MERGERS & ACQUISITIONS: Was Sard Verbinnen a bargain at $150m?

It came as no big surprise when independent Sard Verbinnen was gobbled up last month.

It came as no big surprise when independent Sard Verbinnen was gobbled up last month. In fact, Incepta Group's purchase of the New York M&A specialist is just the latest in a string of high-octane acquisitions that have rapidly consolidated the IR sector over the past 18 months (see sidebar).

What struck even the most jaded industry veterans, however, was the $58 million price tag, which could inflate to $150 million over the next five years with earnouts. The deal was apparently based on an extremely high multiple - after all, initial reports placed Sard Verbinnen's fee income at just $13.8 million with profits of $2 million. Based on those numbers, the $58 million up-front sale price was 29 times the firm's pre-tax profits and more than four times its revenue.

Independents were reported to be rethinking their much-cherished autonomy.

'I thought the deal was just terrific: terrific for them and terrific for us,' says Richard Torrenzano of the New York-based IR firm Torrenzano Group. 'It changes the valuations in the industry. I would be happy to change my mind (on selling the business) based on this valuation.'

Mike Sitrick at Sitrick & Associates, the Los Angeles-based IR and crisis firm, was equally amazed. 'We hear from people all the time offering to buy our business,' he says. 'But, nobody has said 29 times pre-tax earnings.'

Father Christmas
Upon closer examination, however, a very different story starts to emerge.

In an exclusive interview with Incepta Group's David Wright, the chief executive insists that the multiples are in line with the industry norm, and he expressed his frustration at the focus on the pre-tax figures reported in both trade publications and the London-based Financial Times.

The confusion, Wright explains, is that the London Stock Exchange insists that when you announce a deal, you must report the pre-tax profits, which are calculated after paying shareholder bonuses.

'Private companies pay bonuses not dividends,' he says. 'If you strip those out, the multiple is eight times earnings. People must think I'm Father Christmas, but there's no way we overpaid for this business.

We expect Sard Verbinnen to make a contribution of $6 million this year.

For a company at a 30% compound, that's not a bad price.'

Wright believes that the investment will reap enormous benefits - for both sides. 'The fit is perfect from an operational point of view,' he tells PRWeek, and he boasts that 'this is going to blow the competition out of the water.'

In other markets, he explains, Incepta's Citigate Dewe Rogerson is a strong global player, with sizeable IR operations in London, Hong Kong, Singapore, Frankfurt, Dusseldorf and Berlin. And although it has a $12 million IR operation in the US, it was focused on transactions in Europe and Latin America.

'We needed a strong presence with the US banks, because although we were seen as the leading player in many world markets, without a domestic player in the US, we weren't taken seriously. With Sard Verbinnen, we've got that and more,' says Wright, explaining that Sard Verbinnen now outsources a lot of work that other CDR operations can handle, like advertising and shareholder identification.

'But the deal works just as much for Sard Verbinnen,' Wright insists, and not just for reasons of personal gain. 'None of the specialist domestic players in the US - like Kekst and Abernathy McGregor - can offer the international service that our network brings. We're the only ones who are putting the pieces together.

'Bear in mind, a lot of US banks need help outside the US. As George (Sard) and Paul (Verbinnen) realized, the financial markets have become much more international in scope. Every fund is invested out of the US, and stock migrates more than ever. You need to be international, particularly with a contested deal.'

Five-year plan
Of course, there are other factors at play that could impact the way this deal is eventually viewed, like anchoring Sard and Verbinnen to the agency for the long haul. Both are tied in to five-year deals, which will take them comfortably into their late 40s and early 50s, but some industry observers have expressed doubts about the long-term value of the operation when they exit.

'Whether you're talking George Sard, Paul Verbinnen, Joele Frank or Gershon Kekst - these are the people who built the businesses, and they are why an agency gets hired,' says Kay Breakstone, president of Ludgate Communications.

'If you're going to acquire a firm, you'd better make sure they are going to be around.'

Wright is unconcerned. He argues that there are a number of successful companies that still bear the name of long-departed founders. But in a veiled criticism of recent cash-only acquisitions like the Morgen-Walke/Lighthouse deal, he also believes the insistence on a deal that includes stock will lock Sard Verbinnen employees into the long-haul integration of the business.

'Forty percent of Incepta shares are owned by 40% of our staff. We believe in the importance of equity, because otherwise there's no incentive to bring in business for other parts of the company. In other recent cash-only deals, there's no incentive to work together.' That emphasis on stock involvement helps explain why UK-based Incepta is 'growing faster than any other quoted company in our sector,' Wright claims.

There are still some hurdles to overcome in terms of integration. The future of Citigate Dewe Rogerson's $12 million US operations remains unclear.

There has been speculation that Sard Verbinnen executives are violently opposed to consolidation of the business. But it is possible that the small M&A operation (run by Owen Blicksilver, a former colleague of Sard and Verbinnen at Ogilvy, Adams & Rhinehart), will be consolidated. 'It's a small team, with retainer income of $2 million, which will integrate very nicely. In fact, Sard Verbinnen wanted Owen to join,' Wright adds.

If the share price is going to be a factor in the successful integration of Incepta, there is still some work to do there. Following news of the acquisition on April 14, shares of Incepta's London-traded stock rose from $191 to $192, but they have since drifted down. At press time, Incepta's stock stood at $160, which is well below its peak of $289 in March.

As for the few remaining independents, maybe prices will come down once they read this story. One deal with a multiple of 12 to 14 times was allegedly pulled following the announcement of the Sard deal; don't be surprised if it's back on. And if David Wright is correct, it won't be just the price that counts.

Wheeling and dealing 

Company  Date Income Price Purchased by
Sard Verbinnen 4/00 $13.8m $58+m Incepta
RLM  3/00 $35m $35m Young & Rubicam
Morgen-Walke 1/00 $25m N/A Lighthouse
Financial Dynamics 8/99 N/A $65m Lighthouse
 FRB 1/99 $32.5m $40m BSMG Worldwide

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