Big Firms Gobble Up Lobbying Interests

WPP also went shopping again. In 2001, it bought Penn Schoen & Berland Associates Inc., which had served as a pollster to Clinton. And in 2003, WPP acquired Quinn Gillespie & Associates LLC, whose principal Edward W. Gillespie is on leave while he chairs the Republican National Committee. Omnicom had come close to buying Gillespie's firm the year before.

The buying sprees were propelled by two financial facts. First, lobbying firms can be extremely profitable -- more profitable, in fact, than public relations or advertising, the basic businesses of the parent companies. Thanks to the high retainers lobbyists tend to charge, the ratio of pre-tax profit to revenue, or profit margin, of a lobbying firm can run from 25 to 50 percent compared with a large PR firm's 10 to 15 percent. "Generally speaking, our government-related businesses are more profitable than our other U.S. businesses," said Kenneth C. Rietz, chief operating officer of WPP's Burson-Marsteller unit.

Second, the principals of lobbying and lobbying-related firms are often eager to sell their ownership to bigger companies, especially when they are contemplating retirement. Their income from the sale (because it usually involves the transfer of stock) is taxed at capital gains rates, which are lower than regular income tax rates. And the sackful of cash they get allows them to squeeze value out of what they've built. "There are always people who have been in the business a long time who are looking for exit strategies," Rietz said.

So Omnicom, Interpublic and WPP never go wanting for wannabe subsidiaries. "I wouldn't say we're besieged, but we get approached by companies who want to sell quite a bit," said Paul Johnson, regional president of Omnicom's Fleishman-Hillard. He said he's in the market now for research, government marketing and specialty lobbying firms.

Newcomers to the merger game are also making inroads. Lake Capital Partners LP, a Chicago-based investment firm, last year committed to spend $50 million over several years to expand Dutko Group Cos., a diversified lobbying firm based in the District. It hopes to make Dutko a brand name in government affairs in the United States and around the world. The France-based Publicis Groupe SA also may be widening its presence in Washington, senior lobbying executives say. Eric Giuily, chief executive of Publicis Consultants, told the Wall Street Journal that it intended to beef up its public relations operations in America.

But the rush to the altar does sometimes prompt misgivings. In exchange for their newfound wealth (which regularly reaches into the millions of dollars), the former owners must deliver what can sometimes be unrealistically large profit to their new bosses. Corporate ownership can also limit flexibility and risk-taking, which typically are traits that allowed the firms to thrive in the first place.

As a measure of their discontent, some already-acquired companies are actively trying to undo their deals. APCO Worldwide Inc., a majority-owned lobbying and PR subsidiary of Grey Global Group Inc., is in intensive negotiations to buy itself back with the help of a significant investor. In addition, Haley Barbour's former firm, Barbour Griffith & Rogers Inc., is negotiating to "restructure" its arrangement with Interpublic Group, a lobbyist familiar with the talks said.

Lobbyists who sell their firms are usually obliged to remain with the company for up to five years, the purchase price tied to maintaining revenue growth over that period. But as often as not, the principals leave the moment they're permitted, occasionally starting another lobbying business of their own.

When such rapid flight occurs, the purchase is generally considered a failure. The reason: As with many service-oriented enterprises, lobbying is heavily dependent on the personal involvement of the principals. In fact, the relationships that the principals bring to the table are often the business's chief asset. "Finding a way to work with principals to have a gratifying career past their earn-outs is very important," Paster said. "We want to sustain the business."

That's rarely easy. Take the case of the lobbying firm Gold & Liebengood. According to people who worked closely with the firm but insisted on anonymity, Martin B. Gold and Howard Liebengood had difficult dealings with their owner, Burson-Marsteller, in the early 1990s. Profit goals weren't always met. At the end of their contract Gold and Liebengood bolted, and their parent eventually merged the remnants of their old firm with a business headed by Republican stalwart Charles R. Black Jr.

Independent lobbyists have seen similar turmoil in other merged firms and aren't sure they want the aggravation. Thomas J. Downey of Downey McGrath Group Inc. said he has been approached two or three times, including by Omnicom. But he has demurred, he said, because he does not want to "twist myself into a pretzel" to deal with both clients and a corporate master. "You surrender a lot of control if you're not an owner," he said. For instance, he covets his freedom to do pro bono or low-fee work for the do-gooder clients he favors.

Bought-out firms also grouse that they sometimes have trouble attracting young talent, because they can't offer substantial ownership stakes. The allure of such stakes is that they can become hugely valuable when the firm eventually is sold.

Anthony T. Podesta of PodestaMattoon said the fit in a merger needs to be just right to create a growing, ongoing concern. And that takes harder work than lobbyists with their eyes on the exit may foresee. Acquisitions, he said, are "never quite as attractive as they sound. No one's paying you a lot of money to play golf or go hunting."

David M. Carmen, chief executive of Carmen Group Inc., said all sorts of arrangements short of a complete sale, such as merging existing firms and consolidating their administrative functions, make sense given the drawbacks of outright acquisitions.

Another option is to make deals closer to home. Last year, David E. Johnson and Patrick J. Griffin sold 60 percent of their firm to fellow lobbyists, including Peter T. Madigan, who had just left Interpublic's Cassidy after his earn-out contract from a previous merger had expired.

Then again, no lobbyist will ever say never to the chance to sell out. "I don't know of anybody who said with honesty, 'Not me, not ever,' " Podesta said. "At some point it's an attractive prospect for one and all."