News Analysis: Direct Marketing Group
He revealed that his decision was motivated, in part, by the dipping share prices of similar communications groups that have already become AIM listed.
The announcements also coincided with speculation that TDMG had come close to being acquired by The Mission Marketing Group. However, Smith’s response was straight to the point: “We’ve always said we’re not adverse to joining forces with another group at some point in the future, but at the moment, the other AIM listed groups are not in a position to buy us. Their share values have plunged, if not plummeted, and we’re continuing to grow with acquisitions.”
It all points to now being the right time to buy, not sell, but is Smith making the right decision and why are the likes of TheMission, Cello Group, and the Digital Marketing Group (DMG) all witnessing a downturn in value?
Given these reduced share values, the wisdom or otherwise of floating a large buying group, such as TDMG, requires careful thought, and even more careful timing. Groups such as TDMG may, like Smith said, be better placed to proceed with their business gameplans by looking to acquire.
Cello’s Mark Bentley says that the current retrenchment of share prices has the potential to increase acquisitions, as buyers perceive more value in their investment.
“Some share values have declined more than others. Lots of these share prices have fallen a reasonable distance. If you look at the trading statements of all of the small capital businesses over the last two or three weeks, all of them have said they had a good 2007, and trading has not suffered so far in 2008. Most people are making pretty bullish comments. The share prices don’t reflect that at all at the moment,” he says.
“Logically you will end up with more public-to-public mergers and acquisition activity.
“The large groups are saying their focus is on emerging markets and digital. They are not going to be picking up the UK small public companies. I’d be amazed if there is a large group thinking of doing that.”
Carl Hopkins, former chairman of JDA agrees, given that there are still financial opportunities, despite the downturn in share values.
“Business is good, Most people will react if they see an opportunity. All the trading statement say that business is good. Logically you are more likely to get mergers and acquisitions activity between the groups, than you were beforehand. It is the way the market works,” he says.
“They may have to structure buyout deals and earnout deals differently, and accept that it is a flat market which does not reflect the true value of the business. Instead of front-loading the deal for cash now, maybe a seller can get more and more shares, and hope that the market turns round, and the shares go up in value. It could work. The bigger groups have to buy, they just might not be offering great cash deals because cash is hard to come by. They will have to keep on acquiring to satisfy shareholder agendas. It may make them more creative about the purchasing deals, and the balance of cash and shares.”
It seems unlikely that theMission’s failure to acquire TDMG can be interpreted as anything more significant than a conversation that didn’t proceed. At that level, buying groups are invariably engaging in a constant round of speculative inquiries, which more often than not, yield no result. Dialogue can take several months to mature, if does at all, and frequently run concurrently, Hopkins says.
“They don’t always come off. I tried to buy an agency and it fell down at the due diligence stage, which is quite far down the line, and you don’t hear about it. In the first two years since buying JDA I made a move on four different businesses, and none of them happened. In my last year as MD in 2006 I approached another agency, got to due diligence, and that also fell through. These guys are always talking to lots of different people at lots of different stages.”
Ben Langdon, CEO of the Digital Media Group (DMG) cautions against acquiring in this climate, despite the evident value, unless the business is strategically consistent with your own objectives.
“There might be companies you can acquire because their share prices are low, but my gut feeling is that the market isn’t necessarily supportive of acquisitions at the moment. If you want to acquire a business to make them a shareholder in your own, you are giving away your own stock at a cheaper price than you may otherwise,” he says.
“Secondly, if you are driven by the price of stock, therein lies the road to ruin. You wouldn’t buy a business with a ridiculously low share price if they don’t catch your core proposition. Groups buying agencies in an environment where prices are low probably leads to people doing cheap deals. But I suspect they come back to haunt them in the end.”
What next for The Direct Marketing Group? The failure of the proposed Mission buyout would not appear to be a significant setback, especially with talks ongoing to acquire two other businesses. Instead, the breakdown of talks with theMission are more likely to be the result of cautious decision-making whilst the world and local economies remain in recession.
Langdon argues that the credit crunch has resulted in anxiety towards any company with debt, with smaller companies appearing to offer a riskier debt profile in the city. “People are nervous about small companies and their debt proportion; that is what they are asking about at the moment,” he says.
Hopkins agrees that companies like TDMG should reconsider whether to float until the confidence in the financial sector, dented by the Northern Rock fiasco, Bear Stearns and the credit crunch returns.
“If I was ready to float a business, I wouldn’t pick now to do it,” he says.
“Our sector at the moment is quite depressed. Why launch in quite a depressed sector in which you will struggle to get 80p or 90p a share. I would wait, and give it another three or six months to get a better price. You need a bit of space between all that bad news to let the confidence grow.”