Founders Chan Suh and Kyle Shannon are selling their ownership stakes in i-shop Agency.com to the holding company set up by ad group Omnicom and investment company Pegasus Partners II, which has also proposed to purchase all outstanding Agency.com shares for $3.00 each.
At the same time, the New York-based interactive agency announced that it had met expectations of a net loss of $0.12 per share for the first quarter, and said that it is laying off 25 percent of its global workforce, or 350 employees, in an effort to return to profitability.
The ownership maneuverings would concentrate a majority stake in Agency.com in the hands of Seneca Investments LLC, a joint venture set up by Omnicom and Greenwich, Conn.-based Pegasus Partners II back in April. With that majority of shares in hand, Seneca would be free to pursue merger or acquisition deals, which are the current trend in the interactive agency space.
Under the terms of the deal with Suh, Shannon and early Agency.com hire Ken Trush, the three will sell their shares to Seneca Investments LLC, bringing the Seneca stake in Agency.com to 65.7 percent. It previously held 45.3 percent of the company, a stake that Omnicom transferred to Seneca.
Suh, Shannon and Trush would receive $0.94 per share initially, with a potential second payment of $0.47 per share pending the closure of Seneca’s purchase of publicly held Agency.com stock. The three would also receive a third payment of an undisclosed amount, based on Agency.com’s profitability over a number of years ending December 31, 2006. The founders are expected to stay on with the company, and the deal gives them incentive to boost the company back into profitability.
Seneca’s non-binding proposal to acquire the remaining shares of Agency.com for $3.00 a share is subject to approval by the company’s board of directors. An independent board committee composed of the directors are reviewing the proposal.
Under the terms of the deal, Suh, who is chairman and chief executive officer, would receive about $4.3 million now and $2.2 million later ($6.5 million total) if Seneca completes the public share purchase. Shannon, who serves as chief people officer, would receive $3.9 million now and $2 million more ($5.9 million total), if the purchase goes through. Trush, who serves as executive vice president and treasurer and holds a seat on the board of directors, would receive about $180,000 now, and $90,000 later ($270,000 total).
The current payout is less than what they’d theoretically get on the open market — the stock closed at $2.55 on Monday. However, if the founders were to begin dumping large amounts of stock on the open market, they would likely not command the $2.55 price for long.
In a conference call with analysts Monday evening, Suh positioned the transfer as a way to keep the firm running until the economic climate clears up.
“We have said for a while now that we see this as a time of opportunity,” Suh said. “What we needed to get the buy-in of a partner willing and able to help us reach that vision, and we believe Seneca is the right partner for us.”
But industry-watchers suspect that the next news out of Agency.com and Seneca may be a merger. Omnicom’s Communicade division owned stakes in several other troubled interactive agencies — Razorfish, Red Sky Interactive, and Organic — and transferring its holdings to the newly formed Seneca was seen as a way to reorganize its holdings in the shops. Rumors have abounded of mergers between the various Omnicom-associated shops, although no official announcements have been made.
The consolidation of these shops may be eased by the fact that only Agency.com still has its founders at the helm, since founders’ egos are often seen to get in the way of such transactions. Just two weeks ago, Razorfish founders Jeff Dachis and Craig Kanarick stepped out of their executive roles and took co-chairman positions. Following that, Bill Bingham, chief executive of Red Sky, departed. He’d been CEO of i-shop Nuforia, another Omnicom investment that merged with Red Sky Interactive in March 2000.
Suh himself isn’t doing much to discourage the rumors. “As far as I’m concerned, I think we can talk all we want about this being an individual thing, but we need to look at this as an industry trend,” he said during the call. “The consolidation has begun.”
He declined to go into further detail.
In another move Monday that may smooth the way for a merger, the company slashed about 25 percent of its global workforce, or 350 employees. Of that figure, 275 were billable positions.
“While we believe that we have positioned the company for long-term success due to the strength of our model and management team, we feel it is necessary to take additional steps to return the company to profitability,” said Suh. “Our goal remains delivering long-term revenue and earnings growth, and we are focused on generating additional revenue and managing cash effectively through this market transition.”
In connection with the reorganization, the firm said it would take a second quarter charge of approximately $21 million to $28 million, which would mostly consist of severance and real estate-related charges.
On the upside, spokespeople said the company would see about $55 million in 2001 savings as a result of the cuts.
Agency.com had delayed reporting its earnings from last week, giving it time to iron out details of Monday’s transaction with its partner and with Nasdaq regulators. In addition to meeting expectations for a $0.12 per share loss, or $4.7 million, the firm saw quarterly revenues of $41 million, 7 percent better than a year ago, but 27 percent down from the previous quarter.
Last quarter, the firm posted net income of $2.7 million, or $0.06 per share, on $52 million in revenue.
The company added that it finished the quarter with $72 million in cash and short-term investments.
