From WPP to S4 Capital: Rewriting the Advertising Industry | In Practise

From WPP to S4 Capital: Rewriting the Advertising Industry

Founder of WPP and Founder, Executive Chairman S4 Capital

Learning outcomes

  • How to organize operating companies in a holding company structure
  • Balancing cohesion and accountability within holding companies
  • How customers are evolving and in-housing advertising budgets
  • Transparency and analog vs digital media buying profitability
  • Advantages of S4’s integrated value proposition
  • Challenges for traditional agencies and break up opportunity
  • Why S4 has a competitive advantage over large incumbents
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Executive Bio

Sir Martin Sorrell

Founder of WPP and Founder, Executive Chairman S4 Capital

Sir Martin Sorrell is Founder and Executive Chairman of S4 Capital plc, which is building a purely digital advertising and marketing services business for global, multinational, regional, local clients and millennial-driven influencer brands. Sir Martin was CEO of WPP for 33 years, building it from a £1 million “shell” company in 1985 into the world’s largest advertising and marketing services company. When Sir Martin left in April 2018, WPP had a market capitalisation of over £16 billion, revenues of over £15 billion, profits of approximately £2 billion and over 200,000 people in 113 countries. Prior to that, Sir Martin was Group Financial Director of Saatchi & Saatchi plc for 9 years and worked for James Gulliver, Mark McCormack and Glendinning Associates before that. S4 Capital plc merged with MediaMonks, its content practice, in July 2018 and MightyHive, its programmatic practice, in December 2018 and has added eight further content programmatic and data companies to both practices in 2019 and six in 2020. It is listed on the London Stock Exchange under SFOR.L and after a little over two years, S4 Capital plc has over 2870 people in 30 countries, with a market capitalization of over $2.7 billion. Sir Martin supports a number of leading business schools and universities, including his alma maters, Harvard Business School and Cambridge University and a number of charities, including his family foundation.Read more

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Can we step back to the 80s, when you started WPP? What was your original M&A strategy?

If you go back to the original document, which I think still exists, you can find it, at Companies House. In the circular that went to shareholders to approve the issue of new shares, to Preston rather than myself, we said our objective was to build a major multi-national marketing services company. That was it. When you start, of course, with a wire basket manufacturer and you want to try and do it in your own life, organic growth is stronger, but it takes longer; you are probably dead and buried before you get to any scale.

If we were going to do it on any scale and, if fact, if we were going to build a business, it had be done not just organically, but by M&A. In those days, acquisitions were a way of doing it; today, I think it’s very different. It is mergers, but we’ll come onto that. I think, in the first 18 months, we acquired 18 companies. Then, of course, the breakthrough if you like, was JWT Group. People forget that it was not just the agency, which is now no longer, very sadly, but it consisted of the media part of the business, which is now Mindshare, which continues to thrive. It also consisted of Hill+Knowlton and it actually consisted of an agency called Lord, Geller, which had a sad end to it when the management walked out with the IBM business, which they promptly lost. Actually, the IBM business came back in 1992, about three years later. You also had MRB, Market Research Bureau, which included BMRB, quite a famous research company here in the UK. That was the core part of Kantar, which is now part of Bain Capital.

We had a fast start, but the breakthrough was JWT Group which was 13 times our size.

How much did you pay for those assets, on average, in terms of multiples?

I can’t remember what the multiple was, but we paid $525 million for JWT and we found the Japanese property. We knew there was a pretty old property and we thought it was Berkeley Square but it turned out to be Japan, so that was a gross of $200 million; we had to pay $100 million tax. But that reduced the net purchase price by $100 million. Margins were appalling at JWT and we improved the margins, so that was a great buy.

With Ogilvy, I think it was about twice our size and was about $825 million. No profit was there and I made the mistake of funding it, in part, by convertible preferred. I forgot that convertible preferred is really debt, particularly in a bear market where the conversion rights have no value, so we were saddled with debt. We had to do a restructuring, in 1991, so it was a bit of the Perils of Pauline, but we did manage to fight our way through.

In terms of multiples, in those days, I would say that JWT looked, on the surface, to be a high multiple, but when you looked at the underlying potential profitability, we did very well out of JWT. Not just because of the property, but because they had some good assets. We brought Burt Manning back to run the agency. Don Johnston, who was the CEO of JWT Group, had got rid of Burt a year or so previously, who was his natural successor, so it was highly political. There was a disgruntled bunch inside Ogilvy and Ken Roman and David Ogilvy didn’t appear to have a good relationship on the surface, but when you dug down, it really wasn’t. When we sent the facts attack, as we called it, in 1989, to Roman, he removed the last paragraph of the letters, when he showed the letters to David Ogilvy, so David didn’t see that we had suggested he become chairman of the joint company.

