AFTER THE HONEYMOON: The rush of global agency networks whipping out their checkbooks to boost agency line-ups shows no sign of letting up - but not all marriages are made in heaven. Chris Barnett investigates

There will soon be no major independent PR agencies left in the US. If this sounds like a rash statement, consider this. There are only three independents (Edelman, Ruder-Finn and Waggener Edstrom) left in the top 20, after a buying dash this year that has seen MWW, Morgen-Walke Associates and Cunningham become just the latest firms to be snapped up by global networks.

There will soon be no major independent PR agencies left in the US. If this sounds like a rash statement, consider this. There are only three independents (Edelman, Ruder-Finn and Waggener Edstrom) left in the top 20, after a buying dash this year that has seen MWW, Morgen-Walke Associates and Cunningham become just the latest firms to be snapped up by global networks.

There will soon be no major independent PR agencies left in the US. If this sounds like a rash statement, consider this. There are only three independents (Edelman, Ruder-Finn and Waggener Edstrom) left in the top 20, after a buying dash this year that has seen MWW, Morgen-Walke Associates and Cunningham become just the latest firms to be snapped up by global networks.

As the independents get fewer and fewer, their prices rise, illustrated by the amazing dollars 58 million that Sard Verbinnen (with revenues of dollars 14 million) commanded earlier this year. With all this money sloshing around, you'd have to be a fiercely independent agency owner to not have considered selling out and providing your loved ones with generations of financial security. But hang on a moment - is it really such a good idea?

It's not just giving up of your autonomy that could prove to be the sting in the tail of the multimillion dollar deal. Who you are selling to has important implications.

Robert Marston, chairman of independent Robert Marston and Associates questions the whole notion of PR agency owners sacrificing their biggest competitive edge: total candor and objectivity in counseling CEOs and senior management. When newly acquired PR execs are looking for ways to shave expenses, boost profits, hit mandated new business goals in order to reach their earn-out targets, Marston argues that clients are shortchanged.

He also believes advertising agencies will buy - and use - PR consultancies with large multinational clients as 'stalking horses' to forge a connection with a client CEO and eventually make a grab for the advertising account.

Even though PR profit margins are heftier than ad agency margins, the lower commission rate on a medium-size dollars 40 million advertising account still generates more income than a large - dollars 100,000 per month - PR account.

'Absolutely true,' says a senior advertising agency executive who asks not to be identified. 'It's an age old problem. Ad agencies buy other ad agencies to get their client roster, and that logic extends to PR agency acquisitions, but no one will admit it. A good PR firm has direct access to the client CEO and CFO because their work affects the stock price and the corporate reputation. Ad agencies don't have that same entree to the top.'

Ken Roman, retired CEO of the Ogilvy Group, says, surprisingly, 'all things being equal, independence is better. To the extent professional services firms are publicly owned, our ultimate objective is to produce shareholder value. You try to put the client's interest first, but at the end of the day you have to make some tough decisions.'

But the darker side of agency acquisitions isn't limited to purchases by advertising groups. Many PR agency owners who gave up their independence in the 1980s to large PR networks can see the downside with the benefit of a decade's hindsight.

Amanda Brown Olmstead sold her 16-year-old Atlanta firm to Shandwick in 1988 because she wanted to play on a bigger stage. 'I thought it would be exhilarating to be part of a large collaborative organization, and I saw Shandwick's worldwide program as innovative and bold,' she says.

But the honeymoon ended quickly when Shandwick's financial managers in London leaned hard on Olmstead to deliver a 25% profit margin before taxes on her fee income. 'I don't know how many of us achieved that regularly,' she says today.

What's more, her Atlanta office didn't see any of the new business synergies from the Shandwick network that were promised during courtship. In fact, she had to give up an account she had won in Atlanta because it conflicted with another office.

'I had to resign our largest account- Chick-fil-A - because of a conflict with McDonald's that was handled by Golin/Harris, the Interpublic agency in Chicago,' she says.

