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MDC's challenge: 'Everything you know about advertising is going to be useless on Monday'

Chuck Porter (left) and Miles Nadal in Los Angeles.

MICHAEL LEWIS/for Report on Business magazine

Scattered about the New York headquarters of Miles Nadal's advertising conglomerate MDC Partners Inc. are monuments to technology: a pile of out-of-date TV remote controls; a telegraph key; a 1939 Truetone AM/shortwave radio.

"They are there for inspiration," says Bob Kantor, MDC's head of marketing and business development, gesturing to an ancient Mac and a Commodore PET computer entombed in the corner of the company's boardroom.

The tribute to obsolescence is apt: MDC is happily surfing the digital tsunami that has turned the media and marketing worlds upside down. "We were able to lean into the change," says Kantor, boasting that 65 per cent of MDC's revenues come from digital work–roughly double the industry standard.

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That makes MDC exceptional. But there are other ways that it stands out, too. It's from Toronto, for one thing. For another, there's the firm's creator, Miles Nadal. He's the antithesis of slick, a corny guy who keeps proving high-browed doubters wrong.

"Twenty years ago it was, 'Who the hell is MDC?'" says Arthur Fleischmann, chair of Canadian industry association the Institute of Communication Agencies, and a partner at Toronto advertising agency John St. "They're long past the days where you could sneer at them."

But here's one more distinction: MDC may have more than 50 firms in its roster, but as advertising holding companies go, it's a pipsqueak next to the "Big 4" global giants: WPP PLC, Omnicom Group Inc., Interpublic Group and Publicis Groupe SA.

All of which makes one wonder: How did a university dropout from Toronto build such a singular company, capable–despite its size–of attracting global clients like Samsung, Budweiser and BMW? And what are the odds it can keep it up?

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Advertising is all about the Big Idea, the light bulb that goes on in an adman's head and fulfills a client's ambitions–even the ones they didn't know they had. Miles Nadal, on the other hand, borrows others' ideas. His conversations, e-mails and tweets teem with inspirational quotes–from Albert Einstein, from Vince Lombardi, from Oprah Winfrey.

As much as they spend their lives spinning stories, many top-level creatives are allergic to blarney. Nadal, however, is effusive, loud and goofy. He hugs people in meetings. Staff across the MDC network occasionally receive e-mails with pictures of his golden retriever, Truman.

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If he's not a classic adman, Nadal is certainly a classic entrepreneur, forever looking for the next deal.

It all started with $500 borrowed on a credit card in 1980, which he used to start a photography business in a little office above a leather supply store on Bathurst Street. His first employees were his parents, Irwin and Renée. He calls himself "unemployable"–with the satisfied grin of someone who rakes in a multimillion-dollar salary anyhow.

His debut in the world of high finance did not exactly portend great things. In MDC's Toronto offices hangs a cartoon of Nadal, marching blithely out of his underwriters' office door holding a cheque for $3-million. Just behind him, emerging from the shadows, a monstrous clawed hand reaches for his head.

The drawing commemorates Friday, Oct. 16, 1987–the date Nadal chose to take MDC public on the Nasdaq. It was also the last business day before Black Monday, when the U.S. stock market saw its largest one-day drop in history to that time. "So I got my cheque, and the stock price went down 80 per cent in the first day," he says.

Nadal keeps the cartoon as a "funny reminder that success is but a fleeting moment," he says. "Things are fragile. It teaches you humility."

In its early years, the idea of MDC as a creative hotbed would have been laughable. The bulk of its money came from businesses that now look like dinosaurs: It printed postage stamps, airline and event tickets, and cheques. (It swallowed rival cheque-printer Davis & Henderson in a $50-million deal in 1996.) MDC also manufactured credit and debit cards for some of the Big Five banks.

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Toward the end of the '90s, however, the company pivoted. Under pressure from shareholders to find a focus, MDC grew its smaller interest in marketing. The company had purchased firms like advertising and public relations agency Colle & McVoy. Now it did an about-face, selling the other businesses. Marketing subsidiary Maxxcom, which had been spun off, was folded back into MDC.

