Heavy- Duty Mergers

By Janice Castro

In promoting breakfast cereal and laundry detergent, advertising agencies often trumpet the message that giant size is the best size. Now they are embracing the bigger-is-better philosophy for themselves. Merger mania is turning Madison Avenue agencies into megashops with clients in almost every business and bases in every major world market. In the past month alone, three huge mergers involving billions of dollars in advertising have made headlines.

The latest new, improved giant-size deal, which was unveiled last week, will join BBDO International, the sixth-largest U.S. agency, with Doyle Dane Bernbach Group (No. 12) and Needham Harper Worldwide (No. 16). Combining - annual billings of nearly $5 billion, the menage a trois is the biggest advertising group the world has ever seen--for now. Says BBDO Chairman Allen Rosenshine, who will head the new holding company, not yet named: "We are the biggest--but maybe only for ten minutes."

Nearly all the biggest advertising competitors are gobbling up rivals in what Adweek Editor in Chief Richard Morgan calls "a free-for-all." According to the American Association of Advertising Agencies, there were eight mergers in 1984, 19 in 1985 and eleven already announced in the first four months of 1986, most of them involving large agencies. Firms that once expanded by opening a new office are now more likely to buy an existing agency, picking up its client list as well as its creative talent.

Because so many of the acquisitions are taking place among the largest agencies, a top tier is developing of superheavyweights that are several times as large as most other companies in the industry. Rankings in Advertis- ing Age, a leading trade journal, show that the ten largest U.S. agencies controlled about $27 billion in advertising billings last year. That is nearly 17% of the $162 billion that was spent on ads around the world. The leader was New York City-based Young & Rubicam, with 1985 billings of $3.57 billion, followed by the Ogilvy Group ($3.3 billion), Ted Bates Worldwide ($3.1 billion) and J. Walter Thompson ($3 billion).

But the American companies are facing formidable competition from Tokyo's Dentsu (1985 billings: $3.62 billion) and London's Saatchi & Saatchi ($3 billion). Perhaps the most ravenous of all the advertising firms, Saatchi & Saatchi took over twelve companies last year. Flush with $600 million raised through a stock offering, Brothers Charles and Maurice Saatchi are prowling for more prey and are determined to build the world's largest agency. Doyle Dane Bernbach turned down a Saatchi offer before deciding to merge with BBDO and Needham; so far, Ted Bates has also ducked Saatchi's advances. Says Abbott Jones, president of the Chicago-based Foote, Cone & Belding agency ($1.9 billion): "It's hard to say where a company like Saatchi, with such deep pockets, will strike next."

Several factors are driving ad agencies into a pattern of expansion by acquisition. For one, industry profits dipped 1.5% last year, in part because the economy was sluggish and client companies curbed their advertising budgets as a cost-cutting measure. In response, many ad agencies are resorting to mergers as a way of sustaining their revenue growth.

Mergers are also fueled by rising costs and the increasing international needs of advertisers. As U.S. businesses seek a stronger foothold in foreign markets, the agencies are under pressure to offer these clients full-service global marketing operations. Since 1975, Foote, Cone & Belding has acquired agency interests in Europe, South America and Asia. For smaller agencies, mergers may be the only way to branch out in international business. Example: New York City's Leber Katz Partners ($291 million) agreed to join Foote, Cone last month. Says Stanley Katz, the chief executive of Leber Katz: "This at long last provides us with the type of global capability that we and our clients have wanted for several years.

Some agencies feel that they must merge just to stay in the big leagues, especially following so many multibillion-dollar mergers among the manufacturing concerns they represent. Says Harry Paster, executive vice president of the American Association of Advertising Agencies: "Show me an agency that is sitting still, and I'll show you an agency whose profits are declining." New York City's Backer & Spielvogel ($385 million) used to fear that without overseas offices it was vulnerable to client raids by other agencies. Those concerns increased, says Founder Carl Spielvogel, when a British firm was hired to help introduce Miller Lite beer, one of his clients, in Britain. Says he: "You don't expose your back door like that. Let them in the backyard, and they'll work their way back to the U.S." Last month Backer & Spielvogel agreed to be acquired by Saatchi & Saatchi.

