ANALYSIS: What does Edelman win or lose in an IPO? - Whither Edelman? It’s the question on the minds of many, and word is that Richard Edelman is mulling an IPO. Claire Atkinson breaks down his options

Richard Edelman appears to be standing at the center of a metaphorical Arc de’Triomphe, the Parisian monument and nexus of numerous major arteries which stretch beyond the horizon.

Richard Edelman appears to be standing at the center of a metaphorical Arc de’Triomphe, the Parisian monument and nexus of numerous major arteries which stretch beyond the horizon.

Richard Edelman appears to be standing at the center of a

metaphorical Arc de’Triomphe, the Parisian monument and nexus of

numerous major arteries which stretch beyond the horizon.



The job for the junior Edelman, president and CEO of Edelman PR

Worldwide, is to select a path that will bring his family’s business

into the next millennium on the most sound footing possible. He claims

he isn’t under pressure to make significant changes to his firm, but it

looks like Edelman is ready to make a move.



Perhaps he feels that the PR business has finally come of age and now is

the best time to take advantage. A spate of recent mergers and

acquisitions has piqued Wall Street’s interest in the marketing services

sector.



Abe Jones, managing director at New York-based investment bank AdMedia

Partners (brokers of Incepta’s purchase of Cunningham and J. Walter

Thompson’s purchase of Imagio), says the investment community can’t

ignore the PR industry’s stunning growth. ’Advertising is growing at 8%

a year, while PR is growing at between 15 and 20 %.’





Degrees of independence



So what are Edelman’s choices? He insists he won’t sell to an ad

agency-dominated conglomerate - he even refuses to go on dates with

prospective suitors. And for good reason: ’The Edelman family doesn’t

gain anything from selling out,’ says one agency CEO. ’They don’t need

the money, and Richard has made a good case for independence from the ad

agencies.’



The most obvious way of remaining independent is a public offering to

access cash for acquisition growth, and Edelman has said he’s seriously

considering it (PRWeek, July 31). Currently, there are no PR firms

publicly traded in the US, but it could be an intriguing play. Shares in

the Incepta Group (traded in London) have risen steadily lately, and

Text 100’s stock is also doing well of late.



Another impetus for an IPO is the envy of senior managers, who have seen

their peers at the likes of Cunningham, Cassidy, Sard Verbinnen,

Morgen-Walke, et al. sell out, and who want a slice of the action. ’For

his employees, there’s a lot to gain in some action,’ says the CEO.

’Unless they sell, or do an IPO, senior executives can’t cash their

chips.’ Young & Rubicam advertising chair/CEO Tom Bell also thinks

employee compensation is a major factor favoring an offering.



But there are numerous drawbacks to an IPO. First, the valuation

multiples for an IPO would be no where near as high as they would be for

a straightforward sale to an ad agency. Also, the financial markets

don’t appreciate PR firms as stand-alone units. Analysts would probably

place Edelman alongside billion-dollar conglomerates such as Interpublic

Group and Omnicom, which have much wider marketing services

operations.



A public Edelman would also be beholden to larger market forces.

Shandwick International CEO Scott Meyer remembers when his firm floated:

’Shandwick did it to raise capital and grow the network. Then the

economy took a dive, the share price dropped and Shandwick found itself

with a heavy debt load, and that affected its ability to raise

capital.’



’I think (an IPO) would be a smart move for Edelman in the current

economic environment,’ Meyer says, but adds, ’the biggest downside is

the completely unrealistic expectations of the financial community.’ And

would the urbane Edelman really wish to subject himself to the quarterly

demands of Wall Street?



One media industry analyst also has his doubts: ’The history of publicly

held client services firms is mixed. There is a school of thought that

says once you introduce an external figure into the client relationship,

there is the potential to damage it.’



Merrill Lynch media analyst Lauren Rich Fine seems to think Edelman’s

prospects would be good. ’If you’d have asked me six months ago, I would

have said the market is too focused on tech,’ she says. ’Now it is more

diversified. The question is do they need or want to be a public

company.’



Of course, Edelman can always just stay the course. ’They’ve done quite

well on their own. Why give up independence?’ asks Incepta Group CEO

David Wright. He warns that companies not in a global leadership

position are likely to be exposed to the cyclical nature of the

profession.



Is Edelman in a position of global leadership? PRWeek’s figures put them

fifth in the US and sixth on the global playing field, and its overseas

operations are ramping up. It acquired Swedish firm Infokraft in June

and in July bought the Rowland Company’s operations in Australia, Hong

Kong and London.’



Edelman believes the business needs to double in order to do an IPO, and

growth and diversification are big issues for Edelman. While its organic

growth record has been good, in the US it has been relatively quiet on

the acquisition front. Last year its only significant purchase was

Seattle-based Wham, and although Edelman has promised several

acquisitions in 2000, so far he’s only picked up issues-advertising

agency Callahan.



That said, Edelman plans to add a range of other consulting business to

the firm’s portfolio (like brand identity) and hopes to bulk up some of

the services currently being built, like Web consulting, issues

advertising, research and grassroots PR. He also hopes to expand to

Japan, India and Eastern Europe.



Edelman’s trump card in the investment community is its strong

management.



Booz Allen Hamilton’s Randal Rothenberg, who runs the firm’s

intellectual capital unit, says Edelman ’is an excellent firm and has

top notch management. That has helped put it on a growth

trajectory.’





Shack up or sell out



Edelman is not ruling out going into debt or bringing in a venture

capital firm partner. ’We’ve never operated on debt, but it’s an

option,’ he admits.



There’s no shortage of interest from firms like Chicago-based Frontenac,

which invested in the Lighthouse Global Network (recently sold to

Cordiant Communications). San Francisco-based private equity firm

Hellman & Friedman also has an interest in marketing services.



Patrick Healy, managing director of Hellman & Friedman, won’t say

whether he’s speaking with Edelman, but he’s bullish on the sector in

general.



’We think it is a highly attractive area. The broad demographics are

attractive, and it is a typically solid business. These firms generate

substantial amounts of free cash flow.’



But some PR firms have balked at entering relationships with private

equity operations. For example, Cunningham’s courtship with Frontenac

soured when it demanded control over the board. ’I’m not sure that

Richard would enjoy the strictures and interference of an outside board

any more than he would working with an advertising agency,’ says the

CEO.



It stands to reason that Edelman will have to swap some control in

return for serious growth prospects. Now the question is: is trust a

game it really wants to play?



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