WPP at Twenty
campaignlive.co.uk, Friday, 29 April 2005 11:16AM
Sir Martin Sorrell's WPP is to marketing services what Tesco is to the high street. Caroline Marshall charts 20 years of the company and its compulsive founder. Sir Martin Sorrell, born in 1945, educated at Haberdashers', Cambridge and Harvard, knighted in 2000 for services to the communications industry, is not normal, even by the standards of compulsive over-achievers. Hot-wired to his BlackBerry, he is an obsessive, a person of blazing commitment.
For 20 years he has built his empire. Now 60, and with no intention of retiring or slowing down, WPP's chief executive is the figurehead for more than 84,000 staff, thousands of clients and 13,630 shareholders, who have entrusted their money to his care. No wonder he is a compulsive stayer-in-toucher. "Even before cellphones, Martin couldn't pass a payphone without investing a dime," Alan Gottesman, a former Wall Street analyst, whose New York-based West End Consulting specialises in advertising and media, says.
Anyone far-sighted enough to have put £1,000 into WPP in 1985, and ploughed back all their dividends, would have £21,790 today - despite bear markets, bull markets, a profit warning, recessions, inflation and every kind of financial challenge you can imagine. Today, Sorrell's holding company is home to more than 100 marketing services brands, including Ogilvy & Mather, JWT, Hill & Knowlton, MindShare and Kantar. WPP made a profit before tax of £564 million last year. A strong new-business performance ($6.8 billion compared with $3.6 billion in 2003) is underpinned by margins of 14.1 per cent, against an industry average of 12.7 per cent for the top five groups.
Of course, the stresses on chief executives running empires like WPP are high. Of his peers, only Maurice Levy, the chief executive of Publicis Groupe since 1988, threatens to outlast him. Some say Sorrell's ferocious drive is fuelled by Napoleonic theories of height. He points to what some people call a failing - a tendency to take things personally - to illustrate what makes him tick. "The difference between me and John Wren, Maurice Levy and Michael Roth (the heads of Omnicom, Publicis and Interpublic respectively) is that I started this business 20 years ago in one room. It is different. It is personal. I'm not a hired gun and this is not a job," he says.
The message is clear. To understand Sorrell you should take the former Liverpool manager Bill Shankly's quote - "Football's not just a matter of life and death, it's far more important than that" - apply it to advertising and multiply it by ten.
Is this limiting for his people? "It must be," Sorrell admits. "It must make my life very blinkered and life impossible for those around me but that's how it is. I only own 1.5 per cent of the company but I think of it as a part of me." (One week after this interview, Sorrell sold shares in WPP for the first time, for tax reasons. He now owns about 1.2 per cent).
His affair with marketing services began in 1975 when advertising was something of a cottage industry. "It was artsy and craftsy, CDP and Saatchis were the strong creative brands," he says. "But there were business issues to grapple with: private companies going public, the needs of multinational accounts and so on."
The Saatchi brothers were two years into their agency and Sorrell - like Maurice and Charles, the product of a middle-class Jewish home - was their first finance director. He came via Glendenning Associates, the US consultancy, Mark McCormack's sports marketing company and James Gulliver Associates, which offered management and investment advice.
Saatchis used Gulliver for advice on structuring a deal to take over Compton, in which Gulliver had shares. Gulliver and Sorrell advised the brothers to hire a proper finance director. Headhunters trawled other agencies and Fleet Street papers, but drew a blank. Attracted to the Saatchis' quick minds and different way of working, Sorrell was persuaded to upgrade his one day a week at Saatchis to a staff position. He made an instant impression. Neil Blackley, a former Merrill Lynch media analyst and the chairman of the Apax Media Advisory Board, recalls meeting Sorrell for the first time, describing him as "smart, aggressive and clued-up".
