Dotcom déjà vu

Emma Rubach looks at developments in the supercharged digital market as valuations for interactive groups keep reaching new highs

As a surge in demand for digital design groups reaches boiling point, independent interactive specialists are being valued at prices well exceeding the norm.

The most recent example of this was Microsoft’s acquisition of the marketing services company Aquantive, for which it paid a staggering $6bn (£3bn). Alongside acquiring the ad-serving technology Atlas – Microsoft’s main focus in its battle against Google – it picked up Aquantive subsidiary Avenue A/Razorfish, a creative and media group, at a price not seen since the goldrush of the dotcom boom.

Meanwhile, as reported in Design Week (News, 10 May), Amanda Merron, partner at accountant Willott Kingston Smith, says it is now common to see digital businesses valued at five to eight times their pre-tax profits, in some cases even 12 times.

For many in the industry, news of a digital splurge has a whiff of déjà vu about it. Key members of this relatively young industry still remember the glory days of the late 1990s, when consultancies sold for silly money before the digital milk turned sour. Now – if you believe the rumours – parent companies that lost out the first time are stepping back up to the plate with a round of digital acquisitions. But is this really what is happening, or is it just hype? And how will such a shake-up affect the industry?

Andy Chambers, chief executive of digital design group Digit, which was bought by WPP in 2004, says he thinks that though valuations may be up, networks are not actually putting their money on the table. ‘There were a couple of deals last year,’ he says. ‘And it’s true things are overheated. But at the moment lots of individuals in the industry are overvaluing themselves, while clients think interactive work should be cheaper. There are lots of discussions taking place which are fuelling a boom in valuations, but I don’t think people are buying yet.’

If this is the case, independent groups are certainly thinking about selling. Lateral chairman Jon Bains has corroborated the rising market for valuations and even hinted to Design Week that some sort of deal is possible there.

Phil Gerrard, business director of digital design group All of Us, has seen the recent surge as well. ‘I’m very aware of rising valuations. What we are seeing now harks back to the craziness of the dotcoms. The difference is, it’s real money – not venture capital. We have had a lot of interest expressed and we are always open to conversations, but we are not desperate to sell,’ he says.

Veterans of the dotcom boom say that, however high valuations skyrocket, there is likely to be far less fall-out than there was in 2001. Andy Hobsbawm, who founded the company Online Magic in 1995, sold to (part of Omnicom) and is now’s European chairman. ‘Valuations are going up because the future of media is interactive,’ he says. ‘It’s true that people are overpaying, but the growth rate of digital business shows that there is a lot of money to play for.’

He suggests that as a result, the scenario will play out different to the first time. ‘There will be a range of services, from independents to major networks and smaller networks of specialists like Zulu,’ he says.

Independence in the design world is often associated with quality/ it signifies maverick tendencies and the ability to harness the zeitgeist. But with groups like Lateral potentially being bought up by lumbering corporate monoliths, will creativity risk being stunted? ‘It depends on the brands,’ says Hobsbawm. ‘If you are working on Apple or Playstation, of course there’s more range to be creative. But things getting bigger is not usually a recipe for innovation and quality.’

‘We may lose some good groups,’ cautions Richard Davies, who founded Good Technology in 1994, which was then sold to WPP. He recently founded Vexed Digital, which he says he is happy to keep independent for now. ‘The culture of independence still exists but there will be a lot more acquisitions than mergers in the next year or so,’ he adds.

Though Davies says he for one is happy to remain independent, he believes that taking a long-term view shows heavy investment in the digital industry is not throwing money down the drain.

‘When I sold to WPP, they bought into a ready-made company with expertise and the ability to grow,’ he explains. The group was valued at over ten times its pre-tax profits. ‘People were saying it was overvalued but I disagree,’ he says. ‘It was a sound investment.’

• Traditionally, valuations are calculated as a multiple of pre-tax profit
• Four or five times pre-tax profit is a common multiple in the sector
• Digital groups are currently commanding up to ten and 12 times
• Deepend was rumoured to have turned down an offer of 18 times pre-tax profit seven or eight years ago

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