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It’s official: advertising groups have fallen in love with PR

agencies. Long the poor relation of the advertising world, low on

credibility and talent, and high on long lunches and promised press

clippings, PR agencies have now emerged as ’must have’ purchases on the

shopping lists of the big communications groups.

In the past two years, the world’s top three players - Omnicom, WPP and

Interpublic - have all substantially increased their exposure to PR:

Omnicom by buying Fleishman Hillard, the international network; WPP by

taking a 29.9 per cent stake in Sir Tim Bell’s quoted public relations

group, Chime, as well as acquiring local specialist agencies like

Buchanan, the financial PR business; and Interpublic for its pounds 180

million acquisition of what was then the world’s biggest independent

network, International Public Relations.

Not to be outdone, True North, ranked fifth in the world, is also

investing heavily in the development of an international PR network.

In the summer of 1997 it bought the London agency, Charles Barker, for a

reported pounds 11 million in a bid to expand its US PR business, Bozell

Sawyer Miller. Charles Barker BSMG, as it is now known, has since

snapped up two lobbying businesses in Brussels and London and is seeking

acquisitions in all the main European markets. In January, meanwhile,

BSMG acquired FRB, the New York investor relations agency.

True North’s PR business is thought to be the fastest growing in the

industry - around 35 per cent compound over the past three years. With

operating income at around dollars 115 million, the group ranks around

seventh in the global PR league, but has set its sights on getting into

the top three.

Elsewhere, smaller PR agencies have also been in demand. Abbott Mead

Vickers BBDO, now wholly owned by Omnicom, added Aurelia PR - the luxury

goods specialist - to its portfolio 18 months ago. While Omnicom pursued

a network acquisition strategy - it now owns the international brands,

Fleishman Hillard, Porter Novelli and Ketchum - AMV had long been

committed to buying UK specialists like Freud Communications, the

consumer business, and Fishburn Hedges, a corporate outfit. AMV’s

chairman, Peter Mead, says he is keen to buy more agencies provided he

can find quality operations. ’There just aren’t many decent ones left,’

he says.

Why are PR agencies flavour of the month? And why, when for years some

PR firms preached the doctrine of independence on the grounds that they

did not want to be subsumed by an advertising-led culture, are they now

selling out?

The most compelling reason is the intoxicating smell of money. Faced

with an advertising market that is growing by about 5 per cent a year,

the quoted communications groups have been drawn to the PR business

which, by contrast, is enjoying growth rates of around 14 per cent,

according to the Public Relations Consultants Association.

Martin Sorrell, WPP’s chief executive, saw his PR businesses grow by 21

per cent last year compared with an average 8 per cent from his ad

agencies.

Tim Sutton, chairman of Charles Barker BSMG Worldwide, is heading the

group’s drive into Europe. He says: ’Fund managers are expecting the

money spent on mass-market advertising to decline as a percentage of

client spend. As a result, they are looking for the quoted groups to get

exposure to all the other communications areas.’

PR is attractive because it can offer better margins than advertising

and other below-the-line disciplines. ’Advertising margins tend to be in

the region of 8-12 per cent, whereas PR margins seem sustainable at a

higher level - around 15 per cent,’ Sutton says. Some specialist areas

of PR, particularly financial, can deliver margins as high as 20-30 per

cent in a buoyant market.

But the dash into PR it is not simply about revenues and margins. Stock

market ratings also play a part. Ad agency groups have traditionally

been given a higher rating than PR firms by investors. Lord Chadlington,

the founder of Shandwick, floated it on the stock market, renamed it

International Public Relations and sold the business last year to

Interpublic which is rated on the US stock exchange at 33 times post-tax

profits.

’If you took International Public Relations paper and exchanged it for

Interpublic paper, you would have doubled your money,’ he says.

Of the independently quoted PR groups in the UK, Chime Communications -

valued at pounds 81 million - is the most highly regarded. But the 17

times multiple that its shares trade on is way below that of advertising

groups: Cordiant Communications Group, for instance is on 25 times and

WPP on 26.

This rating discrepancy has meant buying PR firms has made immediate

financial sense for the big quoted groups. Rupert Ashe, chairman of GCI

Focus, who sold his financial PR firm to Grey Communications last year

on a structured earn-out deal worth up to pounds 5 million, says:

’Private PR agencies can be bought by the quoted groups for multiples of

between five to ten times post-tax profits. Then they get an immediate

re-rating.’

So much for the financial wizardry, what of the PR business itself and

the quality of its offering?

Sorrell was one of the first to buy up international PR networks. Hill &

Knowlton came with the acquisition of JWT in 1986 and Ogilvy PR with

Ogilvy & Mather Worldwide in 1990. For years Hill & Knowlton struggled,

making losses in the early 90s and attracting criticism for working for

the controversial American Church of Scientology.

But now, thanks largely to the recruitment of Howard Pasteur, President

Clinton’s former head of congressional affairs, to run the business, the

group is thriving. It has just reported fees of dollars 206million, up

15 per cent on last time. Pasteur identifies North America and Europe as

buoyant markets, with London the network’s biggest office.

Sorrell says: ’The most important change that has taken place is that

public relations and public affairs have become more specialised. So the

opportunity to add real value and charge for that is greater. But the

key with all these businesses is leadership; I know it sounds trite, but

if you have the right leader, you win, if you don’t, you lose.’

