I've noticed a few agency groups talking about hire freezes in recent weeks. Some have even gone as far as saying that they've frozen all pay reviews and promotions. I completely understand why they've done this as I know how important it is to make sure your staff costs don't get ahead of revenue in what looks likely to be a tough market. But these blanket approaches have a flaw in my mind. They essentially penalize the good people in an agency and potentially protect the weak. As we learned when the dot com bubble burst the good people in a firm are still in demand, though typically from clients looking to hire internally. If they do walk because you can't reward them or hire good people to support them then that leaves you with the potential to have an agency full of OK people and you know what that is likely to do - mean clients start to walk. This in turn creates a vicious circle which sees the agency gradually starting to die.
I wouldn't want you to get the idea that in times like this agencies should ignore the financial realities of life. Instead I'd argue that they pay greater attention to their talent and make sure the stars are well managed and appropriately rewarded and supported. Of course this may result in weaker talent being forced out more rapidly than in good times. On this I would say that creating a really strong team is something that should really be done in any climate. It's just that in tougher times it's easier to see its importance and it's more obvious when you fail to run the business in this way.
So I guess my message to all the really the good PR people out there who are frustrated by the hiring freezes imposed upon you, then please feel free to talk to any of our businesses. We will always do our best to hire even when times are hard. Having great talent with fresh thinking is a great asset to agencies and is what keeps them competitive.
Thursday, October 30, 2008
Thursday, October 23, 2008
Perfect Storm
Anyone trying to sell or buy a PR business right now is likely in for a tough time. The credit crunch, sagging share prices and a looming recession are all combining to make it harder than ever to get a deal done.
Let me take each of these factors in turn and explain my rationale:
1. Credit crunch - this is perhaps the most obvious problem in getting deals done. Asking banks for any loan right now is a challenge. Of course they will lend money but the real interest rates being asked have increased and the general terms of acquisition finance are a lot worse than they were six months ago. Add to this the fact that most public companies are trying to de-leverage their balance sheets and you have a situation where using debt to buy agencies has become less than desirable.
2. Sagging share prices - Public companies can usually raise money by issuing new shares to investors. Right now placing any new stock is difficult (if not impossible) and that stock will be placed at a very low price. This means they will have to issue many more shares than they would a few months ago to raise a similar amount of money. In short raising money for deals is both difficult and not terribly desirable right now. On the seller side, advisors will struggle to encourage their clients to take stock instead of cash for fear that current share prices will fall even further. Ironically they would likely be well advised to take this paper as stock prices are unlikely to remain at their current unrealistic lows forever.
3. A looming recession - conventional wisdom says that the best time to sell a firm and indeed buy a firm is when the economy is relatively predictable and moving up rather than down. This is because there is a greater chance a company will make its forecasts. In most cases if a company doesn’t make its forecasts then the people involved get a lower earnout which is clearly not good for them. However, the acquiring company is also buying a less valuable asset than it thought and that asset will deliver lower earnings. If the earnings of the acquired company are less impressive than that of the buyer then you end up with the buyer taking an earnings hit which in turns drive down their share price. In short nobody wins.
Of course some deals will get done and some of them will turn out to be good deals as not every PR agency does badly in a recession. Equally, there are firms like ours that have relatively strong balance sheets that can always accommodate the right deal. That said what is very likely is that much like the housing market right now, the majority of deals that will be done will be where people have to sell. We saw this in the last downturn and in that instance some excellent business that had some solvable but serious structural problems such as high cost office leases, or cash flow problems try and hold out for prices they would only see in the good times or simply wait too long before trying to find a buyer. Those businesses disappeared and the owners lost all the value they’d created. Others took what they could get. While these people may always wish they’d managed to deal with the downturn better they did at least get something.
These are interesting times for the agency world and its unlikely the current environment is going to change any time soon. So if your business is getting into difficulties you really should work to find a buyer now before its too late. A new buyer may well be able to solve the problems dragging the business down. Equally, if you or your management team is staring at the looming recession and thinking “I’m not sure if we have the energy to go through this again,” then you should also try and find an exit sooner rather than later. But if you have the energy and no real need to sell then don’t. Better times will come and you are likely to get a better deal. That said that requires patience and a great deal of confidence that you can keep the team you have now together through whatever is in store thanks to this wonderful new economy.
Let me take each of these factors in turn and explain my rationale:
1. Credit crunch - this is perhaps the most obvious problem in getting deals done. Asking banks for any loan right now is a challenge. Of course they will lend money but the real interest rates being asked have increased and the general terms of acquisition finance are a lot worse than they were six months ago. Add to this the fact that most public companies are trying to de-leverage their balance sheets and you have a situation where using debt to buy agencies has become less than desirable.
