The World: Seduced supergroups look for digital dalliance

Now that Levy has taken the plunge, will the union of Publicis and Digitas spur further marriage proposals?

The courtship began in earnest ten months ago with dinner a deux at the Federalist, a four-star restaurant acclaimed for its romantic ambience, in Boston's Beacon Hill district.

It ended just before Christmas with Maurice Levy, the Publicis Groupe chairman, walking up the aisle with Digitas, regarded as one of the world's most desirable digital marketing operations.

Now Wall Street is readying itself for what it predicts will be a wave of tie-ups between Madison Avenue and Silicon Valley. The question is whether there will be enough pretty girls to go round if and when Levy's biggest rivals go wooing.

Those rivals may need sizeable wallets with which to seduce potential partners. But the enticements are unlikely to match the $1.3 billion with which Levy won Digitas, whose operating subsidiaries include Modem Media and Philadelphia's Medical Broadcasting Company, one of the largest interactive healthcare agencies.

The deal, due to be closed on Wednesday, is the culmination of conversations which began at the time when Publicis Groupe was buying Bcom3 in 2002. It is also one of the biggest in recent advertising history. Only WPP's $1.75 billion acquisition of Grey Global Group two years ago surpasses it.

It's so big, in fact, that the sheer scale of it (the offer represents a premium of almost 30 per cent over Digitas' average share price for the past three months) has led some commentators to ask whether Levy has overpaid. "Even if he cuts out overheads with his usual ruthlessness, $1.3 billion remains a very high price," Bob Willott, the editor of Marketing Services Financial Intelligence, says.

Levy denies the deal was expensive - "We paid at a multiple which wasn't even average for the sector" - and that the euro's exchange rate against the dollar worked to the group's advantage.

What is beyond doubt is that Levy has acted with his trademark panache to resolve at a stroke the group's significant digital shortcomings. "With this acquisition, we've taken the lead," he says. "We've not just covered our weaknesses. We now have a real edge."

The takeover underlines the urgency with which agency groups are trying to follow their clients into the digital arena and connect with an increasingly elusive youth market. ZenithOptimedia estimates that global internet adspend will grow by 28.2 per cent next year, while investment in all other media will increase by just 3.9 per cent.

"The Publicis move is bold and strategically exciting," Willott adds. "It has recognised the importance of digital in the long term and the difficulty of establishing a capability via its established model."

Digitas will remain an autonomous unit within Publicis Groupe under David Kenny, its chief executive. He will have overall responsibility for the group's digital and interactive strategy, as well as a seat on its management committee.

After fighting for its life when the dotcom bubble burst, the turning point for Digitas arrived when advertisers began coming back to the internet four years ago. Profits returned and an acquisition programme accelerated growth. However, its shares lost almost 50 per cent of their value between May and July last year in the wake of three significant client losses, making it a top target for Publicis.

Whether this caused Kenny to change his previous assertion that Digitas was better remaining outside holding companies wedded to traditional media is a moot point.

Kenny says not. He claims Publicis is determined to create more synergy between traditional and digital activity.

Analysts suggest Levy's immediate priority must be to improve Digitas' margins, which currently stand at a less-than-spectacular 13 per cent. Levy insists margins will be enhanced as Digitas gains access to the Publicis client portfolio.

Peter Friedman, the founder of LiveWorld, which operates and manages social networking sites, claims the likelihood of the major marcoms players piling into the sector is simply a continuation of a 20-year tradition of holding companies acquiring small, focused agencies. "Digital is the way of the future, and I would expect to see more acquisitions," he says. "There are quite a few digital agencies already, and more are emerging."

So which ones might the supergroups want to romance?

One possibility is 24/7 Real Media, which is based in New York, has offices in Europe and the Far East, and already has a search engine partnership with Dentsu. Another is aQuantive, the Seattle-based group whose operating units include Avenue A/Razorfish.

Elsewhere, the San Diego-based WebSideStory, currently recording an annual growth rate of 74 per cent, presents an attractive proposition. So does LBi, formed by last year's merger of LB Icon and Framfab, two of the most prominent interactive marketing specialists outside the US. AKQA might also be added to a few shopping lists.

Will one or more of them get seduced? It seems a safe bet. As Levy puts it: "If holding companies are going to provide the full range of services, the technological depth, innovation and access to all the new trends clients demand, then they have no choice."

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