The Valentine's matchmaker

Last year was a bumper time for mergers in PR. As Valentine’s Day approaches, Tom Williams asks who is eyeing up whom for 2006

If you haven't sent out a Valentine's card letting suitors know you are 'available', you haven't got long. Your rivals could be days away from making a firm proposal and if you don't act now the apple of your eye could be canoodling with someone else. For buyer and sellers, the time for romance is here, and if 2006 is anything like last year, it could be a corker.

According to data supplied by Thomson Financial, the world of PR mergers and acquisitions has been increasingly frisky of late. Forty PR acquisition deals were announced in 2005, up from 36 in 2004. It is still way off the peak of 85 in 2000, but the strengthening market has certainly fired the imaginations of more bullish-minded PR firms.

'Traditionally a lot of business gets done in the spring,' says Rupert Ashe, founder of management consultancy Wall House Consulting, which acted as matchmaker on the £135m sale of healthcare shop Red Door Communications to marketing services group Creston last July. 'This is because both the buyer and seller want to complete after their accounting year ends and the seller will want to sell based on a recent set of results.'

So who is on the prowl and who will be their prey? PRWeek has done some totally theoretical match-making of its own (see the Love-o-meter opposite), but as speculative as that may be, analysts suggest that merger activity in the UK for 2006 will not be confined to the usual suspects.

The big marcoms groups – WPP, Omnicom and Interpublic – are the great octopuses, according to one marketing veteran, but while their tentacles are many, they are unlikely to be hauling much in – in the UK at least. Weber Shandwick owner Interpublic is more likely to be selling then buying after a restatement of the company's financial results last year led to a renegotiation of £250m of the company's loans. Omnicom, the group that owns Gavin Anderson & Co, and WPP (Cohn & Wolfe, GCI), remain acquisitive but their eyes are turning more toward the Far-East.

Newer groups, such as the aforementioned Creston and Engine made waves in the UK last year. Engine (formerly WCRS) acquired AS Biss & Co and Slice in October and both groups are making encouraging noises about further growth in 2006 (see box).
However, the more established players have not lost their touch – Britain's PR grandees are still active in the M&A market. Huntsworth CEO Lord Chadlington admits he is bedding down last year's acquisition of Incepta, but Chime Communications founder Lord Bell says: 'We are particularly interested in people with clients that we can cross-sell over the whole of Chime – that is what our business is about.'

Numis Securities media analyst Lorna Tilbian, who is house broker to both Chime and Huntsworth, is more blunt. She points out that however coy Bell and Chadlington may be about future acquisitions, neither will ignore a good opportunity in the increasingly attractive areas of public affairs, healthcare and technology. 'If you can offer them a well-run agency with growth potential in these practices, they'll buy it,' she says.

Opportunity knocks
Sellers might also look across the channel to the Gallic charms of Manning Selvage & Lee owner Publicis Groupe. Last September Publicis bought half of high-profile consumer firm Freud Communications, and has increased its stake in MS&L's financial offshoot Capital MS&L to a majority holding. The group has also been tipped as a possible buyer for another City firm, Financial
Dynamics, whenever venture capitalist Advent International, which bought FD in 2003, decides to sell.

Identifying the industry's lonely hearts is more difficult. No one wants to appear in any way desperate; agency bosses would rather hedge their bets and 'never say never'. For example, Mike Mathieson, who set up branding entertainment specialist Cake in 1999, says he has 'no desire to sell', but adds: 'That doesn't mean we haven't been approached.'

However, if you play hard to get, you risk being left on the shelf. Some industry observers suggest that Firefly Communications, the tech shop run by husband and wife team Claire Walker and Mark Mellor, should have been sold off at the height of the dotcom boom.
However, Walker retorts that the industry is 'unhealthily obsessed with selling out'. Selling Firefly through the industry-standard agreement – a three to four-year earn-out – 'would have been disastrous', she says. Earn-outs involve an initial downpayment to the sellers followed by payments based on the firm's performance in subsequent years. Meeting those targets in the maelstrom that followed the dotcom crash might well have proved fatal.

Taking the plunge, Walker says, is something that needs to be seen as more than merely an opportunity to make money. Lord Chadlington, for example, sees acquisitions in terms of 'people in their 30s who run good businesses' joining his company. He is not
interested in buying a business whose principals then walk out. 'As in any form of seduction it takes a lot of discussions,' he says.

But now accountants and taxmen could spoil the PR industry's M&A romance. While buyers have traditionally secured  deals with the promise of earn-out goodies, the introduction of international accounting standards (IAS) and changes in tax treatment could change all that.

Creston certainly has suffered under the new rules. In its interim results for the six months to 30 September the group revealed that new IAS rules (which meant Creston had to recalculate the price of an earn-out deal) had cost it an additional £608,000.

'This is an issue that is weighing on buyers' minds,' says Results Business Consulting senior corporate finance partner Keith Hunt. 'Perhaps they will look at different ways of structuring the deal. They could, for example, just buy 49 per cent of the company.' Adopting such a structure means a buyer would not technically own the firm and could therefore avoid taking on the accounts and liabilities of the new business.

An ideal mate?
All this, of course, assumes that suitors can find their ideal mate. As Pembridge Partners founding partner Mark Adams points out, the market is no longer so conducive to the big-ticket tie-up.

'It is not just a case of Company A buying Company B any more,' he explains. 'It is often Company A setting up a practice with a team poached from Company B. This is symptomatic of the fact that there are not enough agencies to acquire in the market.'

And there is another concern that is being aired in some quarters: that mergers do not always work. 'Acquisition is a very dangerous way of obtaining growth,' says Numis's Tilbian. 'With organic growth you steal the business, winning it from the competition – with acquisition you pay through the nose.'

It is generally accepted that only one out of three mergers is successful. Tilbian suggests, more alarmingly, that the figure is 'more like one out of ten'. PR, she adds, is no exception.
So perhaps the best way for PR agency owners to secure their future is not to cast envious eyes abroad, but concentrate on growing the relationships they already have. After all, a little kindness at home around  Valentine's Day can go a long way.

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