Digitas Buys Modem Media for $200M

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Interactive shop Digitas has agreed to buy rival Modem Media in a stock-swap valued at $200 million. The deal continues the rush to consolidation in the agency space.

The agreement calls for each outstanding share of Modem Media stock to be exchanged for .70 shares of Digitas common stock. Based on Wednesday's closing price, the deal is valued at $200 million. The merger is expected to close early in the fourth quarter.

The Digitas/Modem Media combination is the latest in a series of mergers and acquisitions in the interactive agency world. In late June, Agency.com purchased assets of Exile on Seventh and aQuantive bought SBI.Razorfish. In this case, Digitas brings strength in direct marketing -- both traditional and interactive -- while Modem Media's capabilities lie more in the interactive advertising arena.

Executives characterized the deal as a move to add scalability at a time when clients are migrating more of their marketing spending to the Internet. The two companies share several clients: General Motors, America Online and Delta Airlines.

"This is very good news for those clients, because it's going to allow us to really come together and build a marketing engine that does what they need," said David Kenny, chairman and CEO of Digitas. Speaking of his positive expectations for the digital marketing space, Kenny later added, "We're doing to have the wind at our backs as we get going."

The two agencies also have some competitive clients. Digitas has Microsoft and AT&T, while Modem Media counts IBM and Sprint among its customers. To address any competitive concerns, the two companies will continue as separate branded entities, with offices in London and San Francisco merged and run under the Modem Media name.

Martin Reidy, currently president of Digitas San Francisco, will act as president of the Modem Media operations. Laura Lang, recently named president of Digitas, will keep that title. David Kenny will continue as president and CEO of the combined entity, while Mark Particelli, president and CEO of Modem Media, will stay on only for the short term.

Separately, the two companies issued their earnings reports for the second quarter. Digitas had revenues of $96.3 million, resulting in net income of $7.6 million, or $0.10 per share. For its part, Modem Media reported net income of $1.8 million, or $0.06 per diluted share, on revenues of $15.9 million.

For the third quarter, Digitas said it anticipates fee revenue to come in at $58 to $61 million, and earnings at $0.08 to $0.10 per share. Modem Media expects revenue in the range of $15 to $17 million and earnings from continuing operations of $0.03 to $0.05 per share.

Brian McAndrews, president and CEO of aQuantive, which just purchased SBI.Razorfish, said he thought the merger a smart move for both companies. "We believe today's announcement is yet another validation of the strength of the digital marketing industry," he said. "As the industry continues to drive forward the landscape will ultimately become more competitive and consolidated. We have positioned our agency business to be the leading independent player, and we expected others to make similar moves to help them grow their position in the industry as well."