Digitas Inc.

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Digitas Inc.

33 Arch Street
Boston, Massachusetts 02100
U.S.A.
Telephone: (617) 369-8000
Fax: (617) 369-8111
Web site: http://www.digitasinc.com

Public Company
Founded: 1980 as Eastern Exclusives
Employees: 1,500
Sales: $565.5 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: DTAS
NAIC: 541611 Administrative Management and General Management

Digitas Inc. is a Boston-based corporate parent of three global direct and interactive marketing companies. Digitas LLC, the flagship unit, has been a leading direct marketing firm since the 1980s, establishing itself by serving a select number of large corporate customers such as AT&T and American Express, and then increasingly turning its attention to the use of the Internet in the late 1990s. In addition to its Boston office, the subsidiary maintains operations in Chicago, Detroit, and New York. Modem Media has been involved in interactive marketing since 1987. It offers a wide range of services, including interactive and integrated marketing strategies; digital and direct marketing, research, and media buying. Modem Media maintains offices in Atlanta, San Francisco, London, and Norwalk, Connecticut. Finally, Philadelphia, Pennsylvania-based Medical Broadcasting, LLC is devoted to the healthcare industry, offering marketing services to pharmaceutical and other healthcare companies. Digitas is a public company listed on the NASDAQ.

FORMATION IN COLLEGE DORM ROOM: 1980

Digitas was founded by Michael E. Bronner in 1980 while he was a premed student at Boston University as a way to meet tuition payments. Working out of his dormitory room, Bronner launched the University Coupon Book, to market pizza and other goods that appealed to the college demographic. He talked local businesses into offering discount coupons, which he printed as a book and distributed free in student mailboxes. The effort proved so successful that Bronner formed a company called Eastern Exclusives to take his idea to other schools. He then branched out beyond the college market, creating a quarterly coupon book called The City, which targeted Boston office workers. All thoughts of medical school would be forgotten in 1981 when Bronner was able to persuade giant American Express to let him create a coupon book with its name on it, providing discounts on Boston restaurants and for other services, mailed to area cardmembers. Again, Bronner was successful, his relationship with American Express expanded, and his coupon book evolved into the highly successful Membership Rewards program.

The one-man operation turned into a regular direct marketing agency in Boston in the 1980s, focusing on a limited number of large clients. AT&T would soon join American Express on the roster. Bronner added a partner in 1987 when he was joined by Mike Slosberg, the two brought together by a headhunter. Slosberg had a more traditional advertising background, learning the business at one of New York's most venerable agencies, Young & Rubicam, where he was best known as the creator of the "Excedrin Headache" campaign. He later left to become the chief operating officer of another large firm, Wun-derman, Ricotta & Kline. A year before joining Eastern Exclusives, Slosberg became involved in direct advertising, named the president of the direct marketing division at the Bozell agency. He became executive creative director for Eastern Exclusives. In 1989 the company changed its name to Bronner Slosberg Associates Inc. One of those associates was Steve Humphrey, a 29-year veteran of the advertising industry, who was named president in 1989. He played a key role in expanding the company and improving its account management and support services. In honor of his important contribution the agency changed its name again in 1991, becoming Bronner Slosberg Humphrey.

INTERACTIVE UNIT LAUNCHED: 1995

Now a well-established direct marketing specialist, Bronner Slosberg was in the vanguard of the advertising industry in exploring the possibilities of the new digital economy. In 1995 it formed the Strategic Interactive Group to provide new interactive services for its current customers. Several employees were recruited from within the shop to launch SIG, and as the Internet gained in popularity, the unit became increasingly important at Bronner Slosberg. Initially, SIG was a separate corporate entity, sharing common ownership with Bronner Slosberg.

As SIG ascended in importance, the top ranks of the agency also began to experience a significant shakeup. In early 1997 Humphrey retired and fresh blood was introduced in the form of 35-year-old David Kenny, named vice-chairman in January 1997. Nine months later he succeeded Bronner as the company's chief executive officer. A Harvard Business School graduate, Kenny came to Bronner Slosberg from the consulting firm of Bain & Company, where he was a senior partner. He assumed day-to-day control of the third-largest direct marketing agency in the United States, generating more than $100 million in revenues in 1997. Bronner stayed on as chairman, while the 59-year-old Slosberg became chief creative officer, a new title if not a new job. Humphrey's old title would eventually fall to Kathy Biro, a major player in the growth of SIG, which began to overshadow the traditional direct marketing business.

The agency was clearly in a state of flux in the final years of the 1990s. It had experienced rapid expansion, growing from 80 employees in 1992 to 850 in early 1998 after new offices were opened in the New York and San Francisco markets. The 70-person New York operation was established to primarily service American Express and included a promotions and event sponsorship group. According to Advertising Age, it was also "an experiment to see if the agency's culture and capabilities [could] be replicated." The 50-person San Francisco office, on the other hand, operated as the Sansome Group, a separate customer relationship management agency, serving major clients Charles Schwab and LA Cellular.

The advertising industry was also in a state of flux as marketing went global and small independent shops, in order to survive and gain an international presence and resources, sold out to massive multinational operations. Bronner Slosberg's accounts needed to be global and according to press reports were pushing the agency to add global reach. This could only be accomplished by acquiring operations country by country or by joining forces with one of the large companies. Bronner Slosberg was actively courted but did not find the right suitor. Instead, in October 1998 management announced plans to form a holding company to operate three businesses: Bronner Slosberg Humphrey, SIG, and Sansome Group. While the plan was carried out, the company sold a 20 percent stake to the San Francisco investment firm of Hellman & Friedman for an estimated $60 million to $80 million. Then, in January 1999 the firm and some other investors gained a majority stake, paying Michael Bronner and his family trust approximately $123 million.