That’s all history and, value wise, those were good deals; even today, with the destruction of JWT, the agency, which is extremely sad, not just because it’s a reflection of history, but because of its value. I think management comes in with big boots and stamps all over the history. It’s an ageist attitude, not just to people, but an ageist attitude to companies, in a bizarre way. Corporate memory is lost. I remember when I went into JWT Group, Jeremy Bullmore and Stephen King were being shown the exit door by Miles Colebrook and Allen Thomas, who were taking over JWT. It was the young guns again. In a way, it was very similar to what we’re seeing today; pushing out the old, without out any reference or understanding.

There’s an Israeli professor who talks about the difference between wisdom and intelligence. He says that older people have wisdom and younger people have intelligence. At the end of his YouTube video he says, make sure your companies are run by wise people and that intelligent people work for them. The older people run the business because they have the wisdom and the younger people, who have the intelligence, work for them.

So I said to Jeremy and Stephen, join our board. To this day, Jeremy is still at WPP, I’m glad to say. As he’s a leading national treasure, if they booted him out, there would be uproar.

How would you compare the assets you were purchasing at WPP in the early days to today at S4?

It’s a very different model. Both Saatchi’s, where I was previously to WPP and WPP itself, were what I call market share models. This is not a phenomenon that started in the 80s, with me or with John Wren, with Omnicom, then later on, with Publicis and Maurice Lévy or Dentsu. This is a model that started in the 1950s, so it has run its course. It has been around for 70 odd years. Marion Harper, of IPG, used to fly around in a big jet; it was amazing, really. When you read some of the books about him, he was quite funny, in a way. But it started with him. His view was, I think, primarily for conflict reasons, you had separate businesses because you couldn’t service Unilever and P&G in the same agency; they wouldn’t accept it. You had to have different channels or verticals or organizations.

The idea was that you had McCann and you added Lintas – they bought Lintas from Unilever, because it was actually Lever International Advertising Services; that’s what LINTAS stood for – and they had these separate brands. It meant that you knew, if you had competing brands or you launched a competing brand, that you would cannibalize some of your existing business. It is a bit like detergents at Procter or Unilever; you knew you would lose sales because of cannibalization but, on the other hand, you would build your market share overall. It is very much what I would call a market share model.

Whereas S4 is really about top-line growth. The biggest determinant of total shareholder return, of added value, to shareholders, is like-for-like growth. This morning, WPP has its capital markets day and it talks about accelerating growth. The growth they are accelerating to is about 3% or 4% a year, which is a modest target, to say the least, when GDP is growing at about that rate. But everybody understands that, in the market share model, margin is probably equally as important as top-line growth and you balance the two. Certainly, in our incentive plans at Saatchi’s and at WPP, it was very much about top-line growth and margin, equally weighted.

Today, at S4, I would say it’s two-thirds, three-quarters top-line growth – maybe even more than that – but with decent margins. At S4, we’re doing 20% and a bit more, after central costs. There is not much operational leverage in the business, in the classic sense. There is a bit, but it depends on where the new business comes from.

Is there more operational leverage in the digital business at S4 versus traditional agencies?

Probably a little. We were talking about it with an institution yesterday. I think, when we add an account like Mondelez – Mondelez is an existing client, but we add in the area of content – or when we add BMW and MINI, in Europe, each one is going to add more than 10% to our revenues. We are 3,200 people at the minute and we’ve hired around 300 people and, in that number, a few are the hiring for BMW MINI, but we’ll probably be at about 3,600 - 3,700, in fairly short order, excluding deals, which will drive us over 4,000. I would say, when we add an account like BMW MINI, we are adding people at pretty much the same rate.

Within BMW MINI and Mondelez, in addition to the scope of the business we’ve won, we’ve already added, in a few weeks, additional assignments and in that, that’s where you get the operational leverage. Your operational leverage is better when you do land and expand, which is win a project, add a project – you have to add people – add a project, add a project. Our revenues are around $400 million, trending upwards, obviously, from that level. A whopper, to us, is about $20 million, about 5% of our revenues. The biggest whopper we have is Google; our second biggest is a major tech communications company. You can guess who it is; one of the most valuable companies in the world, but we can’t say because of an NDA. Third and fourth would be BMW MINI and Mondelez; they would be vying between one another, I would think. The fifth is Facebook.

Facebook has come through land and expand. Win a project, grow it. Apple has come through that and Google, to some extent, has come through deals but has, principally, been driven by land and expand. That’s a much healthier way, I think. In terms of big pitches, Mondelez took nine months and BMW MINI took a year and a week. These are great drains on resources. For the bigger agencies, they’ve got more resources, but we’re getting there; we’re getting able to do it. We very carefully assess the likelihood of us winning, before we get involved.

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From WPP to S4 Capital: Rewriting the Advertising Industry

December 17, 2020

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