Wednesday, November 21, 2007

Association of National Advertisers Financial & Procurement Management Conference Panel on Corporate Barter

Media Barter: The Good, the Bad, and the Ugly
Media barter, also called corporate trading, is a growing trend in the media / advertising business. This usually involves using an excess, non-monetary asset to purchase goods and services (in this case media) that otherwise would be purchased with 100% cash. Barter companies such as Active and Magna Global Trading serve as intermediaries who transfer the sale of assets and expand the availability of trading partners. While barter has many advantages, navigating the waters of the barter world can be very tricky and there are clearly some "watchouts" to consider.

Explain the process of media barter - how does it work?
Elliot DeBear: Corporate Trade is a financial transaction, the goal of which is to deliver to a client a higher value to non-performing assets than could otherwise be achieved in the open marketplace. Non-performing assets are defined as excess inventories, dated goods, real estate, capital equipment, debt and factory capacity to name some key ones.
How does a typical transaction work? Active purchases these assets at book or close to book value using its own currency, an Active Trade Credit (or in some cases, cash and/or a combination of TC and cash). The Trade Credit is employed by the client to help fund the procurement of needed goods and services normally purchase for 100% cash. These purchases are executed through Active and done so at the client's historical benchmark costs and qualitative specifications. This assures the client a cash equivalent use of its credits, and, accountability in the deliverables. The corporate trade model is based on the concept that for each trade credit dollar used, a dollar of cash savings is created. The most common area of trade credit retirement is media buying. However, in the case of Active, other services are also available such as travel and meeting planning, freight logistics, printing, displays and fixtures and premiums to name a few.
Brian McMahon: Barter is the exchange of impaired assets for media credits which are then utilized to partly fund media budgets. Typically the credits are utilized with a combination of cash. The underlying structure is simply a math exercise - the key to success is in creating a threshold of performance on both the media deliverables and the remarketing of the product.
David Smith: Media barter involves trading goods or credits for media instead of paying cash. It involves two deals, not one. The first deal is the valuation that is given for the goods or services that the company trades to the barter company. The second is the basis for valuation of the media that is being utilized to burn off the barter balance. For instance, one basis could be rate card, another could be some definition of market price, and a third could be an agency's planning costs.
How does the trading company make its money?
Elliot DeBear: At Active, we put our own capital at risk by purchasing goods and services. We invest in the media's needs and in return are paid in capacity rather than cash. We do this to create cost advantaged positions relative to the marketplace. By acting as a principal rather than as an agent, like traditional mainstream cash media buyers, Active's investments reduce the cost basis below prevailing rates. In the course of these capital investments, the media vendors know they will be involved in a trade and their pricing will not be compromised or exposed.
How big is the barter business? Is it growing, flat, declining?
Elliot DeBear: There is no official rating service to determine the actual amount of corporate trade that is being conducted on a global basis. However, the growth potential is large. Active expects a continued growth of 20% per year. Estimates of non-performing consumer goods in the world today, those that are held by manufacturers, in independent warehouses and on ships, range from $350 billion to $1 trillion. This does not include real estate, debt or under employed factory capacities. Even at the low end of the range, one can see that the potential for corporate trade is immense.
Brian McMahon: Barter is declining dramatically at privately held large barter companies. Five short years ago there were over ten privately held barter companies. With the exception of one, Active International, they have either gone bankrupt or disappeared. In many cases, these defunct companies left huge payables to the clients as well as to the media companies. Conversely, barter is growing dramatically within media agencies as they open internal barter divisions which provide a barter solution as a client service. Omnicom has ICON, Carat has Carat Trading and IPG has MAGNA. Other large agency groups are currently exploring this option as well.
David Smith: It is growing, as are almost all forms of the media business.
There's a perception that finance or purchasing, rather than marketing, is often the point of entry for barter. True or false?
Elliot DeBear: Finance and Procurement management are the trading company's first lines of communication with a candidate for corporate trade. This is because it is these areas that can best define a company's non-performing assets, as well as, identify those areas of their company's spends that are in line with the trading company's portfolio of fulfillment services. Further, it is financial and procurement management that can best define the potential size of the transaction based on their company's ability to use its trade credits and in what timelines.
