Drop-Dead Deadline: Moment of decision nears on ALC-DMI deal

As DIRECT went to press, the clock was ticking on the proposed American List Counsel Inc./Direct Media Inc. deal. A non-binding letter of intent signed by Princeton, NJ-based ALC and Direct Media’s parent Acxiom in June was set to expire on July 30, according to Acxiom group leader Steve Brighton.

“We either have to agree that ALC is going to purchase the company or the deal’s off and we are back to where we started,” said Brighton in a mid-July interview.

While the exact nature of the agreement – merger, acquisition, joint venture – has not been determined, the companies are conducting due diligence. Purchase price and financing arrangements have been discussed, according to Brighton, who has casually referred to the pending deal as a “sale” in two interviews.

“We are not trying to sell DMI to bail out,” Brighton said in an interview at Acxiom/Direct Media’s Consumer Co-op. “We are trying to place the sales staff in a more positive selling environment.”

In March, Acxiom company leader Charles Morgan told editors from DIRECT that “Acxiom has not done a great job of leveraging that asset.”

Plans are for Acxiom to provide data processing services for the resulting entity, no matter what shape it finally takes.

Brighton acknowledged that a culture clash resulted from Acxiom’s purchase of DMI three years ago. DMI, a privately held company, focused on cash receipts while publicly traded Acxiom was geared toward accrued revenue.

DMI, according to Brighton, processes between $500 million and $600 million a year in cash flow before commissions.

Before the Acxiom purchase DMI was an S corporation, and therefore limited to a maximum of 75 stockholders. If plans call for the new company to go public, it will have to keep its books on an accrual system, reflecting revenue and expenses when incurred, as opposed to being based on cash in hand. It would become one of the few list companies that do so.

DMI could handle either accounting system: Brighton said it currently supports both, reporting its finances to publicly traded parent Acxiom on an accrual basis but paying its list owners in cash.

But the companies’ differences went beyond accounting procedures: Analysts of growth stocks such as Acxiom’s expect a 25% improvement in each quarter. And Direct Media needed some structure imposed on it; when he arrived, Brighton said, half of the staff felt they reported to human resources and the other half seemed to think they reported to nobody.

In addition, revenue was flat and expenses were increasing by 40% a year. After DMI lost $4 million in the first two months of 1998, it eliminated 35 positions and chose not to fill 15 open ones, mostly jobs that had been rendered unnecessary by operating efficiencies, according to Brighton.

Now on the heels of a $7 million investment in internal automation, annual revenue growth is 12% and expenses are being held at 8% of growth. But with the list business being a mature industry, increasing market share is easier than creating new customers.

An entity comprising ALC and DMI “would certainly give ALC critical mass,” said Michael Petsky, CEO of direct marketing strategic consultant the Winterberry Group LLC, New York. As a pure list management/brokerage company, ALC and DMI are the two biggest out there. “So you have significant market share,” he added.

Something else ALC would have in its favor is its recently launched interactive division, ALC of New England, which “adds the Internet component that so many IPOs are looking for today,” Petsky pointed out.

“However, list brokerage and management is such a relationship-driven business, it would certainly look a lot better if it had a strong service bureau component or an analytic component to go with it,” he said.

Petsky was referring to Acxiom’s plans to phase out its SmartBase database. In mid-May the company formed a relationship with Abacus Direct under which Acxiom will discontinue SmartBase and rely on the Abacus Alliance to provide coo perative catalog database services to its clients.

But Brighton has indicated that there was no language in the letter of intent prohibiting an entity resulting from a DMI/ALC alliance from operating the cooperative catalog database, whether under the SmartBase name or not.

List professionals say bigger is not necessarily better. “The larger the company, the less likely there is to be quality of service,” said Lesli Rodgers, president and CEO, LR Direct Ltd., Monroe, CT. “If you go back 25 or 30 years and looked at how the list business grew, it was based on the dynamic personalities of the leaders. Today, those entrepreneurial spirits are being replaced by large companies where the people who are actually on the line providing the service are far removed from the education, experience and philosophy upon which these companies were originally based.”

As executives hammer out details, DMI list professionals can wait and see what happens – or walk. “There’s talent there and I think list companies are going to do their best to attract it,” said Lonnie Mandel, chairman of The SpeciaLists Ltd. in Weehawken, NJ, who added that his firm hasn’t hired anyone from DMI yet.

According to DMI client Omaha Steaks, there hasn’t been a ripple in service. “We’re very pleased with how Direct Media is handling the possible changes,” said Jim Paschal, director of marketing at Omaha Creative Group in Omaha, NE, an Omaha Steaks-affiliated company. “We feel like they’ve got a strong team of brokers. Unless there are some big changes, we feel there will be business as usual. As far as I’m concerned, nothing has changed.”