Inevitably, many agencies cite the ability to cross-sell services as a

rationale for PR acquisitions. But getting to the bottom of just how

much PR business is won from advertising clients or vice versa is

tricky.

There is plenty of anecdotal evidence to support a case for

cross-referrals: Chime agencies handled the PR work around the launch of

Egg, the Prudential’s direct banking business set up last year, partly

because HHCL & Partners, its ad agency, devised the advertising

campaign.

But not everyone is a disciple of cross-selling. The one remaining

independent PR network is the privately owned Edelman Worldwide, which

has global fees of dollars 170 million. Richard Edelman, president and

chief executive, says: ’It is totally unproved that there is synergy

between advertising and PR. We’ve seen no slowing of our growth rate,

our clients like our independent view and, while we are happy to work

with ad agencies as partners, we don’t want to be part of one of

them.’

But the ’happy to be single’ line is what Lord Chadlington used to say

before he was acquired by Interpublic. ’I thought if you put PR first,

invested in the people, you would maintain quality and grow the

business. But the world has changed.’

He says one of his first tasks within Interpublic and as the head of its

three PR networks - Shandwick, Golin Harris and Weber - has been to

’show them that the quality of the PR offering is not going to let them

down’.

Few clients hand business to sister agencies just because they are

sisters - it is quality, not ownership that determines agency selection.

However, from a City perspective, the idea of cross-selling carries

weight. Ben Tompkins, a managing director at Broadview, the media and

hi-tech investment bank, says: ’People think it (one stop shopping)

works and are prepared to make acquisitions on that basis.’

Nevertheless, Bell says he cannot think of many situations where it is

appropriate to pitch advertising and PR together. ’Ad people deal with

middle management, PR people tend to deal with top management concerned

with corporate reputation and financial reporting,’ he says.

This point about access to the boardroom - which tends to be the case

for corporate, financial and public affairs specialists - is seen as one

of the industry’s strengths. Corporate reputation is a growth market and

increasingly falls to company chairmen and chief executives. One PR

agency head says: ’Ad agencies do not want to have non-aligned PR people

in the boardroom.’

All the communications groups interviewed for this article - including

WPP, Omnicom, Interpublic, Cordiant, Grey and True North - said they

want to buy more PR firms.

Last year, Michael Bungey, Cordiant’s chief executive, bought two US PR

operations, Churchill Group, a business-to-business agency, and The

Criterion Group, a travel specialist. He says: ’We are thinking about PR

very seriously. There have been problems with PR acquisitions because

lots of the firms hinged on one individual and lots of relationships

were one-offs. But everything has become more strategic; brands are

being controlled better and PR plays a role within that.’

Meanwhile at Grey Communications Group, Roger Edwards, the chairman and

chief executive, describes PR as one of his ’primary areas for

investment’.

He has around pounds 60 million of PR income from GCI offices in 30

countries and from Apco, the lobbying business, but says: ’In clients’

eyes it has become a highly valued skill. We want to be better at

consumer PR, at internal marketing and at crisis management.’ Buying

local agencies rather than networks and rebranding them will continue to

be the Grey strategy, he says.

It certainly looks set to be a sellers’ market for PR agencies over the

next few years. However, in a business where the assets are famous for

’going down in the lift every night’, buyers are unlikely to tie the

knot with anything less than the toughest of earn-out terms firmly

attached.

WORLD TOP TEN COMMUNICATIONS GROUPS WHICH OWN PR AGENCIES

Rank  Name and PR agencies owned (networks in bold)               Income

1     Omnicom Group                                       dollars 4.15bn

      Porter Novelli; Ketchum; Fleishman Hillard

      Gavin Anderson; Freud Communications;

      Fishburn Hedges; Aurelia PR; Government Policy

      Consultants

2     WPP Group                                           dollars 3.64bn

      Hill & Knowlton; Ogilvy PR

      29.9% of Chime Communications; Buchanan

      Communications; Carl Byoir The Wexler Group;

      Timmons; Alexander Communications; Blanc & Otus

3     Interpublic Group                                   dollars 3.38bn

      Shandwick International; Golin Harris

      International; Weber Public Relations Worldwide

4     Young & Rubicam                                     dollars 1.49bn

      Burson Marsteller

      Cohn & Wolfe

5     True North Communications                           dollars 1.21bn

      Charles Barker BSMG

6     Grey Advertising                                    dollars 1.14bn

      GCI Group

      Apco

7     Havas Advertising Group                             dollars 1.03bn

      Euro RSGC International Communications

8     MacManus Group                                        dollars 842m

      Manning Selvage & Lee

9     Saatchi & Saatchi                                     dollars 657m

      The Rowland Company

10    Publicis                                              dollars 625m

      Publicis Consultants

UK QUOTED PR GROUPS RANKED BY MARKET CAPITALISATION*

Rank  Group and PR brands                                   Market value

                                                              (millions)

1     Chime Communications                                     pounds 81

      Bell Pottinger; Smithfield Financial; Opinion

      Leader Research

2     Incepta                                                  pounds 64

      Citigate (includes Dewe Rogerson)

3     Lopex                                                    pounds 26

      Grayling; Westminster Strategy

4     Text 100 (Ofex Market)                                 pounds 16.7

      Text 100; Bite

5     City of London PR                                         pounds 6

      City of London

6     Holmes & Marchant                                         pounds 3

      Holmes & Marchant; Counsel; Counsellor

7     10 Group (Alternative Investment Market)               dollars 2.4

      Leedex

* As at 1 March 1999