Innocean, an affiliate advertising agency of Hyundai Motor Group, is seeking to acquire David & Goliath (D&G), a LA-based advertising agency responsible for Kia Motors America.
According to investment banking and advertising industry sources on December 11, Innocean began talks with D&G to hammer out the details for the acquisition from the second half of this year. An official from Innocean said, “Nothing is confirmed yet but it is true that we are in talks. We are proceeding with the negotiation with the goal of completing the takeover procedure by the end of this year.”
Founded in 1999, D&G has an influence and foothold in the U.S. advertising industry, the largest market in the world. The company created a spot featuring a cute new baby hamster named Turbo for the Kia Soul in 2010, generating buzz across the U.S. It also helped improve the brand awareness of the Soul in the U.S. In particular, D&G produced commercials for the Super Bowl, the championship game of the National Football League (NFL) which is the biggest event in the U.S. advertising industry. In addition, it has numerous famous local brands as customers such as Universal Studios, California Lottery and fast-food restaurant chain Jack in the Box.
Market watchers say Innocean is targeting the captive market using its strong cash holdings. When the company wins orders of Kia Motors’ ads which have been produced by D&G, its global sales will rise. Innocean held a net cash of 637.4 billion won (US$585.42 million) as of the end of the first quarter this year, accounting for 50 percent of the current market cap.
The ad industry thinks that Innocean’s acquisition of D&G will not only boost its sales but also expand its global markets. D&G had a gross margin of 50 billion won (US$45.93 million) last year, which is a tenth of Innocean’s gross margin.
Innocean recorded consolidated sales of 275.2 billion won (US$252.78 million) and operating profits of 25.3 billion won (US$23.24 million) in the third quarter this year. The sales and operating profits grew 18.8 percent and 18 percent, respectively, from the same period last year. Gross margin is a company's total sales revenue minus its cost of goods sold. Usually, advertising agencies count gross margin, instead of sales, as the basis for their performance. Innocean’s gross margin amounted to 96.2 billion won (US$88.39 million) in the third quarter this year, up 9.5 percent from a year earlier.
Innocean’s stable performance is driven by its foreign subsidiaries with a steady growth. Notably, Canvas Worldwide, which was established in 2015, is aiming at the U.S. media market, leading the growth. U.S. affiliates took up 48 percent of Innocean’s total gross margin as of the third quarter. The annual rate of U.S. office contributions to total marginal gross last year came to 42 percent, surpassing South Korean office with 33 percent. When Innocean succeeds in taking over D&G, it will be able to develop the U.S. market more easily.