CLOSE-UP: LIVE ISSUE - MANAGEMENT BUYOUTS. Would a WCRS management buyout suit both the parties?
By Bob Willott, the editor of Marketing Services Financial Intelligence, campaignlive.co.uk, Friday, 29 August 2003 12:00AM
If the price is right and the deal fits, then buyouts can succeed, Bob Willott writes.
Rumours of a move by WCRS to buy itself back from Havas prompt several questions. Why should Havas agree to it? Is it financially viable? And if so, why doesn't it happen more often?
Management buyouts tend to be suited to a relatively limited set of circumstances.
The most fundamental of those prerequisites are that a buyout actually suits both parties and that only a modest sum of money has to change hands to complete the deal - factors that featured in all three of the better known ad agency buyouts, namely St Luke's, Delaney Lund Knox Warren & Partners and Leagas Delaney.
Leagas Delaney was bought originally by Abbott Mead Vickers BBDO when its balance sheet fell short of media credit recognition criteria. It was a friendly gesture by AMV toward an agency that, despite its creative talent, has rarely made serious money. It added little strategic or financial value to AMV apart from the theoretical opportunity to cope with client conflicts.
By 1998, AMV had become part-owned by Omnicom and was negotiating the sale of the rest of its shares to that group, so there was no obvious reason why it should resist Leagas Delaney's managers' desire to buy the agency back. AMV fixed the price at £4 million but asked for only £100,000 in cash. The rest of the price was settled in paper - £1.2 million in preference shares and the balance of £2.7 million in loan notes due for repayment out of gross profits (if any) with the final balance repayable in 2008.
Sadly, Leagas Delaney has not enjoyed financial success as a reborn independent.
Nevertheless, the two conditions for a buyout were met. AMV had no strategic need for Leagas Delaney and didn't want a lot of cash from its sale.
The Leagas Delaney and DLKW buyouts had two characteristics in common, apart from a name. Both were still managed by some of the entrepreneurs who had set up the original business before it was bought out by a major group and both were owned by groups that were subjected to takeover bids from even bigger players.
DLKW started life as Delaney Fletcher Slaymaker Delaney before being bought out by the Bozell Group. Later, Bozell was bought by True North and in 1999, a massive rationalisation programme was implemented, thrusting the FCB and Bozell agencies together all around the world. The Delaney agency had been making a healthy profit - £548,000 in 1998 and £1.2 million in 1999 - yet in March 2000, True North was persuaded to surrender control of 74 per cent of the company for £1.3 million, of which the majority was left outstanding as a loan. Again, the key ingredients for a successful deal were present - no strong strategic need for True North to retain a controlling stake (it also owned Banks Hoggins O'Shea/FCB) and a tolerable price tag.
Neatly, this enabled DLKW to emphasise its link with a global network when pitching to global clients, while emphasising to everyone the new-found creative and management commitment that comes with independence.
DLKW has never had cause to look back, with some fabulous client gains and pre-tax profits exceeding £1 million each year.
St Luke's rebirth out of Chiat/Day followed a similar pattern, except that the buyout team comprised London branch management of this distinctive US agency rather than some of the agency's founders. The London venture had been run by managers who hankered after a direct-ownership stake in their part of the business. When the retiring founder, Jay Chiat, sold out to TBWA, which already had a London agency, the London management negotiated an exit in November 1995.
The cost was modest: less than £2 million payable out of future profits by October 2002. That was settled well before its due date, and before the initially successful St Luke's ran into tougher times.
So what do these precedents tell us about the scope for a WCRS buyout?
First, the climate is very similar. Havas is rationalising its business and WCRS does not fit into the mainstream Euro RSCG Worldwide agency network. Its strategic importance to Havas would depend on the need for a serious alternative agency to handle client conflicts (how much does BMW matter to Euro RSCG?) and the profit WCRS contributes.
Sadly, WCRS is not at the peak of its performance, so Havas may be prepared to let it go, especially if both parties can agree to Havas retaining a minority stake (and providing global coverage) in much the same way True North retained 26 per cent of DLKW.
What would be a realistic price for WCRS? On paper, it should be much higher than the other deals mentioned here, as profits were very substantial before the more recent decline. But buyouts are hard to finance from outside the industry, as venture capitalists are almost invariably seen as wanting too much for too little, as well as an early exit. Is this where Peter Scott would bring something to the party? And would Havas settle for a deferred price, payable predominantly out of future profits? Given the condition of its own balance sheet, it would probably be looking for a mixture of cash up front as well as a longer-term element.
Finally, can the WCRS team make a buyout work? Robin Wight may be irrepressible, but even he must surely start slowing down eventually. And is today's agency offering clients what they really want? Possibly not, judging by its recent business gains and losses, which seem to be showing a net deficit after Orange left and Vodafone stayed only briefly.
It's one thing to do the deal, it's another to create a long-term durable and profitable business.
- Bob Willott is the editor of Marketing Services Financial Intelligence(www.fintellect.com) and a special professor at the University of Nottingham Business School.
This article was first published on campaignlive.co.uk
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