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Focus Media Holding, whose acquisition trail helped it triple revenue last year, faces a battle to justify its US$300 million purchase last week of the mainland's largest online advertising agency, Allyes Information Technology, analysts said. 
Shares of Focus, which has grown into  the mainland's largest outdoor media firm in just four years, fell 3.32 per cent to US$77.44 the day after the  announcement of the cash and stock deal for Allyes.
Allyes competes in a sector where 'the competition is tough and margins are low', said an industry source.
While Focus' earlier purchase of rival Target Media Holdings gave it a virtual monopoly in its core business of lift-lobby advertising, Allyes competes in a fragmented market. 
The Allyes deal might stretch  Focus' already highly diversified advertising spectrum, said Morgan Stanley analyst Richard Ji.  Management skills at Focus, led by chief executive Jason Jiang Nanchun, would be tested,  integration risks heightened and  the company would be exposed to wider competition over the medium term.  

Online advertising agencies typically bear  margins of about 10 per cent, compared with 40 per cent at  Focus, he said.

Allyes  has about 15 per cent of the mainland online advertising agency market, according to iResearch, and provides online advertising tracking technology to 80 per cent of mainland websites and advertising agencies, including Sina and Taobao. 
It also forms the largest integrated pay-for-performance advertising network in the country, similar to ValueClicks in the United States, with more than 5,000 websites that produce  300 million daily views.

'Although its tracking software is used by 80 per cent of the websites, it is priced low so to get special deals with the websites for agency business, I doubt Allyes can make a lot of money from it,'  the industry source said. 
Allyes' advertising network was 'just beginning', said the source.
Focus has been on an unrelenting acquisition spree in the mainland since the company's  initial public offering in 2005,  with six deals in less than two years. 
It acquired Shanghai Framedia Advertising Development, which runs poster advertisements in residential buildings; Dotad Media Holding which targeted advertisements over mobile telephones; and Appreciate Capital Ltd (ACL), which runs movie screen advertisements. The company  also bought outdoor billboard company Fengjing for street-level advertising.

Focus  and Target, half its rival's size,  dominated their market after building networks of LCD panels in office building playing advertisements to passing office workers. 
The Target purchase gave Focus 'pricing power', said T.R. Harrington, the managing director of Darwin Marketing, an online marketing consulting firm. 

Focus shares jumped 14.6 per cent to US$42.42 the day after it announced the US$325 million cash and stock purchase of Target in January last year. 
The acquisition essentially eliminated what had been a constant price war as they competed for advertisers as well as for office buildings to hang their panels. The deal also produced savings by removing workforce duplications  - about 200 people were laid off as a result,  Focus chief financial officer Daniel Wu said. 
The monopoly helped Focus to raise its advertising rate by 10 to 15 per cent every six months, rather than a year at other firms, Mr Ji said.

Focus still gains more than 50 per cent  of its revenue, which surged to US$213 million last year  from US$68 million in 2005,  from its LCD  network in office buildings. 
The Allyes purchase  will help Focus to tap the red-hot internet advertising sector, an area absent from  the company's portfolio.
Mainland internet advertising will reach nine billion yuan this year and maintain annual growth of more than 30 per cent over the next eight years, according to  iResearch.  Outdoor advertising will grow at 20 per cent for the next three years, Morgan Stanley estimates.
The Allyes deal would also help Focus compete for television advertising, which attracted 40 per cent of the mainland's advertising spending against about 15 per cent for outdoor advertising,  Mr Ji said.
sherman.so@scmp.com



Focus faces test over acquisition of Allyes