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£3bn Aegis deal will test Dentsu’s mettle

Cynics might say that £3.2bn – cash – is an awful lot to pay for digital competence and a superior market rating. And they have a point. Would Dentsu ever have planned such an audacious and costly coup as the acquisition of Aegis Group had the Japanese advertising group earlier succeeded in its seemingly knock-out offers for Razorfish and, later, AKQA? It’s subjunctive history: we’ll never know.

Aegis chief executive Jerry Buhlmann and Dentsu president Tadashi Ishii: Firm friends?

The cynics are, in any case, substantially unfair. There’s much more to the Aegis acquisition than digital. This is arguably the transformative deal of the decade. It’s as if there has been a tectonic plate shift in marketing services, revealing a series of minor preceding tremors as clearly apparent elements in a wider pattern.

These minor tremors include the foundation of a much stronger, and more independent, operating unit in the US – Dentsu North America – under the direction of Tim Andree; Andree’s earlier acquisition of some of America’s sharpest shops, McGarryBowen, Attik, and 360i; the harnessing of McGarryBowen to Dentsu’s embryonic European network, led by former WPP executive Jim Kelly; and, not least, Dentsu’ decision to pull out of its unsuccessful strategic alliance with Publicis Groupe, cashing £535m in the process.

Andree, now gone global as senior vice-president at Dentsu and no doubt a strategic architect of the acquisition, has admitted that the £535m was “helpful in this deal” – coded language referring to the cash pile making it possible at this time. But something of the sort has needed to happen for a long time if Dentsu were not to be stranded in its idiosyncratic role as a one-country wonder, with 80% of global earnings still accounted for by overwhelming dominance in the Japanese market.

There are lessons in failure, and the Japanese management of Dentsu finally seem to have learned them. Neither strategic alliances, meaning stakes of about 20% in rival but complementary marketing services companies, nor the occasional one-off acquisition, such as Collett Dickenson Pearce all those years ago, suffice  for players in a global market. They needed to delegate more, and yet be more masterful in their acquisition strategy.

The delegation came in the realisation that people like Andree, John McGarry and Kelly would know more about how Western advertising culture actually functioned than Tokyo Central would ever know.

The more masterful acquisition strategy came from the realisation that opportunities for global expansion were rapidly narrowing, and if they wanted a suitable counterweight elsewhere in the world, they would have to put aside an institutional aversion to big takeovers and get the cheque-book out.

That’s why £3.2bn to buy the Aegis Group – 18 times prospective earnings compared with a market average of about 13 – is not too much to pay for this deal. It gives Dentsu indispensable weight as a global player: at $7bn revenues combined, close competition with the Interpublic Group as the number 5 player. As a media/digital operator, it moves into the third slot, behind GroupM (WPP) and Vivaki Media (PG). And geographically, it reduces its dependence on Japan to 60%.

Over at Aegis, it’s difficult to guess whose smile is broader: that of Vincent Bolloré, 26% shareholder; Harold Mitchell, who doubles his invested capital from the sale of his business two years ago with a £112m takeaway; or Aegis chairman John Napier. Napier has had to perform a very difficult tightrope trick in the City with a monkey on his back. The monkey is Bolloré.

On the one hand, Aegis has performed extremely well in recent years, with organic growth rates defying all its bigger rivals. A cleaning-up operation, which brought Mitchell’s Australian media buying services in and off-loaded the under-performing Synovate market research business on Ipsos, improved them still further.

On the other, there was always an air of impermanence about a company as small and narrowly defined as Aegis being on the public markets. Chief executive Jerry Buhlmann knew it, Mitchell – judging from his share investment strategy –  knew it, Napier knew it and – most importantly – Vincent Bolloré knew it. Which is why he built up a stake in the first place. From the angle of Aegis’ corporate independence it is difficult to know which was worse: Bolloré Mark 1, the corporate raider stealthily engineering a boardroom takeover with a view to break-up; or Bolloré Mark 2, the disillusioned ‘strategic investor’ seeking to offload his game-changing stake at the first reasonable opportunity. Each was destabilising; neither the stuff of a good corporate narrative to wow other investors. Bolloré is now laughing all the way to his bank – £725m in pocket, representing a 50% premium on his investment. Quite what this means for the future of Havas, trailing with only $2.3bn global revenues, is of course an interesting  – but quite separate – question.

The nature of the Aegis deal – cash, and a 50% premium to the share price – makes it exceedingly unlikely that Dentsu will face any challengers for its prize. What matters now is whether it will make the deal work. The enlarged Dentsu can boast that 37% of its revenues are derived from the cutting edge, digital – a greater share than any other global marketing services group. Buhlmann has agreed to stay on until at least the end of next year, which should help the glue to set. But what then? Aegis, at nearly 40% the size of its new parent company, is by a wide margin the biggest acquisition that Dentsu is ever likely to make. That’s quite a cultural challenge.

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