After seven years, Olmstead left Shandwick to reopen A. Brown Olmstead Associates as a strategic PR consultancy in Atlanta working with young companies.

'I don't need to be huge,' she says. At Shandwick, Olmstead was 'always under pressure to bring in business, bring in business, bring in business, and now it's all about great client relationships. It's tremendously satisfying.'



Lessons in love

Bob Dorf says he learned a horrendous lesson when he sold Dorf & Stanton to Shandwick in 1989: 'Don't sell unless you're ready to retire.' Dorf & Stanton was the eighth largest independent PR firm in the US with dollars 11 million in fee income, a 150 person staff and high profile clients including Ford, Sharp Electronics and PepsiCo. 'We had broken our backs to get big and able to go up against firms like Burson-Marsteller, we were being courted, and I saw the window being closed on the acquisition frenzy (of the 1980s).

Dorf says he got a cash buyout from Shandwick and a dollars 5 million check when the deal closed. 'I had no long term confidence in the Shandwick stock,' he says. But right after the check cleared, Dorf realized he sold his agency and his soul. 'I hated it within a few weeks - the oppressive, neo-Nazi financial management.'

Dorf pulled the ripcord 18 months after selling and gave up 'a lot of money' on his earn-out agreement to get out from under Shandwick's thumb.

He was at loggerheads with the parent over new business strategy. 'We use to be pretty fussy about who we'd work for, and Shandwick would say 'Just get it. Don't worry about the quality of the client'. Worse, when three of the agencies teamed up to sell a new account and won, even before we celebrated, there was bloodshed on who got how much of the monthly retainer.' Dorf now runs a venture capital fund in Stamford, CT.

Not every agency boss who sold in the 1980s is unhappy. John Casey, sold Casey Communications in Detroit, and he is thrilled with his Shandwick deal. But the former Detroit Free Press reporter and his wife ran an immensely profitable shop with pre-tax profits margins of more than 30%. Plus, he wangled an all-cash deal, a two year earn-out, pegged the payout rate 'back to the best year in our history and negotiated an ironclad contract that gave me complete control on the money.' Now happily retired, traveling the world and playing golf, Casey says, 'I have no ill will against Shandwick.'

Herb Rowland, who sold control of The Rowland Company to the London advertising agency holding company Saatchi and Saatchi in 1985, says 'the Saatchis never interfered with our operations at all. But then I would never allow my company to be subsumed under an ad agency - ever.'

Rowland's deal gave him the 'financial resources to fuel our expansion.' Over an eight year stretch, he built Rowland Worldwide into a 34-office, dollars 50 million powerhouse that he says was sixth largest in the world before 'budgets exploded' in the recession of the early 1990s. That's when Saatchi started to crumble and began 'dismantling' Rowland offices to cut overhead.

'I was never good at treading water and by 1993, I had enough of them, and they had enough of me,' says Rowland who's now 'between engagements' and dividing time between Palm Beach and New York. 'My only regret is that I didn't have time to better institutionalize Rowland Worldwide.'

The recession that crushed advertising and public relations agencies and budgets in the early 1990s drastically changed the mergers and acquisitions game, says Jack Bergen, president of the Council of Public Relations and a former president of Hill & Knowlton. 'From 1975 to 1991 - the first consolidation period - acquisitions were driven by the 'whole-egg theory',' he says. Ad agencies wanted to own PR firms and 'work alongside them to give clients integrated marketing solutions, but that didn't work. Other PR firms were bought by ad agencies to protect their advertising billings and client relationships,' adds Bergen.

Those were the dark ages for sellers. 'In some cases advertising partners even offered PR as a discounted service to win new advertising accounts,' says Bergen. 'It was a terrible time because ad guys were doing the mergers and accountants were dictating client service.'

Since 1997, many of the oppressive PR holding company management tactics that Marston and other practitioners railed against have diminished or disappeared, according to Bergen and other M & A specialists. Ad dollars have shifted into PR.

The industry is booming, influential and profitable, and combined with the growing stature of PR, there is arguably less financial pressure - for now.