COMPANY PERSPECTIVES

DIGITAS INC. is the parent of three leading direct and digital marketing companies: Digitas, Medical Broadcasting Company, and Modem Media. Digitas Inc. companies help blue-chip global brands develop, engage and profit from their customers through digital, direct and indirect relationships.

In April 1999 Bronner Slosberg changed its name to Bronnercom, a reflection of the increasing importance of the Internet to the company. Several months later it was reported that Bronnercom was preparing to go public, a move supposedly pushed by Hellman & Friedman. By the end of the year filings were made with the Securities and Exchange Commission for an initial public offering of stock, valued around $200 million, under a new corporate name: Digitas Inc. The money was earmarked to pay down debt, fund possible acquisitions, and to be used for general corporate purposes. To prepare for the offering, Digitas made some changes in the top ranks of management, bringing in Michael Goss, former chief financial officer of Playtex Products, a seasoned executive with experience at major public companies, to serve as CFO at Bronnercom. In addition, Robert Galford, former managing director of Counsel to Management, was hired as the head of worldwide human resources. At the same time, Slosberg announced plans to retire by the end of 2000, and Michael Bronner, now 40, was also beginning to ease out of the picture. He took the title of chairman emeritus, and the burden of running the company rested squarely on the shoulders of Kenny, who became CEO and chairman. In 2000 Bronner turned his attention to a new venture, launching UPromise, an e-commerce company that helped families pay for college education by taking advantage of tax-deferred college funds supplemented by rebates from participating companies. He also founded a related nonprofit corporation: UPromise Education Foundation.

IPO: 2000

With Morgan Stanley Dean Witter & Co. acting as lead manager, Bronnercom sold 9.3 million shares at $24 per share on March 14, 2000. When the company's stock, which was priced about $5 higher than expected, began trading on the NASDAQ, it quickly soared to $40. In 2000 total revenues increased by more than 50 percent to a record $414.7 million, and the company opened offices in Chicago, Brussels, and Hong Kong. Nevertheless, it had to contend with a rapidly declining stock price, falling to the neighborhood of $5, due primarily to the general meltdown of the dotcom sector. Digitas attempted to rebuild Wall Street's confidence by shuffling its management team and bringing in new people. Goss, hired just one year earlier to placate the Street, was cut free, and Biro, who had played a key role in transforming Digitas from a direct marketer to an interactive agency in the late 1990s, gave up the presidency and resigned as a director. Both executives denied they were ousted, however. Goss said that he would have stayed but had left to become the CFO and managing director at Bain Capital. Biro, who took a reduced role at the company, planned to teach, and maintained that the executive changes were in fact a way to build management depth. Her replacement as president was chief operating officer Michael Ward, expected to work closely with Kenny in shaping the future at Digitas.

However, no executive shuffle could help Digitas withstand the confluence of events that took place in 2001 that adversely impacted the company. The global economy soured, leading to contractions in the capital markets. Without ready funding available, companies cut back on their investments in both technology and marketing. Matters grew even worse with the events of September 11, 2001, as the terrorist attacks on U.S. soil crippled the airline and travel industries, and had a ripple effect on the U.S. and global economy. In April 2001 Digitas cut the pay of its 70 highest-paid executives by 5 percent, matched by the layoff of 65 people, or 3 percent of the staff. Total revenues fell off over the next two years, to $335.3 million in 2001 and $321 million in 2002. Digitas held on better than many companies during this difficult period, however. In 2002 it signed half-a-dozen new clients, including Celebrity Cruises, Grainger, Network Solutions, OnStar, Royal Bank of Scotland, and Six Continents.

KEY DATES

1980:: Company is founded by Michael E. Bronner as Eastern Exclusives.
1989:: Name is changed to Bronner Slosberg Associates.
1991:: Name is changed to Bronner Slosberg Humphrey.
1995:: Strategic Interactive Group is formed.
1999:: Holding company organization is adopted.
2000:: Company goes public as Digitas Inc.
2004:: Modem Media, Inc. is acquired.
2006:: Medical Broadcasting, LLC, is acquired.

The economy picked up in 2003, as did the demand for Digitas's services. Although revenues only experienced modest growth, 3 percent to $209.5 million, the company posted its first net profit since going public, nearly $17 million. Digitas continued to rebound in 2004, as total revenues increased 20 percent to $382 million and net income totaled $31 million. Digitas was also able to fund external expansion. In October 2004 it completed the $168.8 million stock purchase of Modem Media, Inc. Based in Norwalk, Connecticut, Modem was an Internet marketing consultancy founded in 1987 that offered interactive marketing strategies; media research, planning, and buying; and digital and direct marketing services. It maintained offices in both San Francisco and London. Major clients included IBM, Home Depot, Kraft, AOL, Philips Electronics, and Sprint. Not only did Digitas add creative talent in the Modem deal, it gained flexibility, having a second agency to handle any potential conflict between clients. In the long-term, as a result, Digitas would be able to sign more clients and free itself from an over-reliance on a handful of customers, a situation that had been a concern for some investors, because as much as 70 percent of revenues came from 10 clients.

Digitas continued to enjoy strong growth in 2005. Total revenues increased to $565.5 million and net income approached $41 million. The company expanded in 2006 by acquiring Medical Broadcasting, LLC for $22.4 million in cash and $8 million in stock, adding a third brand to the Digitas stable and helping the company in its strategy of targeting the healthcare industry. Launched in 1990, the Philadelphia-based Medical Broadcasting offered digital marketing services for a number of major healthcare organizations, including eight of the ten largest pharmaceutical companies in the world. In all likelihood Digitas would continue to seek out additional acquisitions in an effort to further expand what it had to offer and the types of clients it served.