A decisive moment came in 2001, when Nadal persuaded the partners at one of advertising's hottest young shops, Miami-based Crispin Porter & Bogusky, to come into the MDC tent. The deal for roughly half of CP+B birthed MDC's "partnership" model: It takes a stake in agencies rather than acquiring them outright. (It's almost always a majority position–although in the case of CP+B, MDC has, in steps, gone all the way to 100 per cent.)

"It was an innovation on the acquisition strategy in our industry," says chief financial officer David Doft. "It gave MDC access to firms that nobody else even had the chance to buy, because they weren't for sale."

It also bought MDC instant credibility. CP+B was widely recognized as one of the most exciting independent agencies in North America, thanks to work such as a series of anti-tobacco ads that were harsh enough to influence jaded teens: The "Truth" campaign included a spot showing body bags being piled outside a tobacco company's offices.

The first years of the partnership showed it was working well for CP+B. Rather than losing steam by going corporate, CP+B won major clients including Burger King, Virgin Atlantic and Volkswagen. At the same time, the highly creative, fiercely independent CP+B team became a powerful marketing tool for MDC itself.

Nadal enlisted CP+B partner Chuck Porter, a respected figure in the industry, as his liaison with potential partners. Porter was one of their own who could sell creative entrepreneurs on what he had done: They, too, could gain financial backing, while maintaining operational control over what they had built.

At a time when other holding companies were reeling from a major downturn in advertising spending, Nadal announced he would embark on a $100-million acquisition spree (all currency in U.S. dollars here and hereafter). Porter, as MDC's chief strategist, began spending a lot more time on planes, visiting agencies and analyzing their creative bona fides.

By 2004, MDC, the little holding company no one had heard of, was signing partnerships with New York agencies that people had heard of, like Kirshenbaum Bond Senecal + Partners and Cliff Freeman & Partners. Forbes magazine was asking of the former cheque-printer, "Who is this guy?"

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Anomaly founding partner Carl Johnson pitches forward in his chair in his Lower Manhattan office, looking incredulous. He has just said that his life would be "ruined" if Anomaly were owned by Big 4 firm WPP, and I asked why.

"Why?" he says in an astonished tone. "Because my phone would melt every five minutes, with [WPP CEO Sir] Martin Sorrell telling me what was wrong. I met him. And for two hours, he told me what was wrong and why we were going to lose all our clients. Because he knew better than me." Johnson knows a bit about holding companies. In the late '90s, he sold his London-based ad agency, Simons Palmer Clemmow Johnson, to Omnicom, where it was merged with TBWA. Johnson himself rose to the position of chief operating officer of TBWA Worldwide.

Omnicom was a more accommodating place than some, Johnson says, but holding-company relationships are by their nature often heavy-handed, entailing salary caps and hiring vetoes. Some will limit agencies to using suppliers owned by the same network.

Anomaly was already winning major clients such as Budweiser and Nike-owned Converse shoes in 2011, when MDC bought a 60 per cent stake. Accepting Nadal's terms–take our backing and we'll stay out of your hair–meant the agency could stop debating whether to hire people or to install air conditioning. Now, when clients ask the agency to expand into new markets, it has the capital to do so–it has already opened in Toronto and built an office in Shanghai, both largely to service Budweiser. In turn, Anomaly gets a bigger share of the client's business, and the chance to win more clients in new markets. The first year of its partnership with MDC, Anomaly grew its business by 75 per cent, and then doubled it the following year.

Of course, it's not as if MDC has invented a formula that is foolproof and not reproduceable. Because it buys small to mid-sized agencies, observers say their magic is more likely to stem from a couple of founding geniuses. In the first couple of years, with the founders still on board and a highly incentivized structure, MDC agencies like Anomaly go gangbusters. But the question remains as to what happens after the earn-out period, when those people start to leave. (Nadal says he never buys an agency without a succession plan in place.)

Like all advertising holding companies, MDC does not break out the financials of its agencies. But CP+B, which launched the MDC revolution, is hurting, having lost both founding genius Alex Bogusky and clients such as Burger King and (for the most part) Microsoft. As for Cliff Freeman & Partners, its struggles led MDC to sell its 20 per cent stake back to agency management in 2009.

