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By MICHAEL J. DE LA MERCED
It’s not often that a popular television show illustrates corporate finance. But the most recent episode of “Mad Men” provided a lesson in advertising agency deal-making, circa 1968.
But before diving into Don Draper’s world, readers, please take note: There will be spoilers.
The first, obviously, is Sterling Cooper Draper Pryce’s weighing a potential initial public offering.
The episode on Sunday night, “For Immediate Release,” opens with an investment banker hunkered over agency documents, in the midst of preliminary due diligence.
The banker proposes selling 400,000 shares to the public at $9 a share. Given Sterling Cooper’s existing 1.5 million outstanding shares, that would have valued the agency at $17.1 million — or about $114.4 million in today’s dollars.
In the episode, Sterling Cooper eventually improved its position, winning a higher proposed price of $11 a share. That would have valued the agency at $20.9 million, or $139.8 million today.
By May 1968, when the episode is set, seven ad agencies had held initial stock offerings, according to Ad Age. Among them were Wells Rich Greene and Papert, Koenig, Lois.
Over all, 21 agencies went public from 1962 to 1973, according to a 2008 research paper by Andrew von Nordenflycht, a business professor at Simon Fraser University in Vancouver, British Columbia. Among them were major shops like Doyle Dane Bernbach and Ogilvy & Mather, the latter of which once counted Berkshire Hathaway among its shareholders.
Inside AMC’s “Mad Men”Behind the flood of offerings was the booming ’60s stock market, which prompted bankers to seek ever more companies to pitch to investors. Services companies like ad agencies became hot commodities, playing off the allure of Madison Avenue and its mad admen.
The trough wasn’t restricted to the big names. As the banker (whose name or firm affiliation is never identified) notes in the “Mad Men” episode, there was precedent for small advertising agencies going public. An article in The New York Times on Feb. 13, 1968, detailed the I.P.O. of Adams Dana Silverstein, then the tiniest firm in the industry to begin trading publicly.
“We made our decision to go public — a gutsy one — six months after we started and our reason was that we wanted to build a damn good agency and staff,” D. W. Silverstein, the firm’s president, told The Times then.
Yet the bubble eventually burst, violently. Of the 21 agencies that had held I.P.O.’s, two failed and six had gone private by 1978, according to Professor von Nordenflycht.
Today, the advertising concerns that remain publicly traded are largely giant conglomerates like Omnicom and WPP, which own scores of smaller shops and have largely thrived. A number of small digital advertising firms went public in the late 1990s, only to sputter in the wake of the dot-com bust.
Why? Big firms can spread out their risks among a number of their holdings, making their earnings less volatile.
And then consider Sterling Cooper. News that Jaguar had left as a client prompted an apoplectic fit by the junior partner Pete Campbell, and with good reason: Don’s summary firing of the car company took away a significant amount of revenue. It wasn’t the first time the firm had suffered from a client departure; Lucky Strike’s exit was chief among them. (At the end of the third season, the cigarette maker brought in $24 million in billings. Vicks Chemical, which was gone as of Sunday’s episode, was worth $9 million.)
And as service businesses, ad agencies are at the mercy of client fees rolling in, a lumpy operating model that wins little favor among many investors. The same problem prompted investment banks like Lazard and Evercore Partners to add steady-revenue businesses like asset management for smoother earnings.
Adams Dana Silverstein’s very reason for going public proves the point. The 1968 article noted that the idea came after the agency, founded two years earlier, had just lost its first account.
“We were just sitting here,” Bill Silverstein told The Times, “having just lost an account and had just staffed up. We didn’t want to go backward. So we said, ‘Why not go public?’ ”
As Professor von Nordenflycht notes, the ad industry of the time wasn’t sitting on particularly notable growth or profitability during the early 1960s.
And the firms taking these agencies public weren’t always of the highest caliber. Bert Cooper, a name partner, sniffs that the banker pitching Sterling Cooper — who was earlier shown furiously punching an adding machine — conducted only 20 minutes of analysis.
His dismissive reply to the banker’s preliminary estimate hinted of the army of drones seeking business: “I can’t take this to the rest of partners, but I can take it to other underwriters.”
Adams Dana Silverstein was taken public by the Hancock Securities Corporation, which was eventually expelled from the National Association of Securities Dealers in 1972, according to The Times. The bank’s president, Mortimer Tover, was barred from the industry as well and fined $5,000.
Not that any of this mattered anyway. By episode’s end, DealBook had its second reason to pay close attention: Don struck a secret deal with his main rival, Ted Chaough, to merge their guppy-size agencies and win business from Chevy.
“They wanted our ideas and a big agency,” a beaming Ted says. “So we gave them both.”
Peter Eavis contributed reporting.
http://dealbook.nytimes.com/2013/05/...gewanted=print
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