Do big mergers and acquisitions create long-term value?
Three weeks on, and the Publicis-Omnicom mega-merger continues to dominate discussion, with all manner of pundits and analysts pitching in with their points of view.
Tadashi Ishii, president of Dentsu and Aegis CEO Jerry Buhlmann
Generally, the coming together of these two giants has generated a lot of cynicism; most commentators can see some value in the deal – in media negotiations for example, and of course to messrs Levy and Wren – but the jury seems to be out as to whether this will create real value to shareholders and clients in the long term – assuming the merger gets the regulatory all-clear, of course.
Time is the only way we’ll be able to determine that of course, but there is an interesting precedent. Last year the Japanese ad giant Dentsu announced that it was buying Aegis Group, the UK-based global media network, for a staggering $5bn.
Negotiations dragged on, and the Chinese regulators’ prevarications meant that the deal wasn’t finally approved until late March of this year.
Five months isn’t really long enough to evaluate the worth or otherwise of such a huge deal, but already there are signs that this particular mega-buy is adding significant value to both acquirer and acquired.
Dentsu, which was founded in 1906 as Japan Advertising & Telegraphic Co Ltd in Tokyo, has dominated its home country for half a century. Its sales are more than double those of its nearest competitor ADK.
But it’s not enough for a large listed company (Dentsu joined the Tokyo Stock Exchange 12 years ago) to be a big fish in a biggish pond. It has to expand, but Dentsu’s problem has always been that it has been isolated, both geographically and culturally. With real growth opportunities in Japan limited (even with the country’s economy’s growth in recent months), efforts to expand outside its home market have been slow. One of their more significant UK acquisitions prior to Aegis was STEAK – a transaction that we at Green Square advised STEAK on – was two years ago, but Dentsu has never been an international player in the way that WPP, Publicis or Omnicom have been for decades.
The Aegis deal changed all that. Dentsu now had significant bridgeheads and relationships around the globe – particularly in the crucial Chinese market (it is now the third biggest marcomms player there, according to most estimates). It has a presence in 110 countries and employs over 36,000 people, and through the newly-created Dentsu Aegis Network, headed up by Jerry Buhlmann, the company can grow internationally while preserving its lead back home. Most importantly, it could now compete with the other global holding companies, WPP, IPG, Publicis and Omnicom (it is the fifth-biggest ad business in the world and is catching up fast on IPG, its next nearest rival), while reducing its over-reliance on one market.
Of course the deal created an enormous amount of debt, and Dentsu’s share price wobbled a bit post-acquisition. However, management has been prudent and last month it announced a new share issue to significantly reduce that debt and, if investors take up the shares, the debt could be reduced by almost a quarter. More importantly, in the short-to-medium term at least, cash seems to be flowing into the Dentsu coffers.
Earlier this week the company unveiled its second-quarter numbers to June 30 (including, for the whole quarter, Aegis), and they made for interesting reading – total revenue was up 60.7 per cent, with revenues from outside Japan increasing 320 per cent over the same period last year versus a comparatively modest 6.3% increase in revenues for Japan. The importance of the Aegis deal is clear.
However, Dentsu reported a net loss of 3,698m Yen for the quarter, with an operating income before amortisation of goodwill and intangible assets of 10,032 million Yen (a decrease of 4.9 per cent against the same period last year). It is going to take a while for a meaningful picture of profitability to be established.
But the point is, Dentsu is now more able to aggressively target markets outside of its home territory and other Asian countries. Only last month, it acquired, through Dentsu Aegis Media Italy, a majority stake (70 per cent) in Simple Agency, a leading Italian digital marketing agency. Italy may have had its economic travails of late, but it is still a Top 20 advertising market, and there are signs that the economy is starting to improve. Aegis has long been a major player in the Italian market through its iProspect unit, but now it has a significant presence in the fast-growing digital performance-marketing sector.
Dentsu appears to be well on its way to achieving its goal of generating at least 55 per cent of revenue from markets outside of Japan by 2017. On a yen basis, global markets contributed 45.5 per cent of revenue in the quarter ended June 30, which means that this target is not only achievable, but may well be met ahead of schedule.
Coming back to our STEAK deal, STEAK’s CEO, Ollie Bishop, has found that ‘being part of Dentsu has brought significant benefits. Working together since the acquisition has been smooth and successful and reporting to the parent company via the US is working well – Tim Andree is doing a great job’.
Ollie says that ‘Dentsu’s rule of buying best of breed as well as scale has paid dividends. Being part of the Dentsu Network has allowed STEAK to partner its digital marketing expertise with Dentsu’s award winning social and content experts, 360i - together we are providing best in class integrated digital excellence to our clients. The business as a whole is innovation led, so it's exciting’. A textbook example of how properly planned acquisitions work for both parties.
So it looks as if Dentsu has got its acquisition and integration strategy right. Perhaps we should all bear this in mind when listening to all the usual conjecture surrounding the success of big mergers and acquisitions.
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