Buyers today swear they aren't meddling and micromanaging the agencies they acquire. 'I am only buying proven, successful firms that either have a specialized practice or fill a geographic void in our network,' insists Tom Hoog, CEO of Hill & Knowlton, who sold his Denver agency to H&K in 1989. 'I have no interest in managing their operations because they've obviously figured out the formula for success, and I don't want to mess with it.'

Hoog, who's now looking for PR agencies with expertise in healthcare technology, says the old M&A strategy of 'take 'em over and destroy the culture' failed. 'My goal is to have minimum turnover on client account teams and deliver consistent client service to keep them happy and on-board,' he says. 'I want organic growth and will not push the envelope on profits.' He says that this strategy has helped Blanc and Otus, a San Francisco and Silicon Valley hi-tech PR firm, grow 200% since H&K bought it in February 1999.

Hoog's colleagues and competitors claim to be taking a more realistic approach to acquiring PR firms. 'I think it's pretty hard to push profit margins up to 30% in this tight labor market,' says Steve Conafay, CEO of the Americas East for Shandwick International. 'That's whipping kids pretty hard. And we won't force our sister companies to work with each other. You have to earn that honor.'

Conafay won't comment on the Shandwick's strategy before he joined, but now that the agency is owned by Interpublic, he says it's a brand new ballgame. 'We're not buying personal charisma (of an agency owner),' Conafay says. 'We want high-quality firms that fit strategically in our network.'

What's on his shopping list? Tech PR firm are his top priority, healthcare firms are second followed by government relations and IR firms. Interestingly, the lobbying shops do not have to be in DC where Shandwick owns the immensely profitable Cassidy Companies and Powell-Tate, the PR firm headed by former Carter press secretary Jody Powell. Conafay is on the prowl for PA/lobbying firms with clout and clients at the state level.

Conafay's boss, Larry Weber, who is in the process of grafting Weber-Shandwick as one IPG PR brand (Golin/Harris is the other), says he's targeting 'hyperpractice' independents with 'best of class' reputations. 'These firms have senior staff underneath the principal and margins of 15% to 20%.' For that caliber, he'll do flexible, customized deals that may include a 6x to 8x multiple and a five year earn-out. Adds Weber: 'There's no leaning on them for top-line performance.'



Loose rein

The M&A advisors, lawyers and accountants doing the deals agree that buyers are recognizing they must give sellers more autonomy and independence if they want a bottom-line payoff.

Dealmaker Abe Jones of AdMedia Partners, New York who sold Ketch-um to Omnicom and Benjamin Group to BSMG, says today's well-managed buyers today like Omnicom and Interpublic 'will work with their subsidiaries to set annual margins and growth, but they typically let the operators determine how to get there. But they do hold them accountable.'

He says ad agency chiefs have gotten a lot smarter about PR. 'Anyone owning a large ad network will be extremely careful about pushing an ad agency into the back door of the PR agency's client.' But he doesn't see the iron curtain between PR and advertising that some PR purists demand.

'Global branding assignments make integration more of a reality,' he says.

Jones, who was president of Foote Cone & Belding Advertising, now part of True North, confirms that PA, IR and technology firms are on most buyers' radar screen because of the 25% to 30% profit margins, and they'll command the higher multiples. Straight PR firms are generating 15% to 20% pretax profits.

A New York attorney, who mostly represents buyers, says his clients are looking at independent PR firms where a 'strong successor management is in place.' Brad Schwartzberg, a partner with Davis & Gilbert, who has done dozens of deals, says 'what you're really buying is relationships with their clients. The need is always to solidify client relationships.' If buyers get an inkling that top management has one foot out the door and there's no backup team in place, it would kill a deal or devalue the purchase price.

Okay, you've held out this long. Should you sell now that buyers are more enlightened and agency valuations are getting to be moonshots? Tom Gable, a former financial editor, who's been running his dollars 3 million (fee income) Gable Agency in San Diego for 25 years, says maybe. He's rejected two legitimate offers and 'three decent overtures' because the valuations were too low. 'It depends on the energy of the firm; where it's going, and if it will give me the ability to play in a bigger, more exciting arena.'

