Saatchi Will Pay $450 Million for Bates Ad Agency

Advertising giants Saatchi & Saatchi PLC and Ted Bates Worldwide on Monday announced final plans for their merger into the world’s largest ad firm and immediately began discussing plans for further acquisitions.

British-based Saatchi will pay $450 million in cash--far more than most analysts predicted--to create an agency with 150 worldwide offices and $7.3 billion in annual advertising billings. Of the total, $400 million is to be paid at the closing, expected in July, and the remainder in two years.

At a Manhattan press conference, Bates Chairman Robert E. Jacoby said the New York-based agency “will continue to look for acquisition partners and will continue to raise our billings, because that’s what the future of this business is all about.”

Billings refers to the cost of placing ads through agencies, which typically add a 15% fee to the cost of advertising broadcast time or print-media space.

List of Acquisition Candidates

Jacoby said that Bates has a list of 21 ad firms it would like to acquire and that the agency is particularly interested in purchasing agencies to expand its reach in Canada, France, Germany and the United Kingdom.

The deal, and Jacoby’s remarks, again focused attention on a merger wave that has swept the industry as agencies have sought a means of better serving international clients. “There are a lot of agencies out there that have put together lists like Bates’,” said David Leibowitz, an analyst with American Securities Corp. in New York.

Last month, Doyle Dane Bernbach Group, BBDO International and Needham Harper Worldwide agreed to merge in what would have created the world’s largest agency, except for the Saatchi-Bates deal.

Saatchi, now the fifth largest in terms of billings, has already this year acquired Backer & Spielvogel for more than $50 million and Dancer Fitzgerald Sample Inc. for more than $75 million.

Interpublic Group, Ogilvy Group and Foote, Cone & Belding have also been on the acquisition trail, noted Charles Crane, analyst with Oppenheimer & Co. in New York.

Crane said analysts’ predictions of the sale price were too low because they underestimated the earnings of privately held Bates.

Figures disclosed Monday by Saatchi showed that Bates’ net income was about $33.2 million in the 12 months that ended last March, making the $450-million price tag more than 13 times annual earnings.

The multiple is “more than Saatchi has been paying but still pretty modest when you consider that (U.S. agencies) have been going for 15 to 16 times earnings,” he said.

Skepticism Over Merger Wave

The proceeds from the sale will be divided among 200 shareholders. Chairman Jacoby declined to discuss his profit from the deal, but industry insiders have said he holds about 40% of the agency’s stock.

The merger wave has been met with some skepticism from other industry officials, who say that while the deals often enrich agency principals, they may not yield more creative advertising.

Fred Goldberg, chief operating officer of Chiat/Day Inc., a Los Angeles-based agency, acknowledged that the presence of overseas offices might enable an agency to keep a multinational client. “But you’ll have a hard time holding on to him if the creative product isn’t the best around,” he said.

Chiat/Day has recently formed a business alliance with a French advertising agency and is looking for partners in other countries. The agency hopes in this way to form an international network that will assist it with multinational clients without sacrificing its independence, Goldberg said.