By all rights, Dentsu's market value should have taken a bigger dent the day after it shelled out a three-martini premium for UK media buyer Aegis. That the stock only fell seven per cent suggests its shareholders partly sympathise with its existential dilemma. Like most Japanese companies dependent on a shrinking domestic market, Dentsu is in a mad dash for its long-term survival. In that context, the Aegis deal has some merits - but only if it can keep its new Don Drapers from jumping ship.
True, Dentsu took a hit. Its shares posted their biggest decline in more than a year after saying it would pay $5 billion (£3.2 billion) for Aegis. That took about $500 million off its market cap in Tokyo. But that compares relatively favourably to the $1.4 billion premium it’s handing over to Aegis shareholders. By conventional financial logic the stock should have fallen by as much as 18 per cent.
Japanese shareholders must be getting used to deals like these. Indeed, Japan Inc has already spent almost $33 billion this year on overseas shopping sprees. Such dealmaking looks particularly enticing with the yen near a record 78 to the US dollar and corporate balance sheets heaving with cash. Dentsu, for instance, had $2.2 billion in cash generating negligible returns for its shareholders.
Though there are no synergies promised from the deal, analysts had expected Aegis to report £223 million of earnings before interest and tax. On that basis, Dentsu could be looking at a roughly five per cent after-tax return on its investment. That's nothing to shout about. But in deflationary Japan, where the government pays less than 0.8 per cent to borrow 10-year money, it’s defensible.
Perhaps more importantly for Dentsu's long-term existence, Aegis potentially offers a new lease on life. While the group dominates Tokyo’s version of Madison Avenue, its sales have fallen by half over the past five years. Aegis, then, is a hedge against a withering Japan.
But if there is any lesson to draw from TV’s “Mad Men,” advertising’s assets are its people. Aegis’ employees will have to adjust to life under Dentsu CEO Tadashi Ishii. And while Dentsu has operated abroad and made smallish acquisitions, the Aegis deal is a quantum step forward. If the creative talent at Aegis bolts, Dentsu shareholders will regret letting the company off quite so lightly.
