Analysis: How do Aegis and Dentsu fit together?

Japan’s 111-year-old Dentsu stunned observers from Tokyo to Toronto last week with a £3.2bn cash offer for one of the jewels of the Western advertising world.

Aegis has been growing faster than the big four holding companies, notching up organic revenue growth of 9.9% in 2011 and starting this year by beating Publicis Groupe to General Motors' $3bn global media account.  

Its suitor is the dominant player in its domestic market, with clients of the calibre of Toyota, Canon and Toshiba, but has struggled to make an impact internationally.

Tadashi Ishii, the president and CEO of Dentsu, was frank about the other reason he wants Aegis, which has been building out a substantial digital capability.  

Speaking through a translator, he said: "The communications environment is changing mainly because of digitalisation - in order to have more value added to the customer we need to have more digital and integated power."

In Aegis he has found a willing target and, it appears, a highly complementary business that at a stroke bestows Dentsu with muscle it lacks outside Japan and in media buying, not just raising its digital game.

Ishii is pitching the tie-up as "the first deal born in the digital age", a theme on which Aegis chief executive Jerry Buhlmann elaborated.

"If you look at the advertising market dynamics digital and IP-enabled media are growing at 2.5 to three times the pace of other media," he said.

"Convergence is continuing apace and the reality is Aegis has very strong assets in digital - 37% of our current revenues and growing. Dentsu also has some very strong capability and assets in the US and Japan in particular."

This digital growth was a key factor in determining the size of Dentsu’s offer, according to Tim Andree, the American who leads its international business Dentsu Network and was the third man on the conference call.

The international business only accounted for 16.2% of Dentsu group revenue in 2011 and operates in 28 countries, but factoring in Aegis those figures become 42% of revenue and more than 80 countries.

Andree said: "It’s a full but very fair price for a company that is performing at the top of the industry in both growth and margin and as Jerry mentioned for the composition of the business that is digital."

Industry implications

The generosity of the 240p per share offer -described by one analyst as a knockout price - makes the deal virtually certain to be approved by Aegis shareholders in August.

Competition authorities are also judged unlikely to block a union of Dentsu’s £2.5bn revenues and 21,649 staff with Aegis’ £1.1bn revenues and approximately 12,000 staff - the combine would have few overlaps and would be a third the size of global leader WPP.

But it would be within touching distance of the number four Interpublic, with £4.4bn revenues and 42,000 people, and far ahead of Havas, with £1.4bn revenues and around 15,000 staff.

It could have been so different for Havas, which back in 2005 was put in the frame for a union with Aegis by the manoeuvrings of French industrialist Vincent Bollore, who built up big stakes in both companies.

But Bollore folded his hand this week, agreeing to sell his Aegis stake to Dentsu, after signalling last year he no longer saw the investment as a strategic lever.  

Bollore will make a profit of €450m (£354m) now and another smaller but multimillion pound sum when the deal completes, but what if any consolation this will bring Havas is yet to become clear.

So Aegis has avoided a potential combination with Havas networks such as MPG, Arena and Euro RSCG, but what is its destiny now?

Autonomy for Aegis?

According to Andree Aegis will become part of Dentsu Inc and Dentsu Network, but will keep its own name and brand, and each business will maintain their existing strategies because "their strategies are so well-aligned".

This suggests a fairly high level of automony for Aegis within the group, though nothing lasts forever.

Buhlmann claims he and the management team are "all very enthusiastic about this offer" and "have stated our intention to stay at least until the end of 2013".

But where does Buhlman see Aegis in five years time?

After what - by his standards - is a long pause: "Clearly we see this as a very good combination. It’s a very complementary combination for the group and following this transaction all of our networks will be maintained. As a new combination over the next five years there’s a great deal of opportunity in this market."

He also described the deal as a "great for our people because it provides continuity and stability and a plan for growth", and promised all its offices would remain open including the headquarters in London.

For Aegis media networks Carat, Vizeum and Posterscope fitting into Dentsu looks relatively untraumatic, given Dentsu’s lack of media buying assets outside Japan, Russia and Eastern Asia.  

Dentsu Network is creatively-focused, housing an eponymous ad agency with global offices as well as US-headquartered McGarryBowen, whose UK office recently won Honda's ad account, and US and UK design agency Attik.  

It is also strong in sports marketing, but it is in digital where the real overlap with Aegis and its creative Isobar and performance-based iProspect networks lies.

Dentsu’s digital assets include London-headquartered full service agency Steak and US-based agencies Firstborn and 360i.

It also has technology assets in the form of US-based online advertising optimisation specialist IgnitionOne and its European subsidiary online display ad exchange AdJug.

Europe sticks out a mile as a key region where Aegis is strong and Dentsu under-represented. Will there be a single chief of Dentsu and Aegis in the region?

Buhlmann ventured: "Clearly the sort of organisational management we’ll work down in detail in terms of who reports to who at a very senior level after the completion.

"But I think suffice to say that Dentsu doesn’t really have any assets in Europe so very much the Aegis assets will be predominant in regard to the European structure of the organisation in the longer term."

Interesting then that Aegis suddenly parted company with its EMEA chief Simon Francis six weeks ago.

Dentsu Europe is under the ambit of Jim Kelly, the founder of creative agency Rainey Kelly Campbell Roalfe/Y&R who took the position in 2009.

Client relationships and the future

Resolving reporting lines aside, the new group will also be looking at client opportunities and conflicts.

Buhlmann has elsewhere played down the idea that Aegis’ brand new General Motors client could be a conflict with Dentsu’s Toyota client.

Neither he nor Andree would say who the combined group’s top three clients would be, but both claimed it would work with more than 70 of the world’s top 100 advertisers.

Andree said: "We’re going to have some clients in common and we’re going to be able to combine those relationships."

Buhlmann, after naming Diageo as a shared client, added: "We have a very strong global footprint and we’ll be looking to provide more services for more of our clients on a global basis across our full range of specialisms."

Buhlmann certainly convinces in the part of a man determined to keep the Aegis juggernaut on the road.

He has been on board since 1996 and in the driving seat since 2010, when he was promoted by chairman John Napier. The pair went on pick up a host of digital businesses and jettison market research division Synovate for £525m in 2011.

Buhlmann’s reward for delivering the souped-up rig into Dentsu’s care includes the £10m value the deal puts on his company shares and share options as well as the chance to drive into new markets.

But having enjoyed coups such as the £3bn General Motors win and the power to splash £200m sums on agency acquisitions (Mitchell Communications andRoundarch), he may have mixed feelings about giving up a measure of control.

The extent to which Dentsu may second guess his moves is already the subject of conjecture by rivals, who note Japanese companies’ traditionally conservative culture.

If Buhlmann had such concerns, he would guard them as closely as he did the talks. As he summed up the deal before handing the microphone to the man he respectfully called Ishii-san, he claimed: "Together the future looks very bright."

As Dentsu’s tilt at the global market plays out in the coming years, the industry is set for an interesting time finding out how prophetic those words turn out to be.

This article was first published on campaignlive.co.uk