GLOBAL RANKINGS: United States - Dot-com demises, changes in DC,and, of course, mergers within the industry have all affected PR in theUS. The future still looks bright, but caution is the predominantwatchword right now

"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

crestfallen clients.)



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

and staff.



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

attrition.



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

growth nonetheless.



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

Chime.



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

hand.



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.



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