Meanwhile, the big holding companies have lately shown some willingness to cut some slack to the talent they acquire. WPP, for example, has bought two Canadian agencies in just over a year–John St. and Twist Image–and, in both cases, the founders have trumpeted their ability to keep operational independence as part of the deal.

Anomaly's Johnson, however, thinks that only MDC has got it right. "We were offered more money by other people," Johnson says. "Nobody understood the culture of a company like ours, like MDC.…We wouldn't have done it at any price with the wrong holding company, unless we were going [cashing out]."

Anomaly was established in 2004 on the assumption that the industry was "broken." Now, advertising is just one part of what the agency does. In the United Kingdom, it is working with Universal Music on a project that does not involve advertising at all: It is probing the state of the music industry to find future profits. That's much closer to business consultancy than to the traditional role of an ad agency.

Even in more conventional work, Anomaly lives up to its name. Johnson points to one of many papers tacked up on the wall, a naughty-schoolboy gleam in his eye. "This is causing so many problems," he says, giggling. "I love it."

The picture is from Canada. For the Olympics, Anomaly Toronto created a 20-metre-long Budweiser blimp-cum-goal light, which lit up over whatever Canadian city it was visiting every time Team Canada scored. The catch? Parent company Labatt was not an Olympic sponsor in Canada: Its rival is. Both Molson-Coors and the Canadian Olympic Committee complained publicly. Budweiser welcomed the attention. Recently, they flew the blimp over Molson headquarters, just to wind them up, Johnson says.

"The nature of the idea defies description," Johnson says. "Is it an ad? No. Is it an event? No. It's a perfect example of a fully integrated modern approach to communications–social, PR, experiential. I love the nature of that."

The blimp has also caused some headaches: It came untethered and went rogue, drifting unmanned across the New Brunswick skies and forcing Transport Canada to warn pilots. A local resident eventually helped to locate the "Red Zeppelin" when it crashed in the woods near his house. (Oh, the humanity!)

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The more you visit MDC companies, the more you see how the ad business is metamorphosing and invading new realms. Take, for instance, the invention room at Kirshenbaum Bond Senecal + Partners that CEO Lori Senecal wants to show off.

In a corner of the agency's offices in Lower Manhattan, Senecal holds up a mechanical gizmo made on the laser cutter. On a counter nearby sits a 3-D printer; on another, some electronic prototyping equipment. The gizmo, a 360-degree selfie machine, was made entirely on the laser cutter. It's basically a spinning mount for a camera phone, which could be used to take not just a self-portrait, but a panoramic selfie video. The agency took its invention to the Coachella Valley Music and Arts Annual Festival, as a promotional tool for audio-systems maker Harman.

"We believe in the power of invention," Senecal says. "We get a disproportionate amount of attention around those ideas, so they're worth more. …A lot of consumers are looking for more than just messages. They're looking for experiences, inspiration."

At the same time, the sheer number of hours we spend with digital media would be enough to make anyone hate ads. The near-infinite inventory of the Internet has exponentially increased the number of messages we are shown. And every single day, the technology is changing. It's enough to drive a marketing director to distraction.

"Somebody right now is writing an article saying, 'Everything you know about advertising is going to be useless on Monday,'" says Chuck Porter. Accordingly, when Porter reviews possible deals, he's looking for hot, young agencies like Anomaly and 72andSunny, another recent tie-up, that can credibly claim to be keeping pace with technological change.

"When I broke into the ad agency business in 1978 as an assistant media planner...our clients didn't even have time to evaluate every new cable channel," says MDC board member Scott Kauffman. "The world has become orders of magnitude more complicated than that."

And not only in the number of channels. When MDC shops, it's looking for au courant agencies–but it's also looking for other sorts of companies that are on top of substantive changes to the very nature of the ad business.

The way media are bought and sold is being transformed by "programmatic" technology that bids electronically for ads according to the audience traits the advertiser wants: MDC, like others, has invested there.

"Big data"–the wealth of consumer information that advertisers can now gather and store–is becoming crucial as those advertisers mine it to build loyalty and sell to people better. MDC has built a corporate analytics group, under David Norton, to help agencies better serve their clients. In January, it partnered with analytics-based communications firm Luntz Global.