At 40, having handled big capital-raising operations in the City and dealt with analysts on Wall Street, Sorrell was ready to risk his own money. He says hitting 40 was more of a milestone than reaching 60 this year: "My feelings on being 60? Awful, terrible. I just wanted to forget about it. Forty was more of a watershed for me; it forced me to think about stuff. I was in the last-chance saloon, having my male menopause."
Resolution came in the unlikely form of Investors Chronicle. He explains: "I went through it looking for a manufacturing firm with about £1 million market capitalisation, liquidity, no debt, freehold property and a management that was mature without being senile."
While still working at Saatchis, Sorrell found the quoted company into which he could inject other businesses. He and Preston Rabl, a stockbroker, raised a loan and bought Wire & Plastic Products, a supermarket basket manufacturer based in Kent. He began to disengage from the Saatchi brothers from this moment on, although he did not step down formally as their finance director until March 1986. Although the Saatchis were early investors in WPP, there is no love lost between them and Sorrell today.
Below the line rather than advertising was the original premise for WPP. Two years after striking out on their own in 1985, Sorrell and Rabl had made 15 takeover bids in the below-the-line area, taking WPP's market value from £1.4 million to £134 million. "There were easy pickings at the beginning because areas such as sales promotion and design were unfashionable," Sorrell says. "But I started to think about JWT early on. Yes, it was a volte-face. It was opportunistic because JWT had fallen on hard times."
That is an understatement. Gottesman, then a Wall Street analyst at LF Rothschild, remarked in 1987: "They (JWT) have problems in places where other companies don't even have places." It was strong creatively in London and New York but its margins were disappearing, there was management upheaval and it began losing money in the final quarter of 1986. When Burger King, a major client, put its account up for review, Sorrell quietly built a 5 per cent stake.
In June 1987, he made a bid at $45 a share. Amid intense anti-British sentiment, and with lawsuits flying, the world's third-largest agency made futile attempts to find a white knight and go private. Sorrell's final offer of $50 a share was successful on 26 June. JWT, an iconic US agency brand, had fallen to a foreigner.
"Britannia waives the rules," Gottesman wrote, explaining why UK companies could make acquisitions in the US that were not open to home-grown companies. It was a unique deal in other ways too; hostile bids were then anathema, given advertising's positioning as a people business. Some clients and staff left but, by 1988, WPP announced profits of £14.1 million. Despite the account losses and upheaval, JWT's revenues were up by more than 8 per cent.
Sorrell's takeover of JWT has come to symbolise the nature of the man. When the guts that enabled him to launch a hostile bid for a company five times bigger than WPP is coupled with luck, he is at his most formidable.
And the luck? When preparing the bid, Sorrell and his team, then operating from a dingy office below a leaking car park, spotted an undepreciated freehold asset buried in the small print of the balance sheet.
They thought it was JWT's London headquarters in Berkeley Square. It turned out to be more valuable - and in Tokyo. When a bank in Sorrell's syndicate offered to lend him $100 million against the property, he knew it was worth twice that. And when a banker friend, who was visiting Japan, took a look at it and offered him "a quick hundred", he knew he was sitting on a goldmine. "A quick hundred meant he was going to double the profit," Sorrell recalls, laughing. In the end, having paid $566 (£330) million for JWT, he sold the Tokyo property for $200 million, netting $100 million after tax.
WPP's greatest coup was followed three years later by its near destruction. The JWT takeover had gone so well that Sorrell was able to turn his eyes to his next target, Ogilvy & Mather, in 1989. From his 12th century French chateau, the retired David Ogilvy hissed: "God, the idea of being taken over by that odious little shit really gives me the creeps. He's never written an advertisement in his life."
Sorrell, cast as the devil with a calculator, swallowed his pride and offered 77-year-old Ogilvy the chairmanship of WPP as part of the deal. Observers were divided as to whether this was a transparent sop to an old man's vanity or a genuine attempt to do the honourable thing. It was certainly an example of the political sensitivities in action that Sorrell frequently harnesses to his advantage. Ogilvy later retracted the "shit" comment (revising it to "jerk") in a long copy ad in the form of a letter, which never ran. "I am sorry I was so offensive to you - before we met," he wrote.