It is important to remember that the product of the trading company is not a marketing discipline, but rather value creation resulting from a client's use of its trade credits. Marketing disciplines, media buying in particular, are the primary vehicles for trade credit retirement but not the primary reason to enter such a transaction.
Brian McMahon: True - we see that most barter companies go through the CFO and then the media folks get "stuck" with the credits - sometimes having little or no input structuring the deal. Our model is dramatically different - Media, Marketing, Procurement, and Finance must be involved at the outset - to ensure that all parties are comfortable with deliverables and the value proposition.
David Smith: True. Barter usually starts with an asset that a company wants to dispose of. This is generally controlled by finance.
Barter is not one, but two deals. First, there's the valuation the advertiser gets for its merchandise. Then, there's the method for valuation of the media. Please explain.
Elliot DeBear: A corporate trade transaction is not two deals, one for merchandise e explain.
and one for media, so often portrayed. It is one transaction. Specifically, the value of the merchandise if liquidated in the open market is the highest amount someone is willing to pay for it any point in time. The value of that asset held on a company's balance sheet is determined by its own accounting methods. After due diligence on the part of the trading company, it will purchase that asset, knowing its true cash liquidation value, at a mutually agreed book value, compensating the client company with a trade credit.
Brian McMahon: Not so - Most of our clients are public companies, as we are. The value of the merchandise is readily available in terms of cost or carrying value. As to the value of the media - that must be set by the client using current costs and benchmarks to set contract compliance.
What media are available via barter and what media are not available? How about new media like the Internet and branded entertainment?
Elliot DeBear: All media disciplines can be purchased on a corporate trade basis. However, there will be individual media vehicles where the trading company will not be able to create the trading leverage necessary to fund its purchase with a client's trade credit. For this reason, it is critical that the trading company be involved with the media planning process as early as possible. In this way, the trading company can provide feasibility of where in the client's media plan the greatest opportunities for trade credit funding exist and to what extent.
With regard to using corporate trade to execute Internet strategies, the answer is yes. At Active, for example, there is a dedicated department for emerging technologies that work with Active clients in the development and implementation of reach schedules, audience targeting and the use of rich-media technologies to achieve an optimization of brand, lead, and retention objectives. We also have a specialized division named Eagle:XM for the development and implementation of Direct Marketing strategies, creative positioning, media planning, ROI modeling, tracking and documentation and post campaign refinement analysis. Again, these disciplines can be delivered with trade credit funding as long as it is achieved in line with the client's qualitative and quantitative specifications.
Brian McMahon: With the exception of network television (supply and demand issue) and newspapers (complexity), all types of media trade - including cable TV, spot TV, out-of-home, radio. This includes new media types such as Internet and branded entertainment. However, there are different degrees of trade and some media (print in particular) set eligibility restrictions. For example, in print, positioning cannot be guaranteed. Clients need to be aware of these before they enter into a transaction - not after.
David Smith: Everything is available for a price. The barter companies have a harder time executing in areas like prime time network or other vehicles that get sold out for cash. Many barter companies want a client to put cash up with the barter. The more cash that is put up, the easier it is to achieve any barter goal. The softer the marketplace, which is often true in newer media, the easier it may be to barter. But it may also be easier to get burned by attaching a valuation to the media which is too high.
What are the "watchouts" to consider in a barter deal?
Elliot DeBear: In reviewing candidates for a corporate trade transaction the first rule of thumb is "Know Who You Are Dealing With". Because many managers, especially those new to corporate trading, are not necessarily familiar with the trading business model, it is essential to review the trading company's balance sheet. Make sure this balance sheet represents exclusively the trading company's activities and is not co-mingled with activities of its holding company or sister organizations. Within this, take the time to study the assets defined as "fulfillment inventories or rights". This will indicate the level of investments the trading company is making in the marketplace (with its broadcast, print, business services partners) in creating the leverage to service its clients' needs. Also, look to see how many trade credits were retired in the previous year relative to the trading company's total volume. This will illustrate the level of value creation actually achieved for the trading company's client base.
Importantly, take the time to visit the trading company's offices to view first hand the scale and scope of its operations and meet the executives managing the media buying and business services teams.
