- $100 million seems like way too much money, based on the business's cost structure and profitability.
- A lot of Communispace's customers are competing ad agencies and their clients. Won't they pull their business rather than let Omnicom look at their confidential research?
MarketingWeek's Stuart Smith broke the story with a bucket of cold water. Although Communispace already shares clients with Omnicom such as Coca-Cola, Campbells, Colgate, Hasbro, Heinz, HP, Microsoft, Pepsi and Unilever, it doesn't seem to be very good at making money:
Communispace's 2010 gross revenue is expected to be $47m and profit before tax, $6.3m: which suggests an already high price/earnings multiple of about 16.
Additionally, however, just under 30% of that profit-before-tax figure is expected to be siphoned into an options bonus scheme for senior Communispace management, which would effectively make the multiple soar well into the 20s. There must be a pretty important piece of mutual business at stake to justify the asking price.Smith also notes that 56 percent of the company is owned by venture capitalists, who must (presumably) either be paid to go away or they will insist on keeping a chunk of the company's profits for themselves.
Ad Age notes that Communispace generates its $47 million from 300 employees. That means each employee is generating just $156,666 in revenue, on average. That margin is thin, given that an employee on a modest five-figure salary can easily cost a company a similar sum when you factor in benefits, expenses, office resources and real estate costs. For an online business that seems remarkably inefficient.
The deal also brings some interesting conflicts:
... the Communispace client list also includes agencies at rival holding companies, like Havas' EuroRSCG, Publicis Groupe's Starcom MediaVest Group and Interpublic Group of Cos.' Martin Agency. Were an Omnicom deal to happen, such alliances would likely have to dissolve, as would accounts with clients like Verizon, a major competitor to a big Omnicom client, AT&T.Communispace also serves WPP (WPPGY)'s Ogilvy & Mather, as you can see here and here. Are all those rival ad agencies going to be completely comfortable if Omnicom also gets to read the transcripts of their online research groups?
A $100 million price tag would be Omnicom's most significant digital buy since the Seneca Investments wrapup of Agency.com and Organic. That venture ended badly when Omnicom was sued (unsuccessfully) for moving the failing companies onto an off-balance sheet entity.
Presumably CEO John Wren won't be making that mistake again.