The deal that turns a regional player into a global giant
By John Tylee, campaignlive.co.uk, Thursday, 19 July 2012 08:00AM
Dentsu's £3.2bn acquisition of Aegis propels the Japanese group on to the world stage. But will it prove a wise investment?
Jerry Buhlmann's associates knew something was afoot when the Aegis chief executive abruptly cancelled last week's monthly meeting of the committee that helps him map his investment plans.
Since being promoted to the role two years ago, Buhlmann had been pursuing a "buy and build" strategy involving strategic acquisitions and the £525 million disposal of Synovate, the Aegis research division, which was not seen as core business.
"It has been an impressive performance," one commentator declares. "But it was hard not to think that he was cleaning the place up for a sale." Indeed, some analysts believe that all the company's activities for the past three years have been based on realising more money for shareholders.
Nothing, though, had quite prepared them for the gobsmacking announcement on Thursday morning that Aegis was being sold to the Japanese communications giant Dentsu, headed by its chief executive, Tadashi Ishii, for £3.2 billion.
Aegis shareholders, previously very agitated at the group's performance, will have had smiles put back on their faces with the news that Dentsu is paying a 48 per cent premium to the Aegis closing share price last Wednesday.
It would seem to make their vote on 16 August a no-brainer, paving the way for a new agency alignment that could prove a global game-changer and a potent rival to Omnicom, Interpublic and Sir Martin Sorrell's WPP.
"Sorrell has always been wary about what Dentsu might do one day," one onlooker says. "That day may well have arrived."
A new global superpower
With a total workforce of 33,000, the operation combines Dentsu's financial might with Aegis' fast-growing digital business and a client list that includes the likes of Diageo, Coca-Cola, Adidas and Pfizer. Together, the companies will form the biggest media and digital communications group in Asia and the second-largest in Western Europe.
For Dentsu, which is paying about 30 per cent more than its total annual revenue, the deal is symbolic of a new audacity from a company so dominant for so long in its domestic market, but often nervous and uncertain when it tried to establish itself beyond its Far Eastern comfort zone.
"The scale of this deal is breathtaking," a former agency chief who knows Dentsu well, remarks. "This is the acquisition that moves Dentsu from being a regional player to a global giant."
Even rivals who might have cause to fear a potentially big new threat are impressed.
"Dentsu has tried for ages to become global, not always successfully but with clear determination," Maurice Levy, the Publicis Groupe boss, says. "With the acquisition of Aegis, Dentsu is acquiring the indispensable base for a global network."
Havas 'left out in the cold'
There is a widespread belief that the ripples from the sale will spread beyond London and Tokyo. How, for example, will it impact on the future plans of the billionaire industrialist Vincent Bollore, the one-time corporate raider and now Havas chairman who once dreamed of bringing Aegis, where he was the largest shareholder, into the Havas fold?
And what of Havas itself, the smallest of the global marcoms groups and - according to one leading industry figure - threatened with being "left out in the cold"?
Will Bollore, who had made little secret of wanting to become France's next media mogul on the back of Havas, now look at alternative uses for the cash generated by the 26.4 per cent of Aegis, valued at £724 million, that he has agreed to sell to Dentsu?
If so, can Havas go it alone? "There's no question that it is vulnerable," Andy Collins, a partner at Results International, which provides financial and strategic advice to the global marketing communications industry, says. "It has to be a bid target."
Some believe Bollore, who owns 37.4 per cent of Havas, could turn his attention to Vivendi, the multinational mass-media and telecommunications company where speculation is rife that he will take a seat on the board as well as become one of its biggest shareholders with just under 5 per cent of the equity.
Despite having once regarded the acquisition of Aegis as a means to an end, those who know Bollore insist he remains committed to Havas and that his retirement date - set for 17 February 2022 - remains unchanged. It is said that any decisions on the future ownership of Havas will be made not by Bollore but his successors.
Bollore's original aim had been to merge Havas and Aegis, whose previous management left him less than impressed. However, sources say he thinks the new regime, and Buhlmann in particular, has been doing a good job and that the Dentsu offer presented an ideal opportunity to cash in.
