With three-fourths of the $270 billion U.S. advertising market now controlled by five agency holding companies, conventional wisdom holds that there are few, if any, ad agencies left out there worth buying.
But three well-known retired Chicago advertising executives hope to debunk that theory by forming their own advertising “holding company.” The trio wants to partner with solid agencies that fly under the radar of the industry’s colossal ad firms.
Tom McConnaughy, who sold his creative boutique McConnaughy Stein Schmidt Brown to Euro RSCG Partners several years ago, and former Leap Group executives Fred Smith and George Gier have gotten together to form the Tungsten Group.
Tungsten aims to buy majority stakes in agencies across a wide spectrum of specialties–giving them access to resources to compete against much larger agency networks.
They claim that big holding companies like Ogilvy & Mather owner WPP Group, Leo Burnett owner Publicis Groupe and DDB Chicago owner Omnicom Group overlook much smaller shops because the lawyer fees alone would outstrip the revenue potential at some of them.
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Most publicly held holding companies don’t look at agencies with less than $10 million in annual revenue.
And the ones they do make offers on are at such pathetic returns for some agency owners that it doesn’t make sense for some agency owners to sell, the executives contend.
“It’s collusion,” said Smith, who along with Gier and other executives formed Leap Group, took it public in the mid-1990s and then watched it fall on hard times when executives couldn’t decide whether it should be a traditional ad agency or a new media concern.
Smith and Gier eventually left the business. McConnaughy left the industry in 2002. Smith, 50, is chief executive of the new entity. Gier, 44, is president, and McConnaughy, 62, is chief creative officer.
Already, the group says it has one agency in the fold. Smith recently signed a deal to buy troubled ad shop Grant/Jacoby–a 60-year-old, $60 million, mostly business-to-business ad agency whose clients include Life Fitness and Ryerson Tull. The Chicago-based agency has been looking for outside investment or a buyer for several years.
Though Smith wouldn’t disclose the details of the deal, he said the transaction gives him voting control of the agency. A number of current and former employees still own the majority of equity in the shop.
The decision to try and roll up smaller agencies comes at a time when the industry is on its heels. With clients squeezing agencies on fees, many shops have struggled to stay afloat.
Critics contend that Tungsten will have no choice but to pick from second- and third-tier agencies that don’t offer a lot in the way of potential.
Not so, says Gier, who claims that there is a void of middle-size agency networks to service smaller clients.
“There are a lot of highly regarded independents out there that are considered too small for big holding companies,” he said. “Independent agencies will suffer without a `network’ relationship.”
None of the executives would disclose other agencies they’re looking at, though they aren’t ruling out talking to design shops, public relations firms and commercial production companies.
“The idea is to be an entrepreneurial group,” says McConnaughy, best known for his work in the past for Illinois Tourism and Walgreen Co.
As part of its pitch, Tungsten says it will offer a more attractive financial package to those agencies willing to hand over control. In exchange, the acquired agencies will keep up to 49 percent equity and the agency’s culture.
While most agencies get anywhere from one to five times earnings when they sell, Tungsten might offer 10 times earnings to entice agency chiefs.
Whether Tungsten will get the financing to pull off the deals is not yet clear. Unlike Leap Group, which got up and running with the help of an outside investor, the executives say there is no such phantom investor involved in this project.
Ahlers steps down: In the first sign that changes may be coming to Marshall Field’s under May Department Stores, Field’s President Linda Ahlers, 54, announced she is stepping down from the company.
May said it is going inside its own organization to replace her. Beginning Nov. 1, Frank Guzzetta, 59, currently head of May’s Hecht’s/Strawbridge division, will take over as president and CEO of Field’s.
In addition, Robert M. Soroka, 52, chairman of the Robinsons-May division, was named chairman of Field’s.
Ahlers joined former Field’s owner Target Corp. in 1977 before being named head of merchandising at Field’s in 1995. She was promoted to president of Field’s a year later.
She raised eyebrows this year inside Field’s when she dumped nearly $9 million of her Target stock two days after Target put the chain up for sale.
Black to put shares in trust: Under pressure in Canada by some outside shareholders to step down as head of Toronto-based Hollinger Inc., embattled CEO and majority shareholder Conrad Black named two outside independent members to the company’s board. Joining the Hollinger Inc. board are Robert J. Metcalfe, executive vice president of Spotnik Mobile Inc., and Allan Wakefield, a former executive with several software and technology companies.
Hollinger Inc.’s principal asset is its 68 percent voting control in Chicago-based Hollinger International Inc., which owns the Chicago Sun-Times.
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Black also said Tuesday that he would put his shares in Hollinger International into an independent voting trust in exchange for the restoration of Hollinger Inc.’s rights as a shareholder of Hollinger International.