M&A Alert - August 9, 2009
Publicis Groupe Agrees to Acquire Razorfish from Microsoft
Transaction Overview
On August 9, 2009, Publicis Groupe (ENEXTPA: PUB, NYSE: IPG) announced that it has agreed to purchase Razorfish from Microsoft, (NASDAQ: MSFT) in a contested three way auction for $530mm.
Target Description
Based in Seattle, Washington, Razorfish was founded in 1995 and became a part of Microsoft (Microsoft Advertising) when Microsoft acquired aQuantive for $6b in 2007. One of the U.S.’s largest online interactive advertising agencies, Razorfish has 2000 employees and provides advertising and branding services including analytics, search/email marketing and eCRM for clients in multiple industries. About two thirds of Razorfish’s revenue comes from web development work, with a third from advertising and media. Razorfish’s clients include Best Buy, Ford, McDonald’s, Microsoft and Starwood Hotels. Razorfish created the bing advertisement for Microsoft, its largest client.
Buyer Description
Based in Paris, France, Publicis Groupe S.A. was founded in 1926 and is one of the world’s largest advertising groups. Publicis provides advertising and marketing agency services including product/services/brand advertising, market research, consumer behavior studies, direct marketing and customer relationship management services as well as media planning and buying services. Publicis also offers digital communication and direct marketing services. Publicis-owned agencies include Leo Burnett and Saatchi & Saatchi, media buyers such as Starcom, MediaVest and ZenithOptimedia and a digital advertising company, Digitas. It acquired Digitas for $1.3b in January 2007. It also acquired Performics, a search marketing company, from Google in August 2008. Performics transaction value was undisclosed. Razorfish will continue to operate under its brand name and be a part of VivaKi, the new Publicis Groupe entity created in June 2008 that will combine the autonomous operations of Digitas, Starcom, MediaVest Group, Denuo, and ZenithOptimedia. David Kenny, VivaKi’s Managing director said Razorfish will help Publicis to be strategically intertwined with Microsoft and Google.
The consideration paid is $530mm in approximately 55% cash and 45% stock. Publicis will issue Microsoft 6.5mm treasury shares worth $162mm, or $233mm, and pay the remaining $297mm in cash. Microsoft will hold about 3% of Publicis ownership. The purchase also includes a five-year agreement where Publicis will purchase display and search advertising from Microsoft subject to certain minimum guaranteed purchases. Razorfish will also remain the preferred advertising services provider to Microsoft who has committed to spend a minimum amount for Razorfish’s services. Publicis won the final bid over WPP (Nasdaq: WPPGY) of Britain and Dentsu of Japan, despite Dentsu’s higher offer. Following Razorfish’s deal, digital advertising, which now accounts for 21% of Publicis’ revenue, will account for 25% of Publicis’ revenue.
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| Equity Value of Considerations Paid | $530mm |
| Enterprise Value / Revenue 1 | 1.4x |
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1. Razorfish generated $380mm revenue in 2008 (Source: Techcrunch)
Strategic Rationale
Publicis had previously announced its intention to increase the proportion of its revenues derived from digital advertising. Razorfish fits within that strategy and David Kenny indicated the potential for further, albeit likely smaller, acquisitions in the future.
Architect Partners’ Observations
This is a win-win deal for Microsoft, Razorfish and Publicis. Publicis will bolster its digital advertising business through Razorfish, while still retaining Microsoft as a major client. Microsoft had been seeking a buyer for Razorfish for some time. The business had been acquired as part of the aQuantive transaction and Microsoft never considered it to be strategic to their business. Microsoft gets out of the creative ad agency business, as desired, and focuses its management effort on the larger competitive challenges, namely Google.