Holding Companies Find M&A Expertise Easier to Buy Than to Build
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Holding Companies Find M&A Expertise Easier to Buy Than to Build

The year 2000 witnessed a frenzy of activity in the M&A public relations realm, one of the most exclusive and most specialized practice areas in the PR industry.

Paul Holmes

 

The year 2000 witnessed the greatest frenzy of merger and acquisition activity in the history of global business. The number of transactions averaged 200 a week, and the dollar volume of those deals was in excess of $2.5 trillion, more than double the previous record. And cross-border deals accounted for 41 percent of all M&A activity last year, up from 24 percent in 1996. Among the most notable cross-border deals: Vodafone (U.K.) acquired Mannesmann (Germany); France Telecom acquired Orange (U.K.); BP Amoco (U.K.) acquired Atlantic Richfield (U.S.); Vivendi (France) acquired Seagram (Canada); and Unilever (U.K.) acquired Bestfoods (U.S.)

The year 2000 also witnessed a frenzy of activity in the M&A public relations realm, one of the most exclusive and most specialized practice areas in the PR industry. The year saw a flurry of headline making deals—starting with Citigate’s acquisition of M&A boutique Sard Verbinnen in April and culminating with the purchase of Abernathy MacGregor by Havas in November—and the expansion of prominent U.K. firms into the U.S.

The activity has continued into 2001, most recently with the acquisition two weeks ago of Finsbury—a rising star on the U.K. M&A scene—by WPP Group. That deal underscored the continued interest of the top-tier holding companies in the high-level public relations business, as well as their apparent belief that M&A expertise is easier to buy than to build.

While some firms are selling, others are attempting to strengthen their international presence by expansion. Brunswick, which handled £148 billion worth of deals last year—tops in the U.K.—has opened an office in New York and recently added senior staff in an attempt to offer a genuinely trans-Atlantic service, and British PR holding company Chime Communications has been looking at high-end IR firms in the U.S. market.

But it’s the acquisitions that have attracted the most attention, and there are likely to be more, because there’s plenty of motivation for both buyers and sellers. 

“There are buyers in the market for businesses like ours,” says Charles Watson, chief executive of London-based Financial Dynamics, which handled more mergers and acquisitions assignments than any other firm in the U.K. last year. “They see the growth of the business, they see the margins, and they see the opportunity to get into client companies at the boardroom level. They are all intrigued by our type of business.”

While the mergers and acquisitions work is the most glamorous part of that business, British firms like Financial Dynamics and rival Brunswick tend to offer a broader array of services, including more conventional crisis communications, employee communications, and increasingly public affairs. In short, anything that will give its senior counselors a seat in the same room as the CEO.

Larger agencies such as Fleishman-Hillard and Burson-Marsteller get called in at that level all the time of course, but they have never been able to establish themselves as serious players in the M&A end of the business. Only B-M figures in the U.S. M&A rankings produced by Corporate Control Alert, and it trails the top four specialist firms by a considerable margin. In the U.K., Megamarket’s rankings for 2000 featured no full-service firms, and its rankings for the first quarter of 2001 featured only one: Hill & Knowlton, which handled just four deals in that timeframe.

Many of the larger firms continue to dabble in the M&A business, including B-M, H&K, Edelman Public Relations Worldwide, Golin/Harris and Ogilvy Public Relations Worldwide in the U.S., and Weber Shandwick Worldwide in the U.K. A couple have made recent investments designed to enhance their capabilities: BSMG Worldwide acquired U.K. corporate and financial specialist Square Mile late last year, and Manning Selvage & Lee this week announced an investment in a new London-based start-up. But the business is still dominated by independents, and seems to operate according to a different set or rules.

“It’s a referral driven business,” says Robert Mead, president of international IR firm Gavin Anderson & Company. “In marketing public relations, the corporate communications department sends out an RFP to all the usual suspects, or to firms that are well known with a particular sector. In this business, firms are hired on the basis of recommendations from lawyers and bankers, or in some cases executives you have worked with in the past. For the most part they don’t care about the firm you work for, or all the resources it has. They want an individual they have confidence in, who is going to make them look good in front of their client.”

James Abernathy, a founding partner at The Abernathy MacGregor Group, long a leader in the U.S. mergers and acquisitions arena, agrees. “People are looking to hire individuals, not agencies, in this arena. Most of the lawyers and bankers we deal with are comfortable using any one of a handful of people, but having a track record is incredibly important.”

The fact that the M&A PR business—particularly in the U.S.—is driven by the reputations of a handful of individuals (Gershon Kekst, George Sard, Joele Frank, and others) is what makes some of the acquisitions of recent years look like risky propositions. There’s a strong possibility that companies like Citigate are only renting talent, and at an exorbitant price. Clients will follow those individuals wherever they do, no matter whose name is on the door, and most have learned they can take home more money—seven-figure salaries are the norm, not the exception—working for themselves.