On paper, it appeared to be a repeat of the JWT deal but Ogilvy was bought at 42 times earnings at the peak of the economic cycle, using debt and preferred stock rather than equity. In his eagerness, Sorrell paid too much - $864 (£560) million - a realisation that dawned as the recession was getting into full swing. Analysts noted the downturn, totted up the mountain of debt and advised investors to flee. A profit warning in late 1990 was the critical point in turning off confidence in WPP. Having stood at 650p the previous year, shares plunged to 115p two days after the warning.
The searing experience of nearly losing his company to the banks and the resulting financial restructure left their mark on the man and on his reputation as a dealmaker. WPP was teetering on the edge of failure for a while and Sorrell even thought of stepping down - his appetite, ambition and lust for success almost defeated by errors of judgment. "That was certainly my most stressful period," he says. "I got the financial structure wrong. I didn't foresee the recession and I thought things would improve more quickly. I had got us into the mess and I had to get us out of it."
He did, thanks to his forensic knowledge of how banks operate, but it was a nerve-shredding time. "The Ogilvy deal certainly destroyed value in WPP, it lost a lot of shareholders a lot of money," Blackley says.
After the JWT purchase, amid talk of his resistance to accepting advice from senior colleagues, Sorrell fell out with two close aides. One was Simeon Galpert, WPP's UK treasurer and a long-time associate since the two worked together at Saatchis. Another was David Stevens, the company secretary and the liaison between WPP and its solicitors. In 1991, WPP confirmed legal proceedings were pending over Galpert's departure and denied Stevens had been fired.
The shockwaves extended from the financial centre to Ogilvy. Its chief executive, Ken Roman, resigned. The agency lost Shell and Unilever in 1989, Seagram's and Nutrasweet in 1990 and, in 1991, Campbell Soup withdrew $25 million and American Express $60 million.
But Ogilvy did return to form. The hiring of Charlotte Beers as its chief executive, and her subsequent "operation win back" as it was dubbed, helped Ogilvy rebuild its confidence. Ogilvy's client IBM fired 40 agencies in 1994 and consolidated its global advertising at O&M - a historic move. Shelly Lazarus, Beers' successor, is today considered best of breed among the network chiefs.
By 1995, although Ogilvy and JWT were by far the two largest companies in WPP, marketing services accounted for a nearly half its revenues and almost a quarter of its operating profit.
Market research, then as now, was a Sorrell obsession. Three purchases in 1995 - Millward Brown, MRB and Research International - were merged under the Kantar brand. Market research was bought by a relatively small number of multinational clients at that time. Now, with clients voting for research with their chequebooks, Sorrell is keen to buy even more. He wants to raise the "measurable" part of WPP (research, internet, direct) from a third to a half of the whole.
How? Taylor Nelson, the world's second-biggest market research business after Holland's VNU, may be on his shopping list. Aegis' Synovate research interests, which are not performing well, may be another target. So may Arbitron, which is to radio audience data what Nielsen is to TV. When United Business Media put its research arm, NOP World, up for sale, WPP had a look.
Aegis also appears keen on NOP World. Investors worry Sorrell's interest may be fuelled as much by strategic fit as a desire to make trouble for a rival. Gottesman describes Sorrell as a "deal junkie, into the detail, and very creative with it". But he points out: "It looks like he might do some deals because that's what he does."
Others are less impressed. Is there a deal he cannot stay away from? Looking at his 20-year history, the 2003 purchase of Cordiant, the former Saatchis spinoff, appears to belie the critics. WPP may have snatched the corporate equivalent of a donkey from the knacker's yard but the price - £220 million for Bates and a part of Zenith - made it a very good deal.
The acquisition of Tempus Group for £400 million in 2001 and Young & Rubicam for £3 billion in 2000 look more questionable. The fact that WPP tried to back out of the Tempus purchase when the events of 11 September destabilised the financial markets showed Sorrell knew he was overpaying.
