The parent companies of two big advertising agencies that represent such major clients as Procter & Gamble, Coca-Cola and General Motors are merging to create a global new agency with more than $1.7 billion in revenue.
Chicago-based Leo Group and New York-based MacManus Group, which own Leo Burnett Co. and D'Arcy Masius Benton & Bowles, are merging into a new company that initially will be called BDM. The Chicago-based company will become the world's fourth-largest advertising company. A 20% stake in the merged companies will be sold to Tokyo-based ad giant Dentsu Inc., and an initial public stock offering is planned for next year.
The merger sparked renewed speculation about what advertising agency insiders view as the inevitable next deal in a rapidly consolidating industry. The consolidation wave is in response to growing client demand for agencies that can handle branding and new product introductions globally. Investment banking firm Donaldson, Lufkin & Jenrette recently reported that, prior to this merger, the five largest agencies controlled 45% of industry billings, up from 30% in 1988.
More changes may be on the way. Rumors making the rounds Wednesday included industry giant WPP Group possibly acquiring Young & Rubicam, and Interpublic Group of Cos. perhaps making a bid for Paris-based Publicis. There was also speculation about the fate of such independent agencies as Saatchi & Saatchi and Cordiant Communications Group, parent of Bates Worldwide.
The deal marks a shift in strategy for Leo Burnett, the Chicago-based independent that created Marlboro man and Tony the Tiger. "Leo Burnett has long made it part of their culture that they didn't need an international network, that you could run a company from a headquarters in Chicago," said one ad industry executive. "So it's a real sea change."
BDM will rank fourth in worldwide billings behind Omnicom Group (BBDO Worldwide and DDB Needham Worldwide), Interpublic Group (McCann-Erickson Worldwide) and WPP Group (Ogilvy & Mather and J. Walter Thompson).
"These mergers show that it's very hard to compete in a world where you don't have great size," said Diane Cook-Tench, director of Adcenter at Virginia Commonwealth University in Richmond, Va. "Agencies that seemed large to us 10 or 15 years ago are now viewed with different eyes. . . . People will now be focusing on which agencies will still be here 10 or 15 years from now."
New York-based Donaldson, Lufkin & Jenrette, in July noted that "there is still room for more consolidation . . . given that the top five companies account for less than one-half of total industry revenue."
The consolidation is being forced by changing business practices at such companies as P&G, which once worked with dozens of advertising agencies worldwide. In recent years, big clients have been paring back agency rosters to a relative handful of agencies in order to better fashion a cohesive brand image worldwide.
"We're excited by this merger," Coca-Cola spokeswoman Susan McDermott said of the formation of BDM. "We already work with both of these agencies, and, if anything, the merger should further enhance their capabilities. We view this as a very positive step."
Advertising industry executives additionally are using mergers and acquisitions as a quick way to accumulate public relations, marketing and direct marketing services that clients are demanding. At many of the biggest agencies, advertising now generates just half of overall revenues.
Industry observers say a true market value of the BDM deal will surface next year if the company, as planned, makes a public stock offering. One published report set the value of the deal at $2 billion, but one industry analyst said the value could reach $4 billion.
MacManus Chairman and Chief Executive Roy Bostoc, 59, will serve as BDM's chairman. Leo Group Chief Executive Roger Haupt, 51, will assume the CEO role at BDM. Richard Fizdale, 60, chairman and CEO of Leo Group, becomes vice chair of BDM.
Haupt said that such important clients as Procter & Gamble and General Motors have blessed the deal. But the merger could result in conflicts. The combined companies' client list includes Delta Air Lines, Continental and TWA, as well as accounting firms Ernst & Young and Arthur Andersen. BDM executives maintained that work would not be compromised because Leo Burnett and D'Arcy Masius Benton & Bowles will remain separate businesses under the holding company being formed.
The new company will have 500 operating units in 90 countries--including such businesses as the Manning, Selvage & Lee public relations firm. BDM also will own the MediaVest and Starcom Worldwide media buying services, with more than $13 billion in billings.