MDC-Stagwell Merger Could Be A Canary In The Coalmine For Agency Consolidation

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The holding company MDC Partners was already struggling before COVID-19 decimated the US economy.

But a proposed merger by Stagwell Group, first reported by AdAge late Thursday, demonstrates how the pandemic likely accelerated the end of MDC’s run as an independent public company.

MDC Partners and Stagwell Group did not respond to requests for comment.

MDC’s troubles started long before coronavirus, after a 2015 accounting scandal involving former CEO Miles Nadal turned off investors. Since then, its share price has cratered from a high of $28 to a low of $1.01 in April, and its market cap shrank from $1.5 billion to less than $90 million.

Even before the Nadar scandal, however, MDC, was saddled with a heavy debt load which it has been slow to pay off. The company took on a $300 million debt investment in 2009, a $775 million investment in 2013 and another $95 million round from Goldman Sachs in 2017. MDC cut five executives from its leadership team in mid-2018 due to financial troubles.

By the time Stagwell founder and CEO Mark Penn infused $100 million into MDC in March 2019 and took over the company, it was trading below half its stock value. In its most recent Q1 earnings report, MDC’s organic revenue declined 2% to $328 million.

“The amount of debt they were carrying was a challenge for them from an M&A, profitability and operational standpoint,” said Forrester analyst Jay Pattisall. “The economic fallout of COVID-19 has amplified a situation that was already well underway.”

It’s not surprising that MDC and Stagwell would eventually merge, given their shared ownership and complementary agency offerings, Pattisall said. But the fact that it’s happening now could be a harbinger of more agency consolidation in the COVID-19 era.

Smaller public companies such as MDC are likely to suffer in a challenged market, where investors favor companies with larger market caps. A merged Stagwell-MDC entity would have a $2 billion market cap, generate $35 million in cost savings and buoy MDC’s stock to $4.25.

“Scale means a lot in today’s ecosystem,” said Greg Paull, principal and cofounder of consultancy R3. “We would expect there to be consolidation going forward to focus more on the assets that are truly unique and special.”

Oil and water

While the deal may be positive for investors, it will be interesting to see how MDC employees react to a proposed tie-up with Stagwell.

MDC Partners, which owns agencies including 72andsunny, Anomaly and Doner, is structured so that agency founders retain ownership and shops are incented on their own performance. In a typical holding company setup, agency founders sell to the network and agencies are incentivized to work together on certain accounts.

While MDC’s model attracted world-class entrepreneurial talent, it made it difficult to foster the cross-agency collaboration that clients increasingly demand. MDC has worked to change that since Penn came on board, launching a media agency network and a data and technology unit in 2019.

But it’s unclear how MDC’s culture of internal autonomy for individual agency founders will fare under Stagwell, which encourages cross-agency referrals and collaboration as well as regular conversations among founders.

“The culture at Stagwell is distinctly different from the almost independent ideology inside the MDC Partner agencies,” Pattisall said. “A very deliberate and concerted effort will be required to bring them together.”

Another issue could arise out of Penn’s ties to President Trump. Penn, a Democrat and former campaign advisor to the Clintons, counseled Trump during his impeachment trial late last year. He is also a frequent Fox News guest and was publicly critical of Special Counsel Robert Mueller’s investigation into Russian interference in the 2016 presidential election.

These actions have left some MDC employees miffed, according to sources, especially as political tensions continue to boil over in the United States.

“Typically, because of where they’re geographically located,” Pattisall said, “the employee base for advertising agencies tends to be a little bit more left of center.”

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