But he was forced to complete the deal, making the departing founder, Chris Ingram, £64 million richer along the way. JWT was the first hostile bid in the sector; will Tempus go down in history as the first hostile sale?
As for Y&R, there are two ways of viewing it. The biggest acquisitions tend to become available only at the peak of an economic cycle. But Y&R's subsequent performance in the US, coupled with a stampede for the door by its top executives after they banked huge cheques following the 1998 flotation, has hardly justified its high price tag. Sorrell offers a terse comment: "We have to raise our game there. Anne (Fudge) wants to make it work. She knows what needs to be done." (Soon after this interview, Fudge relinquished her leadership of the Y&R Advertising network and was sidelined into the lesser role of head of Y&R Brands.)
Sorrell's transforming media deal came in 1997. Despite much internal resistance, JWT and O&M combined their media departments into a single WPP media offer, MindShare. It launched first in Asia and later in the US and the UK.
WPP now owns multiple media agencies - MindShare, Maxus, Mediaedge:cia, BJK&E - under the Group M banner. Sorrell has also made no secret of wanting to snap up the jewel in the Havas crown, Media Planning Group, having approached the financier Vincent Bollore, who has built a stake in Havas, last year. WPP and Havas recently revealed a joint venture, 2MV. Although created to bid for a media-buying assignment at Peugeot Citroen PSA, the deal is viewed as a sign of growing co-operation between the two groups.
The WPP and Havas chief executives might loathe each other but there is no such animosity further down the ranks.
It is hard to see how clients differentiate WPP's media brands but the issues on Sorrell's media agenda are clear. A few years ago he was making a lot of noise about media inflation, then about media-neutral planning.
Now he is talking a lot about PVRs. What does he think will be the next hot topic? "I wish I knew," he says. "Advertising on Mars, maybe? In fact, it's media research - using brain as well as brawn, harnessing the intellectual as well as the scale assets we have."
Ah, integration, the bete noire of agencies everywhere. Having won two huge consolidations - Samsung and HSBC - WPP must by now be something of an expert in the in-fighting that goes on between different group agencies trying to outdo each other.
Still, Sorrell's not satisfied. He is installing a growing army of "client leaders" to manage every aspect of key multinational accounts and is also nominating "country managers". Both roles are controversial because operating companies naturally resist the idea of someone who does not report to them having an over-arching responsibility for their clients' business. "Integration is fundamental to the business. There is no point in companies existing unless they get the benefit of their constituent parts. The thing that bedevils us and our clients is the unwillingness of people to work together," he says.
This begs a comparison with Omnicom. Omnicom's fabled creative positioning has always been its differentiating factor - that and its status as number one in the communications universe. Yet, philosophically, Omnicom has a very different approach, one that has enabled it to avoid the slur that has bedevilled WPP: that it is driven fiscally at the expense of creative quality. "Every major client I have has received a message from Martin offering to do the business for less than us and promising to run the account in a state of perpetual pitch," a competitor spits. "This is a circle that cannot be squared and only results in him offering cheaper, poor quality people to solve their issues."
The real difference, argues Sorrell, goes back to the roots of the groups. Omnicom was created in 1986 to combine three advertising agencies into a single entity capable of competing in the world market - creativity was at the core of the equation. WPP may have changed direction, but it has its roots in the below-the-line sector. "We don't believe there are natural leaders in this business, what conditions the response is the issue," Sorrell says.
Today, WPP comprises 250 people scattered across London, New York, Sao Paulo and Hong Kong and Sorrell is the longest serving chief executive of a UK-quoted media company. Notching up 20 years in charge is nothing more than a tiny pause in a story he began as a married commoner and continues as a knight, divorced from his wife of 33 years. And the themes for the next few chapters?
For starters he must recruit heads for Y&R Advertising and Grey. There is no glimmer of a successor at WPP and that troubles investors. There is the ongoing issue of client conflict and how his fledgling relationship with Procter & Gamble could be nurtured.
