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Deep Dive 31 May 2021 - 7 min read

Sorrell admits he couldn't reengineer WPP, says holdcos must go private to survive, likes the look of Essence as S4 eyes more deals

By Paul McIntyre & Brendan Coyne
S4 Capital chief, Sir Martin Sorrell

Sir Martin Sorrell: Holdcos must go private to survive, or hive off their 'bad bank' businesses.

Never short of an opinion, Sir Martin Sorrell has actually admitted that he couldn't move fast enough to reengineer WPP when he was at the helm. He thinks the holding companies must all delist and go private if they are to avoid break-ups or obsolescence, though is holding his 2 per cent stake in WPP in the hope it sells for parts. In parochial Australia, he thinks groups without strong local leaders are asking for more trouble, while those taking the sales-marketing funnel high ground may find themselves flogging an analogue horse in a digital age (although, unusually, he's still undecided on where it lands). 

You need to know:

  • Sir Martin Sorrell marks Mi3's 100th podcast edition with a typically robust round of punches and insight. A must listen here.
  • He laments a usually "quite vicious, quite direct" Australian trade press could have gone harder on WPPAUNZ's chair Rob Mactier and CEO Jens Monsees before they bowed out in a full WPP Plc takeover of the now delisted Australian group created in 2016 via a merger with STW.
  • Australia, he says, is fiercely parochial and needed strong local management, not an international CEO in Jens Monsees direct out of Germany.  
  • Sorrell admits "mea culpa" on why he didn't reinvent WPP fast enough before being ousted.
  • He says the holding companies are better privatised and/or broken up, per the private equity speculation last year around Publicis, which he believes happened. As listed entities, WPP, Omnicom, IPG and Dentsu are restricted on moving to more unified structures.
  • He poked all the holding companies - "Omnicom, of course, doesn't have a strategy". 
  • Tech software and hardware alliances and capabilities is where the new arms race is rolling on from media as historical powerbrokers - S4 wants to be “agnostic" across all software companies and platforms and is acquiring and building the expertise.
  • There may ultimately be 20 major walled gardens and their power will ebb and flow.
  • Sorrell denies suggestions S4 Capital is a lower funnel tactical shop focused entirely on short-term gains. But says the world and its investment committees may be moving away from the brand-building era. 

 

Local shop, local people

Australia is a fiercely parochial market, according to Sir Martin Sorrell. Which is why he teamed up with the “larrikin” John Singleton and Russell Tate in the first place, spawning STW and later the offshoot WPP AUNZ entity that as of last month, is back under London’s wing after 23 years.

Unless it now appoints a strong local leader, WPP AUNZ will struggle, suggests Sorrell, who thinks Australia’s “usually quite vicious, quite direct” press could have gone harder on former chair Robert Mactier and former CEO, Jens Monsees.

“The troubles at [WPP] AUNZ, I think primarily are about leadership. You can't import somebody into Australia like that. It just doesn't work,” he says.

“You now have a situation where the chairman of the executive committee sits in London, Andrew Scott – who I have a lot of time for and who I think is very able. But you can't possibly chair a group from London in a totally different time zone and totally different location in Asia Pacific. What you'll have is a rudderless company.’’

WPP is not the only holdco in Sir Martin’s crosshairs. “They mouth off about ‘the power of one’ and then you visit one of their lobbies and you have 26 different brands in the lobby area. But I think strategically that’s the right direction.”

Publicis duly poked, Sorrell offers a brisk assessment of the other ad holding groups he perceives as attempting to lift his template.

“Omnicom, of course, doesn’t have a strategy. [Omnicom CEO] John Wren is not strategic, he is very good tactically and he has separate brands.

“Dentsu are trying to build one Dentsu. IPG are trying to build one IPG ­– and probably most successfully, because McCann is such a high proportion of the overall business, probably about 60, 70 per cent, even after Axciom, and therefore they can integrate much more effectively. But the ‘net-net’ is that every holding company is trying to become one company, rather like our own unitary structure at S4 Capital,” says Sorell. “’But they're not making it.”

“Mea culpa’’

The ad holding companies won’t ‘make it’, in Sorrell’s view, unless they delist and go private. He claims that is what prevented him, when at the helm of WPP, from practising what he now vocally preaches at S4.

“Mea culpa,” acknowledges Sorrell. “It didn’t go fast enough. The honest answer is it is an extremely difficult thing to do. You can make the same charge about the auto industry. Why has it taken so long for the auto companies to respond [to Tesla]?

“In the public sphere, I think there is no way any of the six holding companies – well, five now that Havas has disappeared into Vivendi, it’s really a rounding error in the context of Vivendi – can achieve unification,” says Sorrell.

He thinks even those mulling a return to private ownership are ensnared by the very nature of public stocks and speculation.