Brian McMahon: Variable blends - or no set blend of cash and trade credits, no media plan or goals attached to the contract, no agency involvement, cancelability issues, and added value. All of these things must be discussed and agreed and included in the contract with clearly outlined performance goals.
David Smith: Make both deals at the same time. Do not release the goods or services without being sure of whether you can execute in a plan that works for your brands. Don't accept rate card or "high market" valuation.
There's a perception that "Barter deals are never as good as they sound." Please comment.
Elliot DeBear: As with any financial transaction, it is important to define the objectives of the transaction, the magnitude of the deal and a realistic time frame to define value. Work to understand:(1) what can be achieved in a corporate trade transaction that could not have occurred before, (2) how process will impact performance and (3) the mechanisms required to assure financial responsibility and accountability.
Brian McMahon: That is precisely why agencies have had to take matters into their own hands to protect their clients. Previously, barter deals have been dreadful in performance - and largely the reason why legions of these privately held companies went under. Working hand in hand with the agency and the client, barter can be done with realistic expectations and concrete value deliverables.
David Smith: Cash is king. When you use cash, it reduces the variables. The more variables there are, the more questions arise relative to the valuation or the quality of the exchange. It should not be used as a primary outlet for media expenditures but an add-on.
What are some overall best practices for working with barter?
Elliot DeBear: It is always smart to define the rules of engagement upfront and set up a formal list of protocols and procedures that clearly define the role and relationship of the client with its trading company and its media agency. This is especially critical in defining required reporting procedures and methods of documentation and post analysis for all activities performed.
Brian McMahon: Small steps - period. You can always add credits - as you need them. Understand the deal and more importantly your rights in the Agreement - we have had to go in and fix many barter deals done by previous barter companies. A new market sector of business for us has been that many IPG and other agency clients have employed us to replace their existing poorly performing barter transactions.
David Smith: Get the finance, marketing and agency personnel involved at the start. And make sure your agency knows what they are doing and have done this before or bring in an expert who is not in the barter business currently. Know that you can execute both deals before you sign for the release of assets. Start small. Try to get flexibility in timing, giving you enough time to burn off the barter.
There have been some nasty cases of barter companies going bankrupt after receiving payment from the client but before paying the media. Do the barter companies have any current policies on liability, for example sequential liability versus joint liability?
Elliot DeBear: As with traditional advertising agencies, sequential liability is the standard. Here corporate trading companies will use an "in care of" letter when placing media. If, however, after due diligence, it is determined that a client is not considered credit worthy in the business community, credit would not be issued and "cash in advance" or "cash with order" would be required.
There are exceptions. For example, if a trade-for-trade transaction were conducted and the client fulfilled its payment obligation upfront, regardless of the form of payment, the corporate trading company would retain liability and inform the vendor(s) of such in writing.
Brian McMahon: We bill on the same terms as the agency - why should you pay differently because it is a barter deal. Pay for performance - not expectations.
There is sometimes agency resistance to barter. Why is that and how can that be overcome?
Elliot DeBear: Too often agencies are brought into the picture after a trade transaction is completed, with little knowledge of the financial importance of the transaction, how the trading partner's role is defined, and how that role may impact on the agency's logistics. This can cause what we phrase as "agency angst"...dealing with the unknown. Because of this, Active encourages its financial sponsor to reach out to their marketing management and media agency partner in an effort to provide a greater understanding of the transaction, the company's financial objective and corporate trading business model. It is always best if the agency has a working knowledge of its client's trade expectation and how the media agency and the trading company need to work together for the client to meet fruition in its financial transaction.
Because the media buying function is ultimately turned over to the trading company for those buying assignments accepted by the client, it is critical to understand that the trading company is not a competitor of the agency and does not discount the agency's qualitative and quantitative specifications. Also, in the case of Active, all media is based on NET cost guidelines as to not interfere with the agency's compensation agreement with its client.
When viewed in this way, the agency's collegial participation expands its resource to its client, becoming an incremental and valuable contributor to the client's financial transaction and their client's ability to achieve a greater value for its non-performing asset than the marketplace would otherwise provide.