Still, the lure of a high-stakes, high-margin business like M&A public relations is too powerful for the giant holding companies to resist.

“We like the margins we can make focused on the premium end of the business,” says Piers Pottinger, chief executive of Chime unit Bell Pottinger, which tends to handle fewer—but larger—deals than some of its competitors: it coordinated the global announcement of the Daimler-Chrysler merger, for example. “We get to work very closely with the chairmen and CEOs and finance directors of the companies we represent, rather than with the marketing managers who are watching every dollar in their budgets.”

While Bell Pottinger is part of a larger company with access to capital to fund its expansion, smaller independent firms need to find partners if they are going to compete for global transactions—and almost all the largest deals have a global component. Even mergers between U.S. companies—AOL and Time Warner, for example, or GE and Honeywell—have to survive the scrutiny of regulators in the European Community.

Says Watson, “The reason companies are selling or expanding is because there is a compelling reason to do it: the globalization of our clients. Our U.K. clients are increasingly interested in the U.S. equity markets. We have to decide whether we want to be a nice player or a market leader. And we have always been a market leader.”

Tim Payne, who heads the New York office of Brunswick, agrees. “There’s an increasing amount of cross-border M&A activity,” he says. “There’s a more international media, a more international investment community, and more cross-border problems for clients to face. If you’re going to advise these companies you have to have the capacity to approach the market in a global way. I don’t think you need to have offices in Taiwan or Borneo, but you do need to be able to operate on a strategic level in the primary capital markets.”

 The perspective is similar from this side of the Atlantic. Says Abernathy, “There’s a demand for sophisticated financial firms to be able to accommodate the needs of clients in the major financial markets. That was one of the major reasons we sold to Havas.” Abernathy points to his firm’s recent work on Alcatel’s bid for Lucent Technologies. Omnium came to Abernathy MacGregor because of a referral from Havas-owned Omnium, a longtime advisor to the French telecommunications giant.

Even those who haven’t sold—and don’t plan to—see the same factors at work. “In a word, the answer is globalization,” says Larry Rand, senior vice president at Kekst & Company, the perennial market leader in M&A communications in the United States. “The financial markets are becoming boundary-less, and so firms that serve the financial markets are under pressure to become more global.”

At least a couple of firms recognized the need for global corporate and financial communications counsel a decade, although both ran into problems—perhaps because they were so far ahead of their time.

Former Hill & Knowlton executive Gavin Anderson launched his firm in 1981, with the explicit intention of providing IR counsel to clients in key financial centers. The firm quickly opened offices in New York, London, Tokyo, Hong Kong and Sydney (and today has a presence in Brussels, Paris, Frankfurt and Singapore too), but the quality was not always consistent from one market to another.

“The reason I joined Gavin Anderson was because I didn’t think there was anyone else who had a legitimate international offering on the strategic corporate and transactional side of the business,” says Mead, who became CEO of the firm’s U.S. operations two years ago. At the time, the firm was much stronger in Asia and Europe than in its domestic market. It has increased the amount of M&A work it does here, and has also become a leader in restructurings.”

British investor relations powerhouse Dewe Rogerson, best known for its role in the privatization of dozens of European utilities, opened a New York office in the late 80s, but was never able to duplicate its high-end U.K. business in this country. DR sold to Citigate five years ago, and having failed to establish itself as a player in M&A in New York acquired Sard Verbinnen early last year.

That acquisition had a seismic impact on other firms in the sector, and triggered a frenzy of activity. “A lot of us who had worked with independent companies in the U.S. realized that pretty soon those companies would no longer be independent,” says Watson.

In the U.S., Robinson Lerer Montgomery sold to Young & Rubicam, Abernathy MacGregor to Havas, and Fabienne Gershon Associates and The Hudson Stone Group to Publicis. In the U.K., Havas snapped up The Maitland Consultancy, BSMG bought Square Mile, WPP acquired Finsbury. Brunswick decided to beef up its U.S. operations substantially, and Chime began talking with possible acquisition targets in New York.

“We understand that there’s a limit to how big we can be in the U.K., and we believe we have an opportunity to duplicate the Chime philosophy in the U.S. and Germany,” says Pottinger, who claims that 30 percent of the group’s revenues already comes from overseas. “We want to have the leading independent PR firm, the leading independent advertising agency, and the leading independent research company in both of those markets, focusing on the premium business in each market. In corporate and financial public relations and in public affairs we need to be international.”

Chime acquired a small Boston technology PR firm, LNS Communications, earlier this year, but has yet to announce a major corporate and financial deal. “We have been very cautious in the U.S. because so many people have gone into the market have done it badly and because our investors want us to be cautious, especially now,” says Pottinger. 