Thanks to social media, consumers now talk back to advertising. So PR firms are called on to help make dialogue with consumers feel authentic. "The communications firm has an equal voice at the table with the ad agency. And that's going to grow," says Hamilton South, co-founder of MDC PR firm HL Group.

The definition of the business goes wider yet. Earlier this year, MDC took a stake in Kingsdale Shareholder Services, a specialist in crisis communications and proxy solicitation–that is, your helpmate when you're in a battle for control of a public company. Nadal says that if he could find them, he'd acquire six more firms like this and fold them into Kingsdale. "It will increase the intimacy of our involvement with clients, and give us the chance to be the consigliere at important times of adversity when they're under siege," Nadal says.

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MDC agencies, Nadal likes to say, are "born modern." Nadal, being Nadal, didn't originate that phrase–it was coined by L.A.-based 72andSunny.

72andSunny makes ads for clients such as Samsung and newly won global account Smirnoff. But it also tries to make brands matter in culture, says co-founder Matt Jarvis.

For example, the agency says it helped conceive Samsung's advertising strategy for the Oscar ceremony this year, which included more than six minutes of broadcast content and a deal to make Samsung products available to host Ellen DeGeneres on air. That led to her famous decision to take a selfie with a gaggle of A-list stars at the ceremony. Millions of TV viewers watched the photo being taken with a Samsung phone, and it was seen by roughly 37 million people on Twitter. (Maurice Levy, CEO of Publicis, which is also among the team of agencies handling the Samsung account globally, recently took credit for the selfie and pegged its promotional value at $1-billion.)

Clients have been lapping it up: 72andSunny's billings increased 66 per cent in 2012.

What is known as "experiential" marketing is also becoming more important. To promote the launch of the BMW i electric and hybrid line of cars, in 2012 KBS+P invented a "window into the near future," installed on 6th Avenue in New York. It had to find a projector bright enough to work in daylight–80,000 lumens–and projected a "reflection" that mimicked the passing cars on the real street, but showed them as BMW concept cars.

Many brands are waking up to the reality that their advertising will have to look more like entertainment if people are going to be expected to sit through it. A case in point: 72andSunny had the K-Swiss brand of shoes endorsed not by a real athlete, but a fake one known for poor sportsmanship: comedian Danny McBride's fictional, foul-mouthed baseball star Kenny Powers, from HBO's Eastbound and Down. It was a smart co-promotion of the shoes and the show, if counterintuitive as endorsements go.

Then in 2011, it went further, making Powers the shoemaker's new "MFCEO." McBride starred in a cameo– and vulgarity-filled online video about his restructuring of the company that was so ludicrous (and, yes, funny) that it compelled millions of people to sit through what was essentially a five-minute ad. The campaign won awards in Cannes for "branded content and entertainment"–ads that you might actually want to watch for enjoyment.

The very structure of MDC's agencies is designed to be media-agnostic. Most function under a single P&L, forgoing the traditional practice of hiving off different media functions into silos within an agency. Analysts say this is a boon to MDC Partners' structure at a time when "advertising" can encapsulate any number of things.

"The reason they've done well is, they're an ad agency company that's built for the future," says Dan Salmon of BMO Capital Markets.

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Investors are buying the pitch: MDC's stock has been on a roll. Its share price has gone up 244 per cent in the last two years, as financials improved and its agencies won more work (and as investors got excited about the merger of Publicis and Omnicom that was proposed last July). But in May Nadal sold 3.5 million of his shares, reducing his stake from 20 per cent to 11 per cent. He netted $81-million. The stock responded by declining roughly 13 per cent.

Still, shareholders are certainly happier than a decade ago, when Nadal was a bête noire for lapses in corporate governance, lining his own pockets with rich payouts and interest-free loans while his stock sank and shareholders suffered.

Observers say those concerns are in the past: Nadal gave up his super-voting stock, and CFO David Doft came on board, instituting a more rigorous presentation of the company's financials. Nadal still pays himself handsomely, but not at shareholders' expense: While they've seen their shares soar, management has increased the dividend half a dozen times since 2010, and the stock was up 273 per cent last year.