Ron Rogers, founder of 21-year-old LA-based Rogers & Associates, says he certainly wouldn't sell his dollars 10- million-per-year (fee income) firm to an ad agency. 'We get a lot of referrals.' But if he 'had 12 kids to put through college and wanted to retire tomorrow and live in Paris I might think about it ... but I don't.'



Time to get hitched?

David Weiner, a Roseland, NJ CPA and marketing services consultant, cautions against thinking a sellout isn't going to change your life. 'The buyer brings discipline to your business. You're not going to pay for your wife's car through the agency anymore. You're not flying to Tahiti and writing it off on the company. If you want to take on controversial causes and accounts, you'll need approval. And if the buyer overpays or underpays, there will be problems down the road.'

Rick Gould, CPA and partner in Gould Eisele Crombie, New York and an active advisor to PR firms, makes no bones about the pros and cons of being part of an international company today in the so-called second wave of PR agency consolidations.

'You'll have high-powered financial people looking at your numbers every month and looking over your shoulders,' he says. 'But today they want you to succeed and hit your margins so you get your earn outs and bonuses.'

Lee Levitt, one of the deans of PR industry deal-making who heads Levitt Management Consultants, says the PR business has totally changed in the last 10 years, but the complexities and subtleties haven't. 'I was with Benton & Bowles when our client, Crest toothpaste, was banned in Massachusetts because there were public health questions on fluoride,' he recalls. 'It scared the hell out of Procter & Gamble.'

Levitt prepared a press release explaining the facts on fluoride, but Benton & Bowles advertising people became terrified. He was told 'you can't say that because the client doesn't want to say that. Say nothing.' Levitt pushed for a response. 'They just didn't realize you can jeopardize the entire product line if you stonewall or play games with the press.'

Fortunately, when you cut a deal with Omnicom or Interpublic, says Levitt, 'you're not dealing with ad people any more. Everyone's gotten much more sophisticated. Ad people still don't understand us, but now we have real status within the communications industry as a whole.'

Next week: How much could you get for your agency? PRWeek helps you make the calculations and takes you through details of the negotiations.



ADVERTISING GROUPS SHOPPING FOR PR

PUBLICIS

Maurice Levy, chairman, says: 'We will continue to develop financial PR in the US and Asia.' Recent acquisitions Winner & Associates for dollars 7.3 m in April 2000; Saatchi & Saatchi (which includes PR agency Rowland Worldwide) for dollars 1.9 billion in June.



HAVAS

Jean-Michel Carlo, chairman and CEO of Havas' Diversified Agencies Group, says he is looking for an IR agency acquisition in the US. 'It will happen by the end of the year.' Recent acquisitions Middleberg & Associates for dollars 22 m in June 2000, through DAS; Kratz & Jensen; Capstone Comms; and ACG Comms in June 2000 for dollars 30.4 m.



WPP

Martin Sorrell, chairman, says: 'PR is as effective - and maybe more so - than other channels.' He expects WPP's non-advertising revenue to rise from 53% to 75% over the next few years.

Recent acquisitions Young & Rubicam (including Cohn & Wolfe and Burson Marsteller).

Competing for New York IR firm Abernathy McGregor.



INCEPTA

David Wright, CEO, says: 'We needed a strong presence with US banks because without a domestic player in the US we weren't taken seriously. In two years we expect to be earning more out of the US than anywhere else.'

Recent acquisitions Sard Verbinnen in April 2000 for up to dollars 150 m; and Cunningham Communications in July 2000 for a projected dollars 75 m.



CORDIANT

CEO Michael Bungey aims to increase North American share of revenues to 40% and the proportion of revenues from diversified marketing services (including PR) to 50% by 2003.

Recent acquisitions Lighthouse, including Morgen-Walke and Financial Dynamics, for dollars 592 m in July. Currently bidding for New York IR shop Abernathy McGregor.



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