Brian McMahon: Agencies do not trust outside barter companies based on their past bad experiences. Outside barter firms have no vested interest in protecting agency clients. They are profit driven - pure and simple. While outside barter companies may protest that they are doing right by the client - my question is then - "Why are there so many horror stories - somebody had to create the problems?" Clients choose their agencies for many wise reasons. If you need to do barter, make sure that your agency is in control of the process and that they are accountable. It just won't be seamless if agency clients use a third party barter company who then has access to that client's confidential rates, plans and strategies.
David Smith: Agencies want flexibility. When a client cuts a deal for media, it takes away part of the flexibility that agencies want and that clients are asking them to have. Never meet with a barter company without all parties involved (agency, finance, marketing) at the table.
Major agency holding companies including IPG (Magna Global Trading) and Omnicom (ICON) have now entered the barter space. How has this impacted the industry?
Elliot DeBear: The fact that companies like IPG, Aegis and Omnicom have entered into the barter business gives evidence of the growing importance of corporate trade and its acceptance by major corporations and advertisers. However, it will be incumbent upon these holding companies to maintain separation between its trading practices and mainstream cash media buying operations. This means totally separate and dedicated staffs for media buying, vendor transactions, asset re-marketing and accounting.
We believe there exists a flaw in the advertising holding company model. Specifically, that once the media agency negotiates the lowest price for a client's media, the agency's affiliated corporate trade company does not have the ability to create 20% or more lower costs that are the basis for using trade credits. A truly independent trading organization invests its own capital and in-kind payments in the media community, as a principal. This is a critical point of differentiation in creating the required leverage or margin for a client to use trade credits.
Brian McMahon: As previously stated - it is wiping out the third party barter companies. Literally, there is only one company of any size left. Clients are becoming so much more demanding and sophisticated about barter and major agency holding companies have risen to the challenge to protect their clients by creating a structured and highly regulated internal barter answer.
We asked Brian to clarify his statement that MAGNA is not a barter company, even though their web site says otherwise. His response is below.
Brian McMahon: We are not a barter company for one simple reason - we say "no" to clients. I never (and I mean never) have seen a barter company say that they can't provide the necessary media or that it does not make financial sense for a client to do a barter deal. We do say "no" - and that is why it is not marketing hype or semantics when I say we are not a barter company. We do structure barter deals for clients and provide barter media if it makes sense for that particular client and if it doesn't - we say "no". Many ANA members each had barter deals that for a variety of reasons did not work. We met with these clients; analyzed why their deal had not worked; ensured that advertising, procurement, finance and sales each met with us at the same time to give each group ownership of the transaction. When the analysis was complete, we issued replacement credits and these clients promptly began using credits to run their media. Even more compelling - each of these clients with a previously negative barter experience has returned to us to do multiple new barter deals, because our methodology works. We tell the truth - the good, the bad and the ugly (to steal your line) - and our clients love us for it! So when a client asks, "Are you a barter company?" - Our answer is - absolutely not! Will we structure a barter transaction that is right for a client? - Absolutely!
David Smith: It is unclear as to whether these organizations are acting as pure barter companies or referees for the barter deal. Their role needs to be clarified at all times.
The Jack Myers Report article on barter from 5/9/05 cited that the potential market for barter is not as robust internationally as it is in the U.S. Please comment.
Elliot DeBear: The international marketplace poses a number of challenges to the corporate trade business but also represents a very robust potential. Active International built a base for corporate trade in the United States and transferred that model, creating offices throughout the world to mirror the U.S. This has afforded our company the ability to provide clients with a reverse logistic to meet their international needs. For example, Active recently purchased a large shipment of wine from a foreign destination, had the ability to ship and re-market this inventory to non-competitive distribution channels in other parts of the world, and, accommodate the client's media and premiums needs using trade credits in multiple media disciplines in the U.S. and Europe.
Brian McMahon: Barter is more common in the US but has increased over the past few years internationally - again agency involvement is critical to navigate the different media issues that abound like share deals in the UK or Loi Sapin in France - both of which have a profound impact on a client's ability to achieve value from barter. Further, the lack of media venue proliferation in some countries creates a supply/demand hurdle to barter. The key - go slowly and go wisely and, above all, consult with your agency partner.
ANA West Coast Marketing Financial Management and Procurement Committee Meeting, 09/08/05
Elliot DeBear, Senior Vice President - Active International:
Brian McMahon, President & CEO - MAGNA Global Trading:
David Smith, CEO - Mediasmith:

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