Meanwhile, he is said to have bought into an alternative vision for Havas that sees it not as being of a similar scale to its rivals but as a more nimble and agile alternative, particularly in digital, which accounts for around 25 per cent of its business. "Technology and digital have changed the world and the game is much more about your speed of reaction," a source close to Havas says. "Big networks have big volumes of business, but they're trapped in yesterday's model."
CDP and other challenges
Having paid out Bollore for his Aegis shares, the time has come for Dentsu to stand up and be counted on a global stage.
"It seems that Dentsu has taken a long, hard look at itself and asked whether or not it wants to be a serious global player," Bob Willott, the editor of Marketing Services Financial Intelligence, suggests. "And they've concluded that they have to be bold."
Also, as Collins points out: "So many big brands want the kind of global services that Dentsu has struggled to provide in Europe and the US."
Some also believe the enfeebled state of Japan's economy may have helped force the issue. Overall ad revenues fell by 2.3 per cent to $72 billion in 2011 - the fourth annual contraction for an industry that has shrunk by almost 6 per cent in the past decade.
Dentsu's first attempt at going international - a 1981 joint venture with Young & Rubicam called DYR that gave Y&R entry into Japan and Dentsu access to the US and Europe - enjoyed some success. However, as an industry source explains: "It was a 50/50 venture. Dentsu was never in the driving seat."
Britain's Collett Dickenson Pearce was the first vehicle that Dentsu bought outright, taking almost 100 per cent of the agency's equity in 1991. Today, most would argue that it was sold a lemon.
CDP was once the country's hottest agency, but its best days were well behind it. To make matters worse, the UK was in recession, advertisers were pulling budgets and CDP staffers never took kindly to being run by a Japanese company.
The experience was painful for Dentsu. So much so that, for many years afterwards, it shied away from doing anything in its own right beyond its Asian heartland and focused more on peripheral activities such as sports marketing and events in its domestic market.
Peter Travis, an advertising and marketing consultant, dealt extensively with Dentsu when the chief executive of what became CDP Travis Sully. He says: "CDP was a prime example of Dentsu's attempts to become a global force by acquiring agencies capable of delivering high creativity. Dentsu has always had a desire to be a global creative force."
He suggests the Aegis deal has a much better chance of working because media has always been at the heart of what Dentsu does. Willott suggests Dentsu will be looking to leverage Aegis' digital capabilities to get more creative clout.
Dentsu's passive approach to international expansion was still evident in 2002, when it took a 22 per cent equity stake in Bcom3 along with Leo Burnett and D'Arcy. The arrangement did little either for Dentsu's profits or its profile.
The influx of a new generation of more internationally minded executives at Dentsu has helped the company shed much of its global inhibitions. The custom of always sending Japanese executives to run its overseas operations was broken in 2006, when the Detroit-born Tim Andree, a former Toyota and Canon marketer, was hired to establish Dentsu in the US and now leads its global operations.
Andree's arrival sparked a US shopping spree by Dentsu, its pivotal purchase being Mcgarrybowen. Launched in 2002, the agency has a new-business record formidable enough to have made it AdvertisingAge's agency of the year twice in three years.
Dentsu exported the brand to London earlier this year and dropped the Dentsu London name, and was rewarded when the shop picked up the £25 million launch of Honda's new CR-V model. In March, John McGarry, the agency's founder, was given a new job advising on client matters across the Dentsu agency family.
"Andree has shown Dentsu that its acquisitions can be successful and given it the confidence to go for Aegis," Travis says. "It has always believed that its real power lies in its media strength. Now it needs to evolve that at a global level."
In doing so, some commentators believe Dentsu may have to confront challenges of a kind it will never have encountered before. And that does not include the lack of any sign of an imminent recovery in Europe's ad market.
'There are problems coming'
The most immediate problem may occur in the aftermath of the coming together, a potentially destabilising time when cultural clashes cause key staff to quit, clients get nervous and rival agencies begin circling them.
This may have significant implications for the new group's automotive business. Will General Motors, which moved its $3 billion global media account into the Aegis subsidiary Carat just six months ago, be content to have its business in an agency whose parent works for Toyota across the world?
Citi Research also cites the possibility of the Aegis media buying networks coming under pressure from other groups using their scale to put pressure on prices.
