Consolidation?

In London last week the Editor in Chief of PR Week spoke at the PRCA conference and predicted a rash of acquisitions and mergers in the coming year. At the same time AdMedia Partners has produced its latest survey on prospects for mergers and acquisitions in the marketing agency space. This too points to a significant increase in the number of deals being done. The survey also suggests that more people are interested in entering the PR market.

There is also some news on the performance of the sector. The Council of PR today issued a release that talks about 2004 being “A ‘Bounce Back’ year that saw strong growth in many key indicators of health for the PR profession.” Sadly the release gives no further detail than that but it helps explain the growing interest in mergers and acquisitions.

Essentially the market ought to be wide open to consolidation. Deal terms for private firms are around six times profits. Given most of the major holding companies (Omnicom, WPP etc) are rated far above that by their respective shareholders and the cost of capital remains low then the opportunity for deals has to be significant.

So I guess the next question is who will be bought and who will be buying? We recently saw Incepta and Huntsworth merge. It’s widely expected that with the deal completed, the new company will sell off its non PR businesses to reduce its debt and improve margins. Given it doesn’t ‘need’ to reduce its debt that much this will open the door to them becoming buyers. It may also make them a cleaner target for others to acquire. Another firm that looks ripe for action is Chime. Incepta tried and failed to buy that business before merging with Huntsworth. The commercial logic of such a deal remains and it will be interesting if Martin Sorrell is prepared to let someone do a deal in the coming year (WPP holds a stake in Chime and it’s believed they blocked the deal with Incepta).

The usual suspects will of course be buying. By that I mean WPP and Omnicom. IPG would appear to need a little more time before it starts buying again. The same could be said of Havas. We should also see firms like Waggener Edstrom and Cossette out buying as they look to establish larger international businesses.

As for targets I suspect the market for specialists will continue to be strong. In particular healthcare and financial services agencies will likely get the most offers given it is expected these industry sectors are set to continue to show good growth. I also expect some larger deals to get done. As I mentioned I think the new Huntsworth, if it can rationalize itself, should be an interesting target for someone. I also wonder if someone like Waggener Edstrom may get bought. The founders of that firm don’t need to sell but at some point, their major client Microsoft may encourage them to take the plunge so they can start to integrate more of their comms activities.

It should be an interesting year in the PR world…