Direct marketing firms announced 99 transactions with an estimated aggregate value of $5.7 billion in the first quarter of 2003, according to Petsky Prunier's Direct Marketing Deal Notes provided exclusively to DM News yesterday.
Activity fell 18 percent compared with the same period a year ago. However, as a result of USA Interactive's $3.3 billion acquisition of Expedia, total dollar volume in the quarter increased over the same period last year. If that sizable transaction is taken out of the total, estimated transaction volume totaled $2.4 billion. This amount is 34 percent below last year.
The report cited “some corporate divestitures [especially among agency networks] and modest consolidation plays [particularly among firms either of similar size or complementary service offerings and customer bases]” occurring.
However, a median deal size of less than $7 million means significant strategic initiatives via “M&A are far and few between,” the report said.
Highlights of the report include:
* Direct marketers. There were 22 deals, down 33 percent from first-quarter 2002. A total of $559 million in estimated transaction volume does not include the Expedia deal, representing a decline of 75 percent from the year-ago period. Also, 36 percent of deals involved Internet-centric businesses, the same percentage as a year ago.
Private equity firm Quadrangle Capital Partners “set the standard for DRTV company valuations” with the purchase of GoodTimes Entertainment for an estimated $250 million. Cataloger/retailer West Marine added $140 million in revenue by acquiring competitor Boat U.S. for $72 million; and gift product manufacturer/distributor Blyth acquired Miles Kimball in an estimated $65 million deal that added $120 million in revenue to Blyth.
* Service providers. There were 77 deals, down 13 percent from last year's first quarter. A total of $1.8 billion in estimated transaction volume was reported, up 30 percent from a year ago. Also, 25 percent of deals involved Internet-centric businesses, off 50 percent from the year-ago period.
Significant sectors included: Media with eight deals, led by Overture Services acquiring two search engine companies and Yahoo acquiring Inktomi; Customer Care with four deals, led by West Corp.'s $397 million acquisition of conference calling service provider Intercall; Transaction Processing with six deals, led by CGI's $329 million acquisition of Cognicase; CRM's nine deals; Software and Supply Chain with six deals apiece; and Fulfillment and Agency with five deals each.
Observations from the report include:
* Many large marketers are taking cost cutting to the extreme and are asking service providers to reduce pricing to nearly “profitless” levels.
* For advertising agencies, softness in demand exacerbated by uncertainty during the Iraq-U.S. war and continued unfavorable changes in agency groups' business mix away from high-margin public relations and other project-based business contributed to a rollback in gross profit margins. Petsky Prunier's index of agency gross margins shows a drop from an approximate 40 percent level at the end of the 1990s to the 35 percent level currently.
* Call center and teleservices gross margins dropped about 2.5 points from their average high in 2001 of about 40 percent. Call centers in India and the Philippines offer labor rates that are about 50 percent of those in many U.S. markets. A reduction in outbound telemarketing resulting from the weak economy and, to a lesser extent, the war have hurt cost management initiatives.
* The average gross margins for database providers have remained steady, typically in the 50 percent range. As price gains have been difficult to achieve, volume increases brought on by modestly expanding customer bases fueled revenue gains. Where sales levels did not increase, efficiencies in data collection, distribution and information technology often more than compensated.
* In direct marketing printing, though revenue growth was not evident, neither was erosion in gross margins. Most of the companies in the sample generated a significant portion of their revenue from statement and other CRM-related printing, a direct mail sector less subject to swings in marketing budgets than acquisition-driven communications. Recurring in nature, these programs permit capacity management and therefore better cost controls.