Thanks to the purchase of Ed Meyer's Grey Global Group for £845 million earlier this year, Sorrell now counts P&G, the world's largest advertiser, as a client. Its arch-rival, Unilever, resides elsewhere in the group.
The truth is that Publicis still has the lion's share of P&G through the Saatchi & Saatchi, Leo Burnett and Publicis networks. So would Sorrell fire Unilever if the world's largest advertiser told him to, in return for further P&G business for Grey or perhaps Red Cell? "Thanks for that easy question!" he says, before offering a rather limp vote of confidence in Unilever. "No, because once you have the structures and resources in place, you have committed to a client.
Historically, there have been such demands made of agencies but, in my view, that climate's ebbed and gone."
To understand his views on succession, one could look at his family. Sorrell's father, Jack, was a strong influence. He ran a successful electrical retailing business, worked on his investments well into retirement and died in 1989, shortly after the Ogilvy acquisition.
His mother, Sally, is 88. Still busy with her own "business" (a luncheon club for the elderly in North London), she appeared in an advertisement for the Campaign A List and turned up to quaff champagne at a party to launch the book. Let she who dares ask Sorrell the succession question after due consideration of the people who shaped his view of the world. But, still, one must. Investors worry that Sorrell is mortal, after all. He still has no obvious successor and the WPP board is, perhaps, overly supine on the issue. At the same time, of course, they realise Sorrell's sheer bloody-mindedness is crucial to the enterprise.
"I've been through two succession plans with the board, the last one in December, and everyone knows who the candidates are," Sorrell says. He declines to be drawn on any names, proving with his closing remark something his army of ground-down subordinates have known for years: never confuse this extraordinary man with a normal, well-adjusted person.
Normal people don't turn £1 million cash shells into multibillion-pound global empires, after all. Normal people do not reach the age of 60 and say: "The truth is, I see myself having a heart attack while still doing this. I would be dreadfully bored without it." By way of a small concession, he adds, with a grin: "But will I be doing it when I'm 78 like Ed? No way."
1985: SP 28p*
In May, Martin Sorrell and his partner, Preston Rabl, a stockbroker, acquire a stake in Wire & Plastic Products. The share price rises immediately from 35p to 54p. On 14 June, the Wire & Plastic Products board votes to accept an offer from Sorrell and Rabl for control of the company. Rabl joins the board first, Sorrell joins in December.
1986: SP 252p
Sorrell becomes chief executive and the company is renamed WPP Group. VAP Group, a UK specialist communications company, is the first acquisition. Pace Communications is first US company to join.
1987: SP 687p
By 1987, WPP has made 10 acquisitions in marketing services. Rabl and Sorrell fall out over the pace at which to build the group and Rabl leaves. Sorrell purchases a struggling J. Walter Thompson Group for £330 million and turns it around. The deal brings with it Hill & Knowlton and MRB Group. Mendoza Dillon, a US-based Hispanic marketing specialist, also joins WPP.
1988: SP 372p
WPP is listed on the Nasdaq exchange in New York.
1989: SP 563p
WPP buys the Ogilvy Group for a hefty £560 million, bringing in Ogilvy & Mather Worldwide, Ogilvy Direct and Ogilvy Public Relations. WPP also purchases Research International and Millward Brown.
1990: SP 567p
Recession strikes. WPP issues a profit warning in late 1990, a critical point in turning off confidence in the company. Analysts tot up the mountain of debt and advise investors to flee. A complete financial restructure saves the company from collapse.
1992: SP 41p
WPP launches CommonHealth, an international healthcare communications service network.
1994: SP 117p
The Ogilvy client IBM fires 40 advertising agencies worldwide and consolidates its global advertising business into O&M - then an historic account consolidation.
1995: SP 113p
Kantar is established as an internal parent company for WPP's research interests.
1997: SP 246p
JWT and O&M combine their media departments to launch MindShare, first in Asia. WPP invests in Singapore-based Batey Holdings and takes stake in IBOPE, Latin America's leading media research business. It also invests in Chime Communications.