While Chime scouts for acquisitions, Brunswick has chose to enter the U.S. market via a start-up. It actually opened its New York office six years ago, but kept a low profile until recently, when a new management team arrived. With a very distinct culture, Brunswick is reluctant to sell and recognizes that making acquisitions of its own could be problematic.

Says Payne, “We have taken the view that to be able to offer a really seamless service we have to be one company. We have no profit centers within the group. If I want help from our leading crisis expert in London, all I have to do is pick up the phone. There’s no squabbling over budgets.” He points to the firm’s work on the UBS-Paine Webber merger as an example. “We started working with them in London and in Europe, but it became increasing clear that if UBS wanted to make a statement to Paine Webber employees the announcement had to be made here. It was not a problem for us to step in and handle the announcement.”

Financial Dynamics is taking a third approach. It sold to Lighthouse, which later sold to Cordiant, one of the two companies created by the Saatchi & Saatchi divestiture.

Says Watson. “Its one thing sending a couple of people to America and saying you have an office in New York. It’s another to have a partner who can provide the full range of services you provide in your domestic market.” For Financial Dynamics, that partner is Morgen-Walke Associates, acquired by FD parent Lighthouse (since sold to Cordiant) in January of 2000. While Morgen-Walke has never been a player in the M&A arena, it does have a solid foundation of investor relations business, and strength in some key industries, including technology and healthcare.

The two firms are now exchanging staff and learning from each other, and over time Morgen-Walke will almost certainly develop its own M&A capability.

Abernathy MacGregor took essentially the same approach, although its U.K. and European partners—Maitland and Omnium—already have strong credentials in the mergers and acquisitions arena. Angus Maitland is regarded as the eminence grise of the M&A scene in the U.K. “The reason we were attracted to Havas,” says Abernathy, “is that they already had some terrific capabilities in this area, people we had worked with before and were very comfortable with.”

Amid all this activity, at least a couple of top tier U.S. M&A firms are standing pat, apparently uninterested in selling, and hesitant to expand into new geographies where they lack the market insight to be instant leaders.

Says Joele Frank, “We may miss out on some cross-border deals, but that doesn’t bother. We are in a position to control our own destiny. We have the ability to control the quality versus the volume of the work we do. That’s important to us.” It’s hard to argue. Frank’s firm established itself as a top three player in the M&A communications business in its first year, and has worked on its share of international deals, including Unilever-Best Food and Procter & Gamble-Clairol.

But the 800-pound gorilla is Kekst & Company, the subject of constant speculation. The firm has handled investor communications in the U.S. for WPP and Publicis, giving rise to rumors about a possible sale. Weber Shandwick’s Larry Weber has made no secret of his respect for Kekst, and its very healthy bottom line. But the firm’s current management team appears quite content to stick to the approach that has worked for the past 30 years.

“A lot of firms are trying to offer their clients the so-called one-stop shopping approach,” says Larry Rand. “The idea is that they will be able to go to clients and say, we can handle your situation wherever it is. But that’s not necessarily the case. We believe that if you have a particular strength in a particular market—as we do in this market—it’s usually best to stick to your knitting. We are very confident of our ability to counsel our clients on how the U.S. capital markets work and how to get their message through to the U.S. investment community.’

Rand says his firm has benefited from globalization because of non-U.S. clients looking for that kind of counsel. But Kekst & Company has resisted the temptation of opening an office in London. “It’s not that easy,” says Rand, “to go into a new market and be an expert. We prefer to work with firms that already know the market, so if an issue comes along our partners will recommend someone who has the relevant expertise.”

So the firm has worked with almost all the major U.K. firms including Brunswick, Finsbury, and Chime’s Smithfield Financial—and expects to continue to do so.

“I think we will be lucky enough to continue enjoy relationships—with investment bankers and lawyers and others—who will suggest to their clients that they think about hiring this firm,” says Rand. “As long as we can prove to those clients that we can think through their communications challenges and provide them with the expertise they’re looking for, then we don’t need to worry about new business. Our business will expand.”

What’s notable about all this activity is that the two largest U.S. holding companies have yet to get involved in any major way. Omnicom owns Gavin Anderson & Company, and may eventually merge it into one of its full-service agency brands—Fleishman-Hillard, Ketchum or Porter-Novelli—but each of those brands would love to build its own capability in this arena. Interpublic’s Weber Shandwick, meanwhile, has made clear its intent to be a market leader in the corporate and financial arena, a goal that would presumable necessitate an acquisition of some kind.

There’s also the possibility that firms from other professional service disciplines could make a play in the M&A arena. Most PR firms don’t deliver the kind of margins that would make them appealing to a PricewaterhouseCoopers or a McKinsey, but the Brunswicks and Keksts of the world might be an exception. Several observers have suggested that Kekst’s culture might mesh better with a management consulting firm that a more traditional PR agency.

With so many potential players still on the sidelines, the only certainty is that there will be more activity in the strategic corporate and financial communications sector over the coming months.


 

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