Sometimes a pair of second-tier firms can combine to enter the top ranks. Last June, Benton & Bowles, an old-line Madison Avenue firm then ranked No. 14, agreed to merge with the Bloomfield Hills, Mich.-based D'Arcy MacManus Masius (No. 12), which is best known for its Budweiser beer ads featuring Clydesdale horses. With combined billings of $2.2 billion, and such huge clients as General Motors and Procter & Gamble, the new agency is now the ninth-largest worldwide, with offices in 24 countries.

The merger of BBDO, Doyle Dane Bernbach and Needham Harper borrows an idea pioneered in the 1960s and '70s by Interpublic ($4.7 billion), a group of three international agency networks whose centerpiece is McCann-Erickson Worldwide ($2.3 billion). By linking multiple agencies, Interpublic is able to | offer an impressive array of marketing services on five continents.

The new supermerger came about after BBDO's Rosenshine informally explored separate combinations with Needham and with DDB during the past year. Rosenshine was pondering the possibilities at a weekend home in Great Barrington, Mass., when he dialed BBDO International Group President Willi Schalk, who is based in Dusseldorf. "I have an idea you'll probably think is nuts," said Rosenshine, explaining his notion of a three-part merger. But Schalk said he had been thinking along the same lines.

When Rosenshine broached the idea to the two smaller agencies, he learned that they had talked of merging with each other in the past year. "Then the adrenaline really started flowing," recalls Rosenshine. "We all knew that if we pulled it off, it would be the most dramatic merger in the business."

Needham ($847 million) is the smallest of the three, but it brings a strong domestic network to the merger. Some industry wags saw a resemblance between Needham's role in the deal and its Wheaties ads, in which pint-size Olympic Gold Medalist Mary Lou Retton gulps down cereal with the "big boys." Doyle Dane Bernbach ($1.7 billion) has the most to gain. After scoring numerous hits over the years with ads for longtime client Volkswagen, the agency attracted notice with its beguiling babies series for Michelin tires. But DDB lost several major clients in 1985, dropping $45 million in business with the exit of Polaroid and Atari alone.

For BBDO ($2.5 billion), the three-way marriage mostly represents more of a good thing, taking it from sixth to first place in the agency rankings. BBDO has been on a roll. It won top awards last year for its Pepsi ads. Last week Pepsi signed one of its most celebrated pitchmen, Singer Michael Jackson, to a new $10 million three-year contract, the largest such deal for a single product in advertising history.

Mergers almost invariably bring together some competing clients. But the new holding company has been structured as two separate agency networks in the hope that valued clients will stay. BBDO will be one agency, while DDB and Needham will make up the second. "There will be two equals," insists Needham Chairman Keith Reinhard, who will head the DDB-Needham network. "There's not going to be a low-priced spread here." A third entity, called the Diversified Agency Group and headed by DDB President Barry Loughrane, will consist of specialty marketing and advertising services. |

Despite the careful structuring, it is doubtful that all the clients will be pleased. One potential conflict was resolved early last week when Needham announced that some of its executives were buying the company's Los Angeles office and forming a new agency of their own, taking along Honda and other clients. Automotive clients still represented by parts of the new holding company are Volkswagen and Audi (DDB) and Chrysler-Dodge (BBDO).

Even in the age of the megamerger, advertising experts believe, there will always be a place for comparatively small shops. They can often best handle the needs of small to medium-size clients, which might get lost in the shuffle at a larger agency. Says Diane Rothschild, a former DDB executive vice president who formed a new company with ex-DDB Chairman Roy Grace this year: "The small agency offers the client hand-tailored, customized work." Boston-based Hill Holliday Connors Cosmopulus, with only $218 million in billings last year, won the prestigious Advertising Agency of the Year Award.

Smaller agencies will feel the most pressure in the coming months as they are picked over by the giants that are out shopping. But even some of the larger agencies will doubtless hear the footsteps of cash-rich competitors. Before it is over, the current wave of consolidation in advertising may produce agencies that will dwarf even BBDO's new three-part giant. As Mary Lou Retton might put it, "Watch out, big boys!"

With reporting by BONNIE ANGELO/NEW YORK