Nadal's pay more than doubled last year to $20.7-million, partly because of a stock incentive plan that kicked into effect when the share price went over $30. That made him among the best-paid CEOs in the entire advertising industry, earning more than the heads of much larger organizations. His salary was second only to Martin Sorrell, chief of the largest holding company in the business, WPP. "I'm not sensitive about my compensation," Nadal says. "I eat my own cooking, as Warren Buffett would say. ...We only get rewarded if our shareholders get rewarded."

That hasn't always been true. But now, the company is growing: Last year its EBITDA (a measure of profits that strips out taxes, interest and acquisition costs, among other things, and is a common benchmark in the media and advertising industries, as opposed to net earnings or losses) was $159.4-million on $1.15-billion in revenues. None of the 33.1 per cent EBITDA growth year-over-year came from acquisitions. Net, MDC lost $148.9-million last year as it continued to digest acquisitions. But CFO Doft has told investors he is committed to deleveraging the balance sheet, and says the health of the business can better be judged by EBITDA and free cash flow, which nearly doubled last year, to $91.6-million.

That cash flow keeps MDC well within the bounds of its debt covenants, which is why analysts say they are not concerned that the company is overleveraged. MDC refinanced its debt last year, vastly improving its interest costs. And the company has structured its acquisitions so that the payout is based partly on performance. If an agency loses business and starts to suffer, the instalment MDC pays in that year goes down. If an agency outperforms, MDC pays out more.

Admen sign on for this deal because, while Nadal can seem a bit goofy, those who get past the first impression notice that he is smart, his eye for talent is peerless, and they are won over by his respect for what they have built.

And MDC's agencies have shown a willingness to work together–as they did when a team of them assembled to win the Target Corp. business in Canada when the retailer launched here. (Too bad the rollout of the stores didn't go as well as the campaign pitch.)

Finding a balance between independence and collaboration could be key to the future, according to Perry Miele, chairman and managing partner of Beringer Capital, which invests in the marketing world and advises agencies in sales to holding companies (such as the Taxi-WPP deal). "I think there is much more value still in that company. The stock can go even higher. The only thing that's keeping it from going higher is that the companies aren't integrated the way they are in other networks." Indeed, the Big Four seem to have scant appetite for the sort of U.S.-based creative shops that MDC likes to buy; rather, they're aggressively acquiring specialists in technology, and leveraging their entire stables by pitching a team offering to clients. In other words, the hands-off model that has drawn partners to MDC could also be holding it back.

Client wins like Target, Smirnoff and Google have helped MDC to roughly double its market share over the past five years. But it is still a very small player, capturing only about 2 per cent of overall global agency billings. And at a time when advertisers are all about thinking more globally, its international presence is comparatively minuscule. Sure, CP+B recently opened in Brazil, Anomaly is in China and 72andSunny in Holland. But international billings are still just 7 per cent of revenue.

In this environment, Nadal has continued to bet on North America, arguing that sticking pins in a map for its own sake is useless. "Every one of our competitors has a mature presence in these marketplaces. It's not like these marketplaces are virgin territory," he says. But he has realized that some international presence is necessary–preferably, cautious moves with guaranteed business, serving the international needs of existing U.S.-based clients. And he does not foresee a day any time soon when international business would account for more than 20 per cent of revenues.

Meanwhile, however, Goliath is getting bigger. The merger of Omnicom and Publicis was called off in early May, but most observers agree that further consolidation is coming to the industry. As marketing becomes a battle of the behemoths, the question is whether MDC will need to keep selling itself as the small, nimble alternative–that is, if it can keep from being swallowed whole.

Nadal says he is fine with staying relatively small: The bigger others get, the slower they are.

But they are also hungrier, and MDC has been identified by observers as a possible target for acquisition itself. While Nadal says publicly that he wants to continue as an independent, being acquired would bring him a major windfall. He is not inviting anyone to kick the tires, but if his fiduciary duty to shareholders required him to accept an offer, chances are he would not be crying all the way to the bank.

Nadal says he hopes the growth MDC has demonstrated will give shareholders little appetite for an acquisition deal. It's a hope on which the identity of the company hangs: MDC was built as a conglomerate of entrepreneurs that would keep its corporate paws off their business, a creative alternative to the big guys. If it ever becomes one of the big guys, that would change everything.

"The only thing I can do is make decisions with the most value," Nadal says. "I hope that I have a long independent future."

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