1998: SP 265p
WPP joins the FTSE 100 and forms an alliance with Asatsu-DK, Japan's third-largest advertising agency.
1999: SP 458p
MindShare launches in the US.
2000: SP 983p
WPP acquires Young & Rubicam, bringing Y&R Advertising, Wunderman, Landor, Burson-Marsteller, Cohn & Wolfe and Sudler & Hennessey into the fold. Boots hires a team of WPP companies to handle its account - signalling the start of collaborative WPP efforts to come on a global and regional scale. On 6 March 2000, the WPP share price reaches its all-time high of 1,323p.
2001: SP 882p
The Tempus Group joins WPP for £400 million - WPP tries to pull out as the markets collapse after 11 September but is forced to go through with the purchase. The Media Edge and Tempus' CIA merge to form Mediaedge: cia. Berlin Cameron New York is acquired and joins Red Cell, which was formally launched this year. WPP takes a majority stake in South Korea's AD Venture, one of the country's top ten agencies.
2002: SP 690p
WPP makes investments in China and Taiwan through stakes in Shanghai Advertising Agency and (through Ogilvy PR) H-Line Worldwide (China) and Era Public Relations (Taiwan). O&M and Y&R take a controlling interest in Korea's LG Ad, the country's largest ad agency. The downturn takes its toll on the share price.
2003: SP 426p
Cordiant Communications is acquired for £220 million, bringing in Bates, Fitch, 141 Worldwide and Healthworld. Bates is relaunched as a standalone Asian agency brand. Group M is formed to oversee media investment management interests. WPP takes a stake in HHCL to add to Red Cell's UK presence.
2004: SP 606p
JWT purchases 30 per cent of China's Guangzhou Newsun Insight Advertising. O&M China acquires a controlling interest in China's Fujian Effort Advertising. WPP wins HSBC and Samsung. WPP takes a stake in KR Media, founded by Bruno Kemoun and Eryck Rebbouh.
2005: SP 577p
Grey Global Group, acquired for £845 million, joins the group formally. WPP's revenues are £4.3 billion. It employs more than 84,000 people in more than 2,000 offices in 106 countries.
AN ANALYST'S TAKE ON WPP
Having observed WPP on a daily basis since 1986, I can genuinely claim that the last 20 eventful years have all the ingredients of great classical drama.
From Martin Sorrell's David-and-Goliath struggle for J. Walter Thompson in 1987 (when fortune indeed favoured the brave with the discovery of a Tokyo property valued at just £8 million in the books, and which he sold for more than £120 million), to our hero over-stretching himself with the acquisition of Ogilvy & Mather at the cyclical peak in 1989, only to find himself saddled with heavy debt and onerous earn-outs just as the cycle turned.
Then, shackled and laid low by a syndicate of 36 bankers, Sorrell was forced into a dilutive debt/equity swap. Bloodied but unbowed, he set about rebuilding his lost empire and delivering the holy grail of 10 per cent margins. Wiser for his experience of the fallow years, our champion spent the years of plenty sowing the seeds of steady growth and reaping their sweet fruit.
Despite a punishing period in the wilderness, our hero was determined to scale the dizzy heights again. Come the cyclical peak in 2000, he was confronted with temptation once more but wisely ignored the siren voices - he devised a fixed-exchange ratio, exchanging his own over-inflated paper for that of Young & Rubicam and, in so doing, avoided a repetition of the sins of the past.
Having looked into the dark abyss of the last recession, our protagonist was now more attune to the subtle changes of nature and, by end 2000, he was laying store his harvest for the famine that would inevitably follow the feast. Having thus husbanded his resources, he plundered in quick succession the houses of Tempus, Cordiant and Grey.
As the saying goes, recession is the time when capital is returned to its rightful owners.
Lorna Tilbian is an analyst at Numis Securities.
This article was first published on campaignlive.co.uk
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