the 28% growth in the previous year), but it's
Kevin Sullivan, VP, equity research analyst at Lehman Brothers, says the
slowdown in PR is to be expected as hi-tech and the dot-coms were big
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 a decent amount of 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 ($29 million) than in the corresponding period
last year. The problem for Ogilvy has been that as fast as it's won
business, it's 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 specialists 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% 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, CEO of Edelman PR -
the last-remaining Top 10 independent - says, "I get calls from the guys
at Interpublic and WPP all the time."
On the rise
Healthcare firms are a favorite buy right now. Noonan/Russo was bought
by Havas earlier this 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 PA shop Read Poland was bought by
GCI, and DC-based Greer Margolis was a Fleishman-Hillard purchase.
Celebrity/entertainment shops like Bragman Nyman Cafarelli and Huvane
Baum Halls also hold an evident fascination for PR agencies, having been
snapped up by Weber Shandwick and Pat Kingsley's PMK respectively.
Despite the downturn, Lasky says hi-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." Hi-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
While there has been some interest in the investor relations 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, like
management consultancy and employee communications. "Agencies keen to
offer a wider palate of services to their current clients are eager to
buy these capabilities."
Big games at the top
But these deals have been dwarfed by what's been taking place at the top
of the tree in recent months, as a new breed of acquisition-fueled
global giants have slugged it out for the No. 1 global agency spot.
When Fleishman-Hillard overtook both the old global behemoths -
Burson-Marsteller and Hill & Knowlton - to become the largest agency in
the world last year, with revenues of $343 million, it signaled
an end to the old guard's domination of the global PR agenda, and was
seen as the crowning achievement for CEO John Graham after more than 30
years with the business.
Even the $335 million merger of Shandwick International and Weber
Public Relations Worldwide in late September last year (a move designed
by CEO Larry Weber to become the No. 1 agency in the world and "own the
bully pulpit") was not enough to topple Fleishman from the top of the
tree - though Fleishman was aided by the $40 million revenues of
global public affairs agency GPC, a sister Omnicom agency which was
merged into Fleishman at the start of the year.
Undeterred, however, Weber has quickly fought to regain the upper
Following the IPG acquisition of True North, Weber dreamed up a merger
with BSMG, under the direction of BSMG CEO Harris Diamond, which creates
a PR agency with income of over $500 million, with 74 offices in
19 countries and over 4,000 employees.
While it would be easy to see these games as a shallow battle of egos,
this massive consolidation and global expansion of PR agency capacities
comes at a critical time for the PR industry as a whole. PR is the
last-remaining marketing discipline to go global, but with the downturn
in the economy has come a new 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 public relations agencies. Reportedly, several other Fortune 500
companies are watching IBM's moves with interest (see "The Global
Dilemma," p. 17).
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
agencies like Fleishman-Hillard, GCI, Ogilvy, Ketchum and MS&L. The
question that the first $500 million agency poses: just how big
do you need to be?
TOP 20 AGENCIES IN THE UNITED STATES
Rank Agency Name Income (dollars) %
2000 2000 1999 change
1 Fleishman-Hillard (1) 266,831,000 181,151,558 47
2 Weber Shandwick Worldwide (3) 219,184,449 179,341,485 22
3 Burson-Marsteller (2) 182,259,000 164,851,000 11
4 Hill & Knowlton (2) 177,858,000 138,140,000 29
5 Edelman Public Relations
Worldwide 168,430,065 128,174,736 31
6 BSMG Worldwide (3) 147,380,253 122,062,663 21
7 Ketchum (1) 143,779,000 123,630,000 16
8 Porter Novelli
International (1) 135,888,000 106,606,000 27
9 Ogilvy Public Relations
Worldwide (2) 129,063,800 92,220,200 40
10 Golin/Harris (3) 107,905,495 74,199,020 45
11 GCI Group/APCO Associates (4) 87,520,051 65,511,811 34
12 Manning Selvage & Lee (5) 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 Worldwide (1) 53,500,000 42,400,000 26
17 Cohn & Wolfe (2) 41,945,000 30,230,000 39
18 The MWW Group (3) 37,723,000 27,317,440 38
19 Schwartz Communications 33,185,571 21,043,233 58
20 Publicis Dialog (7) 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.