Jury out on market's impact on M&As

Most observers feel that market turbulence is not likely to seriously affect industry acquisitions

Most observers feel that market turbulence is not likely to seriously affect industry acquisitions

As 2007 progresses, it becomes ever clearer that Wall Street's wild ride of the past few years is coming to a halt. The flood of easy money that financed the boom in private equity and hedge funds is drying up quicker than spit in the desert. Big lenders, spooked by a stagnant real-estate market and volatility in stocks, have pulled back on lending, sending the debt markets into tumult.

But while the business press has frequently spotlighted large borrowers moaning over the "credit meltdown," the effect on smaller industries like PR is still uncertain. Some within the industry fear that the crunch could have profound effects on how agencies and, especially, holding companies, do business. Analysts and financial players remain largely unruffled.

The most apparent area in which tighter lending could have an impact for PR is in M&A activity. If loans are harder to come by, the reasoning goes, agencies are less likely to get bought.

"Typically, a holding company that is designed to do acquisitions will... line up a certain amount of bank debt... but the bank will typically put performance criteria against those acquisitions," says Tim Dyson, CEO of marcomms holding company Next Fifteen Communications Group. "Inevitably with a tighter debt market, those performance criteria [will] get tougher. And I think that is going to make companies doing acquisitions essentially look for better deals, if they are going to do deals at all."

That tighter debt, coupled with equity markets that aren't especially rousing and doubt about the US economy's future direction, conspire to work against acquisitions, Dyson adds. The situation has not reached crisis proportions for the PR industry yet, but he believes that its effects will be measurable.

"It won't kill the market entirely, but I think it's going to inevitably push prices down a little," he says. "And it's going to make the due diligence process a little bit longer and tougher than it had been for firms who were looking to do deals."

A representative from WPP declined to comment. Interpublic Group representatives could not be reached for comment.

Many observers of the industry's M&A activity, though, believe that PR has thus far escaped the fallout of the debt markets.

Ted Pincus, MD of StevensGouldPincus, a firm that specializes in PR M&A services, says via e-mail, "The current credit crunch has had no effect on the growing M&A market for PR agencies, and we doubt it will."

The reason, according to Pincus, is that the credit crisis is isolated to three sectors of the economy: real estate, corporate mergers, and buyout deals that rely heavily on leverage. By contrast, he says, PR industry deals are much less leveraged; they will continue to be driven by fundamental strategic business needs far more than the ups and downs of debt availability.

His analysis is echoed by Phil Palazzo, MD at AdMedia Partners, the media and marketing-focused M&A advisory firm.

"In our sector, because the deals are smaller... the transactions are not as highly leveraged," he explains. "So getting financing for a $20 million or $40 million transaction in marketing services is a lot easier than financing Chrysler."

Though the constant drumbeat of endangered buyouts on The Wall Street Journal's pages can seem alarming, the fundamental difference in scope between those multibillion-dollar game changers and eight-digit PR acquisitions is immense.

James Rutherfurd, EVP and MD at the media-centric private equity firm Veronis Suhler Stevenson, says that credit terms for PR industry deals remain much the same as they were two or three years ago - so far.

"There aren't that many billion-dollar companies in the industry. There aren't that many even $500 million companies in the industry. And there are fewer still that are independent," he points out. "When you translate all of that, it shouldn't have a big impact."

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