Chicago-based True North Communications was putting the final touches on its proposal late last spring to acquire Bozell, Jacobs, Kenyon & Eckhardt when–out of the blue–a suitor popped up for True North.
Meanwhile, True North’s target–the privately held Bozell–found it had another sweetheart. Omnicom Group, a New York-based agency holding company, made a series of last-minute attempts to buy Bozell.
It took weeks of wrangling before True North and Bozell could officially ward off their suitors and strike their own deal. Not that it stopped there: Even now, True North is trying to fend off a $28-a-share offer from its embittered former European partner, Publicis SA.
These kinds of fast and furious, last-minute backroom dealings for advertising networks are the proof of the advertising world’s latest slogan–go global and grow.
“It has to do with the increasing client requirements for global services,” said Alan Pilkington, president of DDB Needham Chicago. “And clients don’t have to wait anymore, because so many agencies are already there.”
Meanwhile, it is a conflict of interest for an ad agency to handle clients who compete against each other. The U.S. market has matured, leaving little room for growth without stumbling on potential conflicts. As a way around that, the industry in the 1980s went through a wave of consolidation in which holding companies bought up networks of agencies with offices in the U.S. and abroad. That way, a single holding company can use its various networks’ offices to handle accounts for more than one client in a particular industry without running into conflicts.
Clearly, the most sought-after accounts tend to be large, multinational clients on the order of a Procter & Gamble Co. or McDonald’s Corp., most of whom have already made alliances with worldwide agency networks. So holding companies now are looking for new areas of growth.
Which means more acquisition and consolidation.
“The bottom line is that you have to acquire to grow today,” said Skip Pile, head of Pile & Co., a Boston-based advertising consultant.
In the advertising world, the economics are quite clear. Wall Street investors want ad industry profits to increase by at least 10 percent a year. The problem is that advertising spending is growing only at a 6.6 percent clip worldwide.
“If conventional media growth is in the high single digits on a global business, Wall Street is asking for double-digit growth,” said Needham’s Pilkington. “The math doesn’t work.”
That leaves ad agencies scrambling, in some cases, fighting for acquisitions–just about any marketing-related company will do–in order to grow.
Witness the battles in the True North/Bozell deal, and last week’s announcement by Chicago-based Leo Burnett that it was buying a stake in hot London creative ad agency Bartle Bogle Hegarty.
And, industry analysts say, advertising agencies are fetching premium prices. True North’s $440 million stock offer for Bozell is considered high for an agency network that has a very limited international presence.
Burnett’s premium $50 million cash fee for only a minority stake in Bartle Bogle stunned Madison Ave. last week. The London agency has only $350 million in billings annually.
But Bartle Bogle was being hounded by just about every other agency network in the world, including True North at one time and many of Madison Avenue’s high-profile public agencies, sources said.
The fact that True North’s ex-partner, Publicis–True North’s largest shareholder–is now trying to gain control of True North makes sense to industry executives–even though the two never got along when they were first together. Publicis needs True North to grow and go global.
“There is an increasing requirement on the part of clients for global services and to avoid conflicts. And to build that network costs money,” said Pilkington. “The question is, at what cost and how long do you want to wait to build it? It’s extremely difficult. If your goal is to be big, you have to have multinational clients. And if you look around the world, most multinational clients are already well served.”
Thus, pressure is growing for companies to invest in non-traditional advertising operations, such as direct marketing, public relations companies, and new media marketing companies.
“The real growth in the industry is coming out of these (new marketing) companies,” said John Wren, CEO of Omnicom Group. “And that business has consolidated with the top tier of companies, and no one else.”
What’s more, the trend for the big clients, such as Procter & Gamble Co., has been to simplify their advertising/marketing campaigns. As Cincinnati-based P&G enters more and more foreign markets, it wants consumers in Warsaw to think about detergent in the same way as consumers in Cleveland.
To get there means paring its agency roster to only a handful of agencies that can handle its brands all over the world. In the last few years, clients consolidating with one global agency have overwhelmed the advertising business. In one of the biggest, 3M went from working with 35 worldwide agencies to one.
Procter & Gamble’s consolidation wasn’t as drastic, but it was swift. Earlier this year, it cut the number of agencies it employs to buy TV time and print space to two.
“It has been a growing trend for a while, and especially among the consumer products, financial and technology companies,” said Pile, who consulted with 3M on the consolidation.
For any agency just now looking toward a global network, it’s a difficult task, says Eugene Beard, vice chairman and chief financial officer for Interpublic Group of Companies, a New York-based marketing holding company. “You have to build one, and that takes time,” he says.
Clients also are showing a taste for more diverse approaches to their advertising around the world; that’s one of the reasons Burnett was drawn to Bartle Bogle, Burnett executives said last week.
Burnett, as a massive, $5 billion worldwide agency with major packaged goods brands that include everything from Philip Morris to Kellogg Co., believed that in today’s ad environment, it made no sense to hook up with an agency that mirrors its own network.
The two agencies couldn’t be more different. Burnett is known for its conservative style, relying on big brand icons, such as the Marlboro man and the Maytag repairman.
Bartle Bogle is known for its stylized visual imagery that shuns pitchmen and even dialogue in many cases.
But even as marketing titans are going with fewer, bigger agencies, some companies that spend huge sums on advertising are going the other way.
Inside the ad world, General Motors Corp. had been expected to choose one of its global agencies when it was looking for an agency in Britain earlier this year. Instead, GM stunned the agencies by picking a small, local ad shop that it thought had a clearer understanding of the local market.
“It goes back to us recognizing that things globally are changing,” said Jeff Fergus, European group president for Burnett. “If we wish to remain a global player in the long term, we can’t just play in one part of the market.”
So where does that leave the remaining ad shops in the United States? Likely, the smaller, hot agencies will be taken over by their big-name competitors.
Analysts predict that high-profile, but small, creative U.S. agencies, such as Minneapolis-based Fallon McElligott, which has landed big wins recently with United Airlines and Miller Brewing Co., and Portland, Ore.-based Wieden & Kennedy, known for its high-impact Nike work, will be the next targets.
Fallon McElligott chief Pat Fallon said last week that Burnett’s move was “smart” and not surprising. But he said he doesn’t feel any pressure to make a deal now, when his agency is booming.
“We talk to people all the time,” Fallon said. “But there’s no pressure for us to do anything.”
