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Richard Morganby Richard Morganfrom The Deal.com
Tokyo-based Dentsu Inc. has been trying to expand its presence in the U.S. advertising market for more than 40 years. And its efforts have more often than not concentrated on Young & Rubicam Inc. back when this Madison Avenue mainstay was peddling a panoply of marketing services under the shibboleth of "the whole egg." A portion of that egg, however, always wound up on Dentsu's face.
Despite such joint ventures as DYR (for Dentsu and Y&R) and HDM (for Havas SA, Dentsu, and Y&R-owned Marsteller Inc.), Dentsu never cracked the U.S. market. Nor has it cracked any outside of its native Japan. As statistics Dentsu released for the past six months attest, only 9.4% of its sales and 7.9% of its operating income come from "other countries." This is unacceptable, almost unimaginable, in a world long gone global and crazy for Japanese goods.
They've also been on a winning streak, virtually uninterrupted, since striking out on their own in 2002. Contributing to Mcgarrybowen's revenue of $50 million to $60 million are blue-chip brands such as Crayola LLC, Walt Disney Co., Hewlett-Packard Co., Kraft Foods Inc., Pfizer Inc., Reebok International Ltd. and The Wall Street Journal.
Under this impressive veneer, though, lie less savory aspects of agency success: Who deserves credit, and what generation merits leadership? Sources report these issues loomed so large inside Mcgarrybowen that it shopped itself not only to Dentsu but to at least three other ad holding companies.
For various reasons, most having to do with the uncertain outlook for mainstream agencies in the digital era, no deal was reached before the credit crunch brought M&A talks to a halt. Derailed along the way was a proposal entertained by WPP Group plc to acquire Mcgarrybowen and install its leadership over undermanaged or creatively challenged enterprises like Grey Group Inc. or JWT.
Only Dentsu persevered, and it did so with unflinching dedication to the long term. Last week, while announcing Mcgarrybowen's acquisition, it reported a 24% drop in half-year operating income on a 5% revenue slide. Japan's largest agency also took the occasion to revise guidance for the fiscal year, which ends in March, reducing its sales forecast by 5% and its operating-income outlook by 19%.
Analysts countered that, given its one-quarter share of an extremely weak domestic ad market, Dentsu was still overly optimistic about its performance in Japan. But at least that's no longer the case in the U.S.
Although no price was placed on the Mcgarrybowen acquisition, estimates put it between $70 million and $80 million. It seems a small amount to pay not only for a shot at real U.S. success but for a chance to eradicate long-held beliefs that have checked earlier Japanese advances.
Chief among them has been the stigma of working for a Japanese agency, whose culture of reserve and respect runs counter to Madison Avenue's brash and bold ethos. "The business has always been about the art of the possible," says a veteran creative director. "Back in the day, [working for the Japanese] was considered the least of all possibilities."
As a result, Japanese clients felt it necessary to retain local-market talent or multinational talent -- but never Japanese talent -- on taking their brands overseas. "They were never good at piggybacking on their domestic clients as they went from one international market to another," the creative director adds. "But that's what everybody else did."
One shouldn't overestimate Dentsu's latest U.S. foray. As one analyst notes, it's more a toehold than a foothold. Yet it does give Japanese clients an illustrious U.S. outpost owned by countrymen and U.S. talent a reason to let go of provincial concerns about who employs it. What's more, by giving Mcgarrybowen's dissidents an exit opportunity, Dentsu could keep this stallion of an agency from stumbling just before an almost earned victory lap.
Richard Morgan covers media for The Deal.
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