"It will be a great time to be stalking both business and talent," the boss of a major network predicts.
"The execution risks are colossal and there will be a loss of clients and people," another suggests. "The change of control impacts on people and clients. I doubt the Japanese have thought about it. The competition will be all over them. There are problems coming."
"The big question is whether Dentsu will be able to keep the existing management and whether that management will feel disposed to build a Japanese-owned network," Willott says. "Buhlmann and his team have pledged to stay until the end of 2013. But that may cause speculation that they don't intend to stay beyond that time. Who will lead Aegis then? Could it be a Japanese?"
Another issue is whether Dentsu, which generates almost 90 per cent of its annual revenue from its home market, overpaid to get its prize. Dentsu's share price dropped 7 per cent soon after the news. "Right strategy, wrong price" is one industry leader's verdict: "A 48 per cent premium is too high."
One reason for the share price drop may be that Dentsu will have to issue new stocks to solidify its corporate financial base. This is seen as bad news for investors because it means a dilution of the value of their stocks. Dentsu has never suggested this will happen and will use cumulative reserve cash - more than the Aegis price - and borrowing in order to pay.
Another may be the effect of the substantial goodwill that is part of the agreed price. This has to be recognised in annual profit-and-loss statements for several years and is known as goodwill depreciation. There is speculation that the annual goodwill depreciation in this case could be around £160 million - a substantial burden for Dentsu.
What is beyond question, though, is that Japan's sleeping ad giant has finally stirred and will now be a permanent international performer. "How can it be anything else?" a source close to Dentsu asks. "This deal is too big to fail."
THE DENTSU STORY
1901: The journalist Hoshiro Mitsunaga founds Japan Advertising, a broker of ad space, and Telegraphic Service Co, a newswire service
1907: The two companies merge to become Dentsu
1936: Sells its news services department. Relaunches as an ad agency
1943: Acquires 16 companies to bolster its ad business
1953: Creates radio and TV division as commercial TV launches in Japan
1957: Dentsu billings make up more than a quarter of industry total
1968: Has around 5,000 accounts and billings almost equal to those of JWT and Young & Rubicam
1974: Ranked number-one worldwide agency by Advertising Age
1984: Enters the US and Europe via joint venture with Y&R
1988: Named international agency of the year by AdAge
1991: Acquires Britain's Collett Dickenson Pearce.
2002: Invests in Bcom3, which includes the Leo Burnett and D'Arcy networks. Bcom3 merges with Publicis. Dentsu takes 15 per cent of new group
2008: Buys the New York agency Mcgarrybowen. Names Tim Andree as the first non-Japanese executive officer overseeing operations in the Americas, Europe and Australia
2010: Jim Kelly appointed to lead Dentsu Europe, including offices in the UK, Germany, Italy and Belgium
2012: Sells back most of its stake in Publicis Groupe for £535 million. Acquires Aegis for £3.2 billion
THE AEGIS STORY
1968: Gilbert Gross founds the media agency Centrale d'achats radio, affichage television - otherwise known as Carat
1984: Acquired by Britain's WCRS Group
1989: Peter Scott, one of the WCRS founders, launches Aegis as a separate company based on the WCRS media buying division
1990: WCRS group changes name to Aegis Group
1991: Sells its PR and design businesses and acquires more media buying companies. Wins $100 million Walt Disney account
1992: Gulf War causes 19 per cent pre-tax profits drop. Scott quits as chairman. Head office relocated from London to Paris. Sells all remaining interests in full-service advertising. Becomes specialist in media planning and buying
2005: The Havas chairman, Vincent Bollore, builds stake in Aegis, fuelling bid speculation
2006: The board rejects Bollore's bid for two board seats
2008: The chief executive, Robert Lerwill, departs. Shares surge 20 per cent in expectation of Havas bid
2009: Announces 780 job losses as part of cost-saving programme
2010: Jerry Buhlmann promoted to chief executive
2011: Sells the Synovate research division to Ipsos for £525 million
2012: Carat wins General Motors' $3 billion global media planning and buying account, the biggest win in its history. Profits surge to £106.4 million. Announces £3.2 billion sale to Dentsu, which buys Bollore group's 26.4 per cent stake.
This article was first published on campaignlive.co.uk
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