• by Steve McClellan  @mp_mcclellan, March 23, 2012

For the last 10 or 15 years the media agency business has been about scale, with a handful of global players dominating the sector. But according to David Doft, CFO at ad shop holding company MDC Partners, advances in technology and data analytics and greater client focus on performance enable smaller players to compete more effectively.

“That’s where we have an opportunity to disrupt the media business,” said Doft, who explained his company’s emerging media strategy at a Goldman Sachs investor conference in New York Thursday.

Doft made his comments just days after the company acquired a majority stake in New York independent agency TargetCast TCM and created a new division, Maxxcom, to manage some $2.2 billion of the company’s media assets. Steve Farella, CEO of TargetCast, was given the additional responsibility of running Maxxcom. The TargetCast acquisition followed MDC’s January purchase of another New York-based media shop, RJ Palmer.

With those acquisitions, coupled with MDC's smaller digital, direct-response and analytics-focus media shops like Media Kitchen, Varick Media Management and Integrated Media Solutions, the company has enough scale “to effectively go after a significant presence in the media world,” Doft told conference attendees. Historically, he said, MDC’s media business has accounted for less than 5% of its revenues, versus the 25% or so that media has contributed to the coffers of holding-company competitors.

Doft also said that bulking up in media is a “balance sheet friendly” move, because the company can effectively use payments that go through its financial system from clients to media sellers as a “working capital float that is favorable for our free cash generation ability.” 

But just days before MDC confirmed its stake in TargetCast, investment rating company Standard & Poor’s lowered its ratings outlook for the company from stable to negative, citing the company’s high debt level and lower-than-expected fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA).

Doft said the S&P action was not a huge surprise and that MDC is focused on lowering debt levels and boosting its EBITDA margin, which now stands at about 10%, to between 15% and 17% over the next five years. In part, that margin growth will be achieved from new accounts derived from the company’s efforts to be a bigger player on the media side of the business, Doft said.

And despite the company’s recent media agency buying spree, Doft said that acquisitions would be “slowing down” in 2012. For one thing, conditions aren’t as favorable for purchasers as they were just a few years ago during the recession. Fewer acquisitions will also help MDC reduce its debt faster. The acquisition outlook for the rest of the year, he said, is “a deal or two, maybe.”