Monday 24 July 2017

Advertising behemoth is now at a digital crossroad

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John Lynch

Market conditions over the last few years have been especially kind to mega-mergers. Non-stop globalisation, against a background of historically low interest rates, has meant that for the mega-ambitious, consolidations have been high on the corporate agenda.

This has been particularly the case with advertising and marketing companies.

A handful of these companies now control much of the world's advertising spend. They hold an extraordinary sway over the media, deciding when and where to spend their clients' ad budgets and influence the setting of TV schedules. But they are also at something of a media crossroads.

The big idea behind this trend is the assumption that ad agencies need a global presence and full range of marketing offerings to service their global clients. So today, we are left with four major players in the industry: the British group WPP; two American operators, Omnicom and Interpublic; and the French concern, Publicis.

This week, we are analysing WPP, which is an interesting example of the wielding of power and the influence and genius of one man, CEO Martin Sorrell.

Mr Sorrell has often been described as an advertising man, yet he has never written an ad or planned a campaign. He cut his teeth in advertising as finance director in Saatchi and Saatchi before buying, in 1985, a small quoted company Wire & Plastic Products (WPP), which made wire baskets.

He quickly offloaded the original business and went on an acquisition spree in the advertising industry.

Within two years, WPP acquired the iconic J. Walter Thompson advertising agency. This was followed by the purchase of Ogilvy & Mather (O&M), a takeover that almost bankrupt the company.

It was a contentious takeover for lots of reasons. David Ogilvy, who had managed O&M for 40 years, was repulsed by mega-mergers. "Mega-mergers are for megalomaniacs," he said. Mr Sorrell, (whom Mr Oglivy once described as an "odious little jerk"), was undeterred. His financial engineering skills saw the company through a serious recession and as the millennium began, it was adding another famous Madison Avenue name, Young & Rubicon, to its portfolio of businesses.

Today, the company is a global leader in communication. It is involved in advertising, media management, public relations, branding, public affairs, direct and digital marketing and specialist communications. In its 30-plus years, WPP has bought 400 companies, has 142,000 employees, 3,000 offices in 112 countries, and is valued at £22bn (€25.9bn). Over two-thirds of the top global 500 companies are its clients.

The US and Europe account for more than 70pc of the group's business, the former accounting for almost 40pc of revenues and profits. However, in these markets the industry is changing. Technology is changing the buying and selling of advertising.

Over the last five years, digital marketing - led by Google and Facebook - has snatched business from the print media. This digital duopoly controls 60pc of the US digital business, which is now on track to overtake TV advertising. The digital disruption has implications for groups such as WPP.

In spite of the changing competitive environment, WPP has had record revenues and profits for six successive years. Revenues last year were £14.4bn (€16.9bn), an increase of 40pc over the last six years. Pre-tax profits of £1.9bn jumped almost two-thirds in the same period and the share price has also risen from £7.40 to a recent record high of £19, today it trades at £17 (€20). Shareholders were pleased that earnings per share checked in £1.10, a two-thirds increase since 2012, and dividends per share doubled in the same period.

Yet investors worry as to its executive pay as the company is among the most lavish of UK blue chips. However, there are reasons to be wary; global uncertainty, digital mayhem and Mr Sorrell staying at the helm, among them. Nevertheless, WPP is a quality operator, and at a modest price-earnings ratio of 15, could be worth a flutter.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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