2. Sagging share prices - Public companies can usually raise money by issuing new shares to investors. Right now placing any new stock is difficult (if not impossible) and that stock will be placed at a very low price. This means they will have to issue many more shares than they would a few months ago to raise a similar amount of money. In short raising money for deals is both difficult and not terribly desirable right now. On the seller side, advisors will struggle to encourage their clients to take stock instead of cash for fear that current share prices will fall even further. Ironically they would likely be well advised to take this paper as stock prices are unlikely to remain at their current unrealistic lows forever.
3. A looming recession - conventional wisdom says that the best time to sell a firm and indeed buy a firm is when the economy is relatively predictable and moving up rather than down. This is because there is a greater chance a company will make its forecasts. In most cases if a company doesn’t make its forecasts then the people involved get a lower earnout which is clearly not good for them. However, the acquiring company is also buying a less valuable asset than it thought and that asset will deliver lower earnings. If the earnings of the acquired company are less impressive than that of the buyer then you end up with the buyer taking an earnings hit which in turns drive down their share price. In short nobody wins.
Of course some deals will get done and some of them will turn out to be good deals as not every PR agency does badly in a recession. Equally, there are firms like ours that have relatively strong balance sheets that can always accommodate the right deal. That said what is very likely is that much like the housing market right now, the majority of deals that will be done will be where people have to sell. We saw this in the last downturn and in that instance some excellent business that had some solvable but serious structural problems such as high cost office leases, or cash flow problems try and hold out for prices they would only see in the good times or simply wait too long before trying to find a buyer. Those businesses disappeared and the owners lost all the value they’d created. Others took what they could get. While these people may always wish they’d managed to deal with the downturn better they did at least get something.
These are interesting times for the agency world and its unlikely the current environment is going to change any time soon. So if your business is getting into difficulties you really should work to find a buyer now before its too late. A new buyer may well be able to solve the problems dragging the business down. Equally, if you or your management team is staring at the looming recession and thinking “I’m not sure if we have the energy to go through this again,” then you should also try and find an exit sooner rather than later. But if you have the energy and no real need to sell then don’t. Better times will come and you are likely to get a better deal. That said that requires patience and a great deal of confidence that you can keep the team you have now together through whatever is in store thanks to this wonderful new economy.
Tuesday, October 07, 2008
The reprice debate will be next
As stock prices drop, tech firms who for years have relied on stock plans to keep top talent will be forced to look at repricing stock options given to employees. Wall Street hates this practice but the reality is that most of the major tech companies (like most other major companies) have seen stock prices hammered. For example Cisco is down 45%, Microsoft is off 38% and Google has lost 54%. These are actually some of the better performing stocks. There are stocks like VM Ware that are down over 80%. Pu another way an employee that joined Google two years ago and was given stock at a $500 a share vesting price is now considerably underwater when only month ago they were in good shape. To make matters worse these staff will have paid taxes on these stock grants that are now worthless. Of course keeping people in this kind of market is easier than it would normally be but the market will improve at some point and when it does many companies will have lost a key long term incentive with which to keep people if they don't look at repricing their stock grants to reflect the new reality of stock prices. Will the bad news ever end?
Should anyone be launching anything this week?
Given the media is fully engaged either by the financial market meltdown or the US election (in this country at least), it could be argued that anyone planning to launch a new product or make any other significant news announcement right now, should look at waiting until things get a little calmer. Of course that's hard to do when you have sales teams wanting the new product to sell and or a channel doing the same. My thesis is that right now is a time when people are struggling to even pick up a newspaper or magazine given all the negative articles inside. Indeed I'd hazard a guess that at times like this circulations may well stay high but readership beyond the lead stories will be dropping like a stone. Of course this does make it a good time for companies to shovel out any bad news they have. For one it will get largely lost amongst all the other noise. It will also be measured against some of the unbelievably bad news that the banks are dishing out on a daily basis, which by default makes it not so bad. We live in interesting times.
Wednesday, October 01, 2008
Microsoft, Dell and HP lag while Apple again tops the chart in tech PR
In my recent poll asking who does the worst PR Microsoft got the most votes, closely followed by Dell and HP. Google and IBM fared well but as with my poll on who does the best PR, Apple came out top by receiving no votes. I think this reflects the feeling by many practitioners that Microsoft is something of a PR machine and that it is struggling to throw off its image as a lagging tech brand when compared with the likes of Apple and Google. Equally the HP brand has lost much of its charm now that Mark Hurd (its CEO) has shown that his mantra is all about driving the finances of the business and less about making HP a leader. Dell meanwhile continues to struggle to find a meaningful niche beyond being a place people buy cheap PCs and servers. In short I think the poll reflects the fact that people admire large successful brands BUT they want a certain visible level of positive leadership. This is where Apple and Google clearly score well. Put another way, the measure of who does the worst PR is really no different to who does the best.
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