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Last Year's Deals, This Year's Opportunities

  |  February 26, 2003   |  Comments

Interactive: what investment bankers say will drive direct-marketing growth.

E-marketing growth this year will occur through continued intertwining with direct marketing (DM). So say the mergers-and-acquisitions (M&A) experts at investment bank Petsky Prunier. Closer alignment of the disciplines addresses client demand for multi-channel communications. Increased technology use helps clients meet the need for accelerated speed to market.

The bank's most recent annual report on DM industry corporate transactions takes a close look at 2002 activity. E-marketing predictions are the highlight of their prognostications for the coming year.

Last year's 557 M&A transactions, totaling some $24.8 billion in aggregate value, break into four subgroups:

  • DM merchants such as Lands' End and Columbia House were involved in 22 percent of last year's deals, just over one-fifth of the total. These accounted for over half (54 percent) of the total dollar value.

  • DM services, including agencies, media and data analytic companies, and CRM, providers did the highest percentage of deals (38 percent) at 24 percent of the total value.

  • A shrinking set of pure-play e-merchants made 9 percent of the deals, at 3 percent of total value.

  • E-services, including online advertising networks, email vendors, and others, combined for 32 percent of the deals at 20 percent of the value, just behind their offline peers.

According to the bankers, the economic downturn was at the root of two "spending" trends that dominated in 2002. Acquisitions (long-term spending) were used to advance strategies; marketing budgets (short-term spending) favored retention over acquisition.

Strong companies, facing a stalled economy with lackluster prospects for top-line growth, used acquisitions to push themselves along strategic paths. Increasingly broad eBay bought online billing provider PayPal for $1.5 billion. Online ad networks ValueClick and BeFree merged into a single entity with $270 million in initial public offering cash. Liberty Media consolidated the interactive TV space, gobbling up OpenTV, ACTV, and Wink Communications. Barry Diller slipped Ticketmaster into USA Interactive's transaction-focused portfolio. Buyers in 2002 strengthened their company's core competency.

A "sideways economic picture" undercut budgets for customer acquisition. It stalled revenue growth and undermined profitability of companies focused on acquisition services: list service bureaus and media and creative agencies. Meanwhile, marketers allocated more budget to retention, cross-selling, and customer development. That buoyed CRM, statement processing, niche fulfillment, call centers, and related service providers.

Of nine trends Petsky Prunier says portend another robust year for DM M&A and equity investment, three involve e-marketing:

  • Integrated marketing. DM service firms (including agencies, media, letter shops, and list companies) will ally with or acquire complementary e-services firms. This drives the trend of client demand for multi-channel media strategies (the motive that inspired client interest in direct response television, billing statement inserts, and space advertising). Client-driven multi-channel campaigning is a growth opportunity for e-services companies able to partner effectively with others and for large service firms with in-house multi-channel capabilities.

  • Speed. Clients will continue to pressure DM service firms to conceptualize, test, launch, refine, and retest programs at an ever-faster pace. Some agencies are ahead of clients in trying to leverage new technology to create and extract new value from DM's value chain. For both clients and agencies, rapid-cycle testing, earlier decision making, and accelerated speed to market are emerging as a competitive dimension and a substantial opportunity for e-marketing services and data-analytics experts.

  • List-based acquisition specialists. Continued high customer-acquisition costs, combined with rapidly declining costs for online communications and marketing automation technologies, create opportunities for list companies to broaden their service offerings. Notable example: Credit-rating company Equifax entered DM with its $135 million acquisition of Naviant, an email marketing services company. The bank predicts convergence of list, media, and creative services into a new type of customer-acquisition company.

Skepticism must be applied, of course. The bankers who make these predictions earn their living providing advisory services to buyers and sellers of DM, marketing services, and information companies. There's a vested interest in promoting corporate transactions as a means to achieving business goals. Certainly one of last year's lessons taught us all to be cautious of pronouncements from the capital community.

Still, these guys are in the thick of it. They're neither the first nor the only players to make these observations. Each predicted trend -- multi-channel communicating, speed-to-market value, and customer-acquisition specialists -- has important potential in its own right. In all three, the online dimension does not stand apart but is sewn into the solution to the client's business problem.

It's a sign of maturity that e-marketing as such is disappearing into the increasingly dominant paradigm of solutions-focused communications services. Dot-coms require adult supervision. Sometimes, getting older is a good thing.

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Len Ellis Until recently, Len Ellis was executive vice president at Wunderman, where he charted the course in data-based and technology-enabled marketing communications, including the firm's strategic alliances and worldwide interactive strategy. Earlier, he was managing director, interactive integration at Y&R 2.1, a Young & Rubicam start-up consulting unit. He joined Y&R Group as managing director, interactive services at Burson-Marsteller. Len led interactive services at Messner Vetere Berger McNamee Schmetterer EuroRSCG, and started and led the information industry practice at Fleishman-Hillard. Len's book of essays on marketing, based in part on this column, is "Marketing in the In-Between: A Post-Modern Turn on Madison Avenue." He received his Ph.D. from Columbia and reads informational and mathematical theory for fun.

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