“Before Christmas there were those rumours – though they were not rumours as far as I’m concerned – that a private equity house was looking at Publicis. It was denied by [Global CEO] Arthur Sadoun but I think conveniently so; I think there were discussions about that,’’ Sorrell suggests.

“I think the share price at that time was about €25. It is now over €50. I think it moved during the course of that discussion or negotiation, and that's the reason it didn't happen.’’

But Sorrell ‘’understands’’ both [Publicis chair] Maurice Levy and the Badinter family were “in favour of privatising the company… and that’s the reason why the discussions took place. You need key shareholders to support privatisation.”

 

The ad holding companies are in a similar position to 2008. They have a ‘good bank’ which is the digital and data parts of the business. But the problem is the analogue part of the business, the 60-70 per cent of the business that is still analogue.

Sir Martin Sorrell, Executive Chairman, S4 Capital

Command and control

If that deal had come to fruition, Sorrell speculates that a privately-owned structure could be separated out, if not broken up. He uses a GFC ‘bad bank’ analogy.

‘’The ad holding companies are in a similar position to 2008. They have a ‘good bank’ which is the digital and data parts of the business. But the problem is the analogue part of the business, the 60-70 per cent of the business that is still analogue,” says Sorrell.

‘’If in a private environment you can carve out or split off the bad parts from the good parts, I think you may well be able to do something. But in the public arena… well look at what Mactier and Monsees tried to do in Australia and New Zealand. It was impossible. You try and change things and you have the microscope on you,’’ he acknowledges.

“So I think what needs to be done is you privatise these operations and then you split them up and carve them up into pieces and you'll deliver more value.’’

Sorrell says public structures foster too much risk aversion, with little room and even less incentive to make quick, bold decisions, and too great a distance between ownership and control. He favours the ‘dual class’ share structure favoured by the tech companies which enable their bosses to retain the reins. Rupert Murdoch's News Corp is another he admires for dual structures. 

That way, they can take more strategic decisions. Which is why Sorrell, who sees S4 Capital as “the Amazon or Tesla” of new model ad holding companies, holds a controlling stake.

You might get IPG getting together with Dentsu, or Dentsu finally surrendering on their international business and jettisoning it. But anything beyond that would be ill advised.

Sir Martin Sorrell, Executive Chairman, S4 Capital

Break-ups and mergers ahead?

If ad holding companies can’t change quickly enough, does Sorrell see further consolidation or private equity plays as forecast 18 months ago by his former lieutenant, Hamish McLennan, now chair of REA Group, HT&E  and Rugby Australia.

“You might get IPG getting together with Dentsu, or Dentsu finally surrendering on their international business and jettisoning it,’’ suggests Sorell.

“But anything beyond that would be ill advised. It would just create more confusion, more division. I think the big issue is focus and what should happen is they should be taken off market, there's no reason for them to be on the market anymore,’’ he repeats.

‘’They've gone through their consolidation phases. What they need is focus and integration. They need to become one company. And the only way they can do that is if they go off market.’’

Whether any of the holding companies decide on strategic or partial exits remains to be seen.

But Sorrell is on record as stating his 2 per cent stake in WPP is worth more if the firm is sold as parts.

‘’It’s trading at 975 (pence) now. Most of the analysts think its worth £11, or £11.5. It’s probably worth £12, £13, £14 if you break it up.’’

If that ever happened, would S4 be sniffing around?

‘’Not really,” says Sorrell, before heaping praise on one particular operation.

‘’I do like Essence. It is a wonderful business. The management of Essence is excellent and they’ve done an extra good job,’’ he says. ’’But we’re interested in pure digital.”

Neither is Sorrell unduly concerned that some brands seek traditional capability and an integrated approach.

‘’Our view is that the digital tail will wag the dog. Digital is already 50 per cent of the market.  It is forecast to be 70 per cent of the market by 2026. So I think we are already on a winning wicket.”

More tech buys

However, Sorrell is keen on pursuing other deals, reiterating his admiration for Globant, the tech services firm in which he acquired a 20 per cent stake as WPP boss – and which he says WPP sold too early following his ousting. He says S4 may need “tech services as a third practice”, alongside its content and digital and data units.

Meanwhile, in response to suggestions digital ad shops can be too closely tied to their technology partners in terms of their client recommendations (S4’s Biztech is an Adobe specialist, for example) he says that S4 is close to striking another deal in Asia Pacific ‘’which will build out our expertise in another one of those software platforms’’.

“We're very keen on building expertise and knowledge in an agnostic way across all the hardware companies, all the software companies and all the platforms,’’ Sorrell adds.

We’re looking for people who want to buy into our approach, we’re not looking for people who want to sell out. If you want to sell out, go talk to Accenture or go and talk to the holding companies with an earnout.

