Ad agencies bulk up online

Publicis' surprise $1.3 billion acquisition of interactive marketing firm Digitas could usher in a wave of Madison Ave.-Silicon Valley deals.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- One of the world's largest traditional advertising agencies is scooping up a top interactive marketing firm. And Wall Street is wondering if more Madison Ave-Silicon Valley mergers are in the offing.

Publicis (Charts), which owns the Saatchi & Saatchi and Leo Burnett ad agencies, announced Wednesday that it is buying Digitas (Charts), a digital marketing firm whose clients include American Express, General Motors, Heineken and IBM, for $1.3 billion in cash.

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Shares of several digital marketing firms all shot higher Wednesday following the news that Publicis was buying Digitas for $1.3 billion.
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The deal values Digitas at $13.50 a share, 23.5 percent higher than the stock's closing price on Tuesday. Shares of rival interactive marketing firms aQuantive (Charts), 24/7 Real Media (Charts) and WebSideStory (Charts) all shot up Wednesday afternoon following the news of the Publicis-Digitas deal.

Stewart Barry, an analyst with ThinkEquity Partners, said that on the heels of this merger, it would not be a surprise to see other big Madison Avenue firms, such as Omnicom (Charts), WPP Group (Charts) and Interpublic (Charts), look to buy up interactive agencies of their own.

Large corporations are increasingly using the Internet as a way to promote their brands. Pepsico's Frito-Lay division, for example, is running an online contest to let users create a video for Doritos that will air during the Super Bowl in February.

The explosion in popularity of social networking sites like News Corp.'s MySpace and privately held Facebook, as well as online video sharing sites such as Google's YouTube and privately held Metacafe, has made it more important for big businesses to use the Internet in order to reach a coveted demographic of younger viewers. And that makes companies like Digitas and its competitors attractive to the big ad agencies.

"The appetite remains large for traditional ad agencies to gain greater exposure in the digital area," Barry said.

The Publicis-Digitas merger is the latest in a series of moves by the top four ad agencies to increase their presence online. To that end, Publicis launched its own in-house digital agency, dubbed Denuo, in February.

Over the summer, WPP bought M80, a firm that specializes in online word-of-mouth marketing, and established a joint venture with LiveWorld, a marketing agency that creates online communities and social networking sites for corporate clients.

Omnicom bought a majority stake in EVB, an interactive ad agency based in San Francisco this summer. And Interpublic announced in June that it will participate in marketing and promotional programs on Facebook. Interpublic also agreed to buy a tiny stake, less than a half of a percent, in Facebook.

Aaron Kessler, an analyst with Piper Jaffray, wrote in a research note Wednesday afternoon following the announcement of the deal, that he also expects more mergers.

"We continue to have a favorable outlook on the online advertising services sector given the strong growth of online advertising, the increasing complexity of online advertising, as well as increasing fragmentation, and all trends which favor the advertising services companies," Kessler wrote. "Given the attractive dynamics of this market, we expect continued consolidation." In addition to aQuantive, 24/7 and WebSideStory, Kessler pointed out that ValueClick (Charts) is attractive.

Of the smaller independent digital marketing firms, Barry said that 24/7 Real Media could be the next to be taken over -- although it might not be by one of the four major ad agencies. 24/7 Real Media already has a search engine marketing partnership with Dentsu, Japan's largest advertising firm.

Barry said aQuantive is the most attractive since it is growing the most rapidly of the remaining digital marketing companies. But he thinks that because it is doing so well, the company is probably not as likely to be interested in selling.

Still, Kessler pointed out in his note that aQuantive's stock trades at a lower valuation than what Publicis agreed to pay for Digitas. And he argues that aQuantive should be worth more than Digitas since it is a more diversified company.

Digitas, on the other hand, warned in July that its third-quarter results would be lower than expected and investors expressed concerns about the company losing some key clients.

This, one analyst argued, may have spurred Digitas to decide that remaining independent was not the best course of action.

"We believe the willingness to sell comes from some of the growing pains the company realized this summer," wrote Friedman Billings Ramsey analyst Chris Penny in a report Wednesday afternoon.

But Penny added that even though the valuation Publicis is paying for Digitas may appear rich, the price "should not deter other bidders looking for the capabilities that Digitas provides."

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.