PR firm consolidation tends to occur in cycles. And while the next round of M&As may be more circumscribed and less lucrative than past ones, it appears a new wave is likely soon.Is the third wave on its way? There are signs it might be here. What wave? The PR firm consolidation wave, of course. According to one of the industry's most prominent bankers, a massive industry consolidation that began in the 1980s and stretched to early 2002 can be broken into two distinct waves. In a recent presentation on the future of PR agency M&A given by Abe Jones, MD, founding partner of marketing-services-focused investment bank AdMedia Partners, he asserts that the first wave kicked off in the 1980s. That's when marketing-holding companies and giant ad agencies bought several of the largest and most established PR firms. For instance, it was during this period that WPP bought Hill & Knowlton and Ogilvy, Omnicom bought Porter Novelli and Gavin Anderson, and Young & Rubicam snatched up Burson-Marsteller. This first wave of consolidation eventually ended with the economic recession of the early 1990s. The second wave then kicked off in 1993, stretched to 2002, and is perhaps better described as a frenzy than as a wave. According to Jones, since 1992, over 200 independent agencies across the globe were acquired by major holding companies. And by 2002, only one of the US' 10 largest PR agencies - Edelman - was independent. Yet by mid-2001, the industry saw deal-flow contract significantly. This culminated the first half of 2003, when only eight deals were executed. In past years, it wasn't uncommon to have dozens of deals over the same period. Jones calls this period the "big chill." So with talk of an economic rebound so prevalent, both within the industry and across much of the overall economy, is the market about to thaw? Will we see the third wave? "I think one is about to begin," explains Jones. "It's probably going to be less dramatic then either [wave] one or [wave] two because the major industry forces have already aligned themselves. But I don't think there's any question that there will be further consolidation, meaning more independents joining established networks." Indeed, there are at least some early signs that interest is coming back. The pace appears to have picked up, as 15 deals were executed between July and October of this year. And, in recent weeks, Omnicom has bought New York-based publicity shop Harrison & Shriftman, while it's Porter Novelli unit snatched specialty healthcare firm FischerHealth. A few weeks before those deals, Microsoft's AOR Waggener Edstrom grabbed consumer/ guerilla shop Maloney & Fox. A short time before those deals, the market saw some less typical transactions, including management buyouts of both Financial Dynamics from its foundering parent Cordiant and Minneapolis-based Tunheim Partners from GCI Group. Indeed, both of those transactions seemed to unwind boom-time deals that didn't work, which some might argue could be the harbinger of a new cycle about to come. There also appears to be some new non-industry players in the market, including some private equity investors, such as Lake Capital, which recently acquired Washington, DC-based firm Dutko, which Lake sees as a platform for further expansion in the public-affairs space. Nevertheless, Jones says that deal structures have changed from their heyday of the late 1990s, which was a strong seller's market. Price to earnings multiples (the metric by which most deals are valued) are down considerably from their peak. Meanwhile, agency principals can also expect to sign much more restrictive merger agreements that see down-payments falling to about 30% to 40% of initial valuation and earn-outs often stretching out five years. Principals are also expected to agree to more stringent non-compete agreements. And several areas of the industry continue to remain weak, namely IR, technology, and generalist shops. Yet, Jones feels there is still strength for some niche areas such as public affairs, healthcare (pharma/biotech), crisis management/bankruptcy, and consumer marketing (food and packaged goods). Despite the fact that it is now evident that several late 1990s deals did not work out as planned, Jones insists that in certain cases, buying is always going to make more sense than building. "Let's say you want to get into the government affairs or lobbying business," explains Jones. "That is a very clubby business of established companies with close ties to Congress and the executive branch. I think it will be a long and very expensive build to go out and hire people in that sector, instead of purchasing a firm that will instantly give you those connections, as well as a client base." ----- Trends in agency M&A What's Hot: Public affairs/lobbying; healthcare (pharma, biotech); crisis management/bankruptcy; consumer marketing (food and packaged goods) What's Not: Investor relations; technology; generalist shops Smaller down payments: 30%-40% of initial value Longer earnouts: Up to five years Source: AdMedia Partners
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