Sir Martin Sorrell, Executive Chairman, S4 Capital

Why earnouts are out

As much a mischief-maker as dealmaker, Sorrel now suggests S4 doesn’t need to overpay when it comes to M&A – and implies it can undercut rivals when wooing prospects, citing MediaMonks as an example.

“It's come to light recently that WPP bid a maximum of one and a half billion euros for MediaMonks,” claims Sorrell. ‘’We paid 300 million euros for it, although with our share price appreciation, that figure is a bigger figure now. But they bid one point five billion maximum for MediaMonks – and MediaMonks decided to go with us.”

Sorrell suggests part of the attraction is S4’s unitary structure and that business owners being merged - never acquired - feel that they retain control. No split between ownership and management means everybody pulls in the same direction, instead of padding their earnout – with Sorrell labelling earnouts themselves as divisive, “passe” and ‘’past their sell-by date’’.

“The curse of many companies is that you get a split between ownership and control and that creates divisions. And if you look at the holding companies, the primary affiliation is not to the company as a whole, but to the individual brand. And if you produce budgets each year which are on the basis of the progress of the individual brand, it is in conflict with the overall company.”

He cites the recent deals S4 struck with Jam3 and Racoon:

“When we signed the letter of intent process, the negotiation of the contract, the due diligence usually takes about six to eight weeks. We start to integrate from that second and we pitch together and work together. And it gives both parties during that legal and accounting process the chance to look very carefully at the way they operate,” says Sorrell.

“We’re looking for people who want to buy into our approach, we’re not looking for people who want to sell out. If you want to sell out, go talk to Accenture or go and talk to the holding companies with an earnout.’’

So far, S4 seems to be finding companies that buy-in. Despite industry-wide concerns about a talent crunch, particularly in AUNZ where borders are closed, Sorrell thinks that individual talent is also there to be found by those that look hard enough.

‘’I’m going to go against that [narrative]. I don’t know how many people were fired at WPP AUNZ for example last year. I don’t know how many people lost their jobs in the industry. All I can tell you is we were 2,500 people last year. Today we have 5,500. We’ve added 3,000 jobs. About half of them have come from mergers and half of them via onboarding,” says Sorrell.

“People say there are shortages of people in various parts of the economy, and that’s why we’re starting to see a bit of inflation. But if you look hard enough, you will find them.”

 

Goodbye to brand?

Despite hitching S4’s skirts firmly to digital, Sorrell denies suggestions that S4 Capital is a lower funnel tactical shop focused entirely on short-term gains. But, while many will disagree, he says the world and its investment committees may be moving away from the brand-building era.

“It may be that life has become shorter term. It may be that attention spans have diminished. It may be that we have to be more reactive or more activation focused than long-term focused,” says Sorrell.

“So upper funnel? I would acknowledge the debate. I'm not sure what the conclusion is, I would say we have to debate it. But life has changed… What we have to acknowledge is that with the rise of digital, that there may be a shift in timeframes.”

It looks like Google is going to go from $180bn of revenue to $240bn. Extrapolating Q1 this year, it looks like Facebook is going to go from $80bn to $110bn, it looks like Amazon is going to go from $20bn to $30bn or $35bn.

Sir Martin Sorrell, Executive Chairman, S4 Capital

Regulators versus platforms

Alongside the rise of the platforms, Sorrell thinks reactive regulation now being worked up around the world will only entrench walled gardens – there may ultimately be 20 major walled gardens and their power will ebb and flow, but that is where he sees the advertising world ending up, with first party data critical for brands and publishers.

In the meantime, there will be “short term turbulence” as the digital world adjusts to the new rules of engagement.

For the big platforms, increased regulatory scrutiny will make it “much more difficult for them to acquire further units,” suggests Sorrell (though Google, Apple, Amazon and Facebook may have already done their dash, with 45 pages of collective acquisitions listed by US lawmakers working up multiple antitrust suits).

“They will be able to grow organically, but to make acquisitions… I think it's going to become quite [challenging],” says Sorrell, questioning whether Amazon’s deal for MGM is worth “poking the regulatory bear” given the $9bn price tag is “chump change” for Jeff Bezos’ behemoth.

Whatever regulators eventually do, Sorrell thinks the big platforms are going to keep getting bigger.

“If the media marketplace is about $550-$600bn this year, it looks like Google is going to go from $180bn of revenue to $240bn. Extrapolating Q1 this year, it looks like Facebook is going to go from $80bn to $110bn, it looks like Amazon is going to go from $20bn to $30bn or $35bn. So you're talking about an incremental $100billion of digital advertising revenues going to flow just to those three platforms.”

And, Sorrell’s latest model seems to suggest, if you can’t beat them … partner with them. All of them.

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