Mergers Report: Prospecting Pullback Affects All DM Areas

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Direct marketing companies announced 404 transactions worth an estimated aggregate value of $19.5 billion in the first nine months of the year, according to Petsky Prunier's Direct Marketing Deal Notes.


Only one deal in the third quarter exceeded $1 billion: eBay's $1.5 billion acquisition of PayPal, according to Petsky Prunier LLC, a New York investment bank that provides merger and acquisition advisory services.


Several transactions exceeded $100 million, including two by Staples: acquisitions of Guilbert, the UK office supply division of Pinault-Printemps-Redoute, for $808.7 million; and Medical Arts Press (portfolio company of Freeman Spogli) for $385 million.


"With few signs of an economic recovery on the short- to mid-term time horizon, direct marketers continue to pull back on their customer prospecting efforts, which, in turn, is having major ramifications among several direct marketing service industry sectors," the report said.


"List companies, computer service bureaus, creative agencies [and] inbound call centers are aggressively pursuing strategies to preserve margins," it said. "Shy of a state of chaos, these sectors are using price reductions as the major weapon for keeping and gaining new business. A multitude of firms in these sectors are exploring options to gain scale [and therefore, sustainability], including sales to larger, more established service providers; mergers with similar-sized firms; or capital formation to acquire smaller, niche peers."


The report also said that with several acquisitions involving large catalog companies this year, the DM Merchants sector accounted for disproportionately more deal volume relative to the number of transactions: 49 percent of volume but only 21 percent of deals. Also, pure-play e-commerce is "all but extinguished" with less than 9 percent of total deals and 3 percent of volume.


Here's a rundown of nine-month activity and selected information for the third quarter in DM categories:


· DM Merchants. There were 83 deals for 21 percent of activity, and $9.6 billion in transactions for 49 percent of volume in the first nine months. Catalog marketers accounted for 14 of 21 DM Merchants deals in the third quarter. Many privately held catalogers are taking advantage of the poor economy by pursuing consolidation strategies within their niche business segments. Deals were completed in the quarter by S&S Worldwide, Dynamic Resource Group, Drs. Foster & Smith and Flax Art & Design.


· DM Services. In the first nine months there were 155 deals for 38 percent of activity, and $4.7 billion in transactions for 24 percent of volume. Retention segments (vs. prospecting/acquisition segments) commanded the most attention in the third quarter, with CRM and teleservices companies accounting for 21 of 52 deals. Retention deals included Warburg Pincus' investment in Loyalty Management (UK), DoubleClick's acquisition of Protagona (UK), the buyout of Aftermarket from Guthy-Renker and venture funding for Par3 Communications, Active Decisions, Proficient Systems and Upshot.


· E-merchants. There were 36 deals for 9 percent of activity, and $490.3 million in transactions for 3 percent of volume through the nine months. In the third quarter, Wine.com and Bluefly continued their quest for a profitable business model, each raising another round of financing. VerticalNet and Beyond.com divested non-core offerings.


· E-services. In the nine months there were 130 deals for 32 percent of activity, and $4.6 billion in transactions accounting for 24 percent of volume. The Interactive Television segment was unexpectedly busy in the third quarter with these significant transactions: OpenTV's acquisition of Wink Communications and ACTV for $193.3 million, Liberate Technology's acquisition of Sigma Systems for $62 million, and a $21 million investment led by Comcast in Cox in MetaTV. Nearly 30 percent of transactions in the nine months involved private equity buyout shops (29 deals) or venture capitals (90 deals). Popular investment themes included CRM (20 deals), supply chain (14), catalog (nine), software (eight) and e-mail (six).


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