No end to consolidation

Mergers continue apace, albeit with a sharp deceleration of activity because of the credit crisis. NewsCorp took Dow Jones, Google took DoubleClick, Microsoft snapped up aQuantive, Yahoo! took Right Media, Microsoft took Yahoo!, Pfizer took Wyeth, Merck took Schering-Plough, InBev took Anheuser-Busch, Vodafone went for Hutchison Essar, Danone took Royal and Numico, Bank of America took Merrill Lynch, Carphone Warehouse took Best Buy and Thomson Corp merged with Reuters.

Consolidation among media owners also continues unabated. NewsCorp takes and disposes of DirecTV, Comcast tried to take Disney, Carlton and Granada merge to monopolise ITV and BSkyB takes a blocking stake.

Legislation has favoured more consolidation in the US and the UK, although recent events and changes in administrations may alter that. Even in Brazil, which has been fiercely protectionist, you can buy 30% of Globo or Editora Abril. And in Australia, recently introduced legislation relaxing media ownership rules triggered a media asset bidding frenzy. Germany allows foreign ownership of TV channels.

Italy concentrates further through the Gasparri Bill. Clients and media owners are not alone: retail consolidates, too. Morrison takes Safeway; Boots and Alliance merge and privatise shortly thereafter. In Latin America, Wal-Mart enters the north east of Brazil by acquiring part of Ahold’s interests, Lider consumes Carrefour’s Chilean interests, and Jumbo buys Disco in Argentina.

Rumours surround Wal-Mart and Carrefour and Home Depot and Kingfisher.

In line with the laws of big numbers, the challenge to Wal-Mart, Tesco and Home Depot will be how they can successfully manage expansion outside their home markets. Tesco already has over half its square footage outside Britain (but much less of its profits) and has sent its UK managing director to the West Coast to manage its US expansion as Fresh ’n Easy. It will not be simple; the demands are different and the model will be significantly based on rehabilitating blighted areas on the West Coast. And early signs are mixed.

As a result, it is no surprise that agencies are also consolidating. Certainly in the one area where there are big economies of scale – media buying – consolidation is significant. To negotiate with a Rupert Murdoch, Sumner Redstone, Mel Karmazin, Bob Iger or Jeff Zucker, larger scale is essential.

Media buying, or what we call Media Investment Management, is one of WPP’s fastest-growing businesses, driven by clients looking for media-buying efficiencies – rather than reductions in agency’s commissions. Like-for-like revenue growth in the last four years has consistently been well above WPP’s overall like-for-like growth. Often savings on gross media budgets of 5-10% are achievable.

Media savings are driving client centralisations and are a quick kill in showing efficiencies, as Nestlé and Unilever have shown. The traditional media owners are not only having to fend off disintermediation by new technologies, but the pricing pressure from significant consolidation of media budgets. But even on the creative side, voracious procurement departments and ill-judged price competition by agencies themselves are driving consolidation (the $100 million pitch win headline in AdAge or Campaign is more satisfying than real revenue). We have seen two of our competitors desperately write cheques or subsidise account pitches to the tune of $20 to $28 million to retain accounts globally or in the UK.

Technology and media M&A deals 2008

Target name Acquiror name Value of
Clearwire Corp Investor Group 3,200
Getty Images Inc Hellman & Friedman LLC 2,037
CNET Networks Inc CBS Corp 1,808
C&M Communications Co Ltd Kookmin Cable Investment Inc 1,463
TriZetto Group Inc Apax Partners Worldwide LLP 1,364
Teranet Income Fund Borealis Infrastructure Mgmt 1,218
Sony BMG Music Entertainment Sony Corp of America 1,200
Fast Search & Transfer ASA Microsoft Corp 1,191
Liberty Surf Groupe SA Illiad SA 1,135
Source: PricewaterhouseCoopers

Announced global M&A activity $tn

Announced global M&A activity $tn
Source: Thompson Financial, March 2008