Whatever strategic justifications may be offered in support of M&C Saatchi's new embrace with the stock market as it contemplates an AIM quotation, the over-riding motivation is almost certain to be a very simple one: dollops of dosh. Not so much for M&C Saatchi, but for its owners who must be getting eager to realise at least some of the value of their business as several of them head towards retirement age.
So is the proposed M&C flotation (nowadays more commonly called an IPO or "initial public offering") anything more than a pathway to pecuniary paradise for its owners? If so, what are the potential advantages and disadvantages? And why have they not pursued the more common route of an outright sale?
One of the founding partners, David Kershaw, is adamant that a lot of thought went into the various options and that flotation offered the best way to preserve all that is best about the agency. The company is expected to raise about £10 million of new money for its expansion plans while offering a better chance to preserve its founding principles and culture than would be possible as a subsidiary of another group.
Doubtless sensitive to how the City may view a management team that over-reached itself in its previous guise, M&C says it will resist the temptation to become a global gobbler - acquiring everything in sight - and hopes to persuade the investment community that organic growth is the better policy, even if the pace of growth proves slower. But temptation and investor pressure will be ever-present. And, on the stock market, the seductive aroma of a potential financial gain tends to overpower the stench of a nasty memory.
M&C is keeping quiet about the proportion of existing shares that the partners will be selling. But if no more than 30 per cent of the enlarged share capital is made available to the public and the partners achieve the company valuation they hope for, current shareholders - including those who hold shares in operating subsidiaries - may be able to realise up to about £25 million between them.
Sponsors of the flotation never allow the key shareholders to realise all of their shareholdings at the outset even if they want to, but the outcome differs little from an outright sale where earn-out arrangements normally spread the proceeds over three to five years.
M&C says it wants to remain in command of its own destiny for the foreseeable future, but it is unlikely to be independent of any other global group 20 years after flotation. That is not the way things happen in the UK any more - witness Saatchi & Saatchi Company and the string of other lively advertising agencies that went public in the 80s. Sadly, today's businesses are built to be sold, and usually within the span of a single generation.
However, a stock-market quotation does make it easier to retain and motivate key staff with share options (not to mention offering a future capital-realisation route for existing shareholders in M&C subsidiaries and even in Walker Media). It also facilitates expansion because its publicly quoted shares can be used to pay for acquisitions, and fresh funds can be raised by issuing more shares to the public. By making the company bigger, the value of any shares retained by the founders should get bigger too.
Flotation offers another potential advantage by providing a viable mechanism for management succession. Founders can dispose of their investment at a full market price over time without requiring their successors to raise all the cash themselves or from institutions. By contrast, internal share transfers rarely realise anything like as much as a public sale. And the involvement of an institution usually provides only a short-term and expensive breather before that institution itself demands either a third-party sale or flotation so it can sell on its stake.
But why would M&C - an agency that believes in doing everything in style - choose to float its shares on a secondary stock market rather than on the main market? The answer probably lies with the taxman. Some shareholders are likely to have a better tax deal on AIM than would have been the case with a company listed on the main market. Tax aside, M&C will enjoy greater flexibility on AIM and it will be cheaper too.
Nevertheless, entry on to AIM will probably cost the best part of £500,000 by the time all the professionals have been paid - certainly not less than £300,000, according to the Willott Kingston Smith partner Amanda Merron.
Will M&C's founders get a better price per share than they would from a global giant such as Publicis Groupe, Omnicom or WPP? In the recent past, prospective buyers may have been less than eager to match the rumoured £75 million valuation that M&C's partners are hoping will be placed on the company at flotation. This would represent a price/earnings multiple of 16.3 times the post-tax profits of £4.6 million estimated to have been earned last year (or about 11.4 times pre-tax profits). Although that multiple is a long way behind WPP's stratospheric 30, M&C's annual profit growth rate and its reluctance to adopt an aggressive acquisition strategy may limit investors' enthusiasm, putting a dampener on the eventual flotation price.
What if Maurice Levy were to offer a cheque for £75 million tomorrow? Would the partners change their minds and agree to an outright sale? "Categorically not," Kershaw reacts with some vehemence. Irrespective of pricing considerations, the management team probably could not stomach the idea of being someone else's servant after so many years in the driving seat.
A flotation offers more freedom to manage - as long as they can keep outside shareholders happy.
And that leads us to a bigger question: will M&C's management respect public investors' interests as much as their own? People have questioned whether those who managed Saatchi & Saatchi in the 80s paid enough attention to the back office in general and the financial management in particular, let alone the longer-term interests of institutional investors.
Even at M&C, operating profit margins have usually been well below the optimum level of 15 per cent, and that's after adjusting the founding directors' remuneration packages down to an average of £300,000 per person.
Assuming M&C achieves a successful flotation, will it set a trend? With WPP dominating the UK marketing communications sector, it would be healthy to see some more quality players listed on the stock market alongside Aegis, Chime, Incepta and the batch of recently revitalised shell companies. But inevitably the culture of such businesses becomes increasingly dictated by the need to achieve consistently better financial returns. For some, such a financially driven environment would be no more appealing than answering to the monthly demands of an Omnicom.
Would Mother contemplate it? Or Delaney Lund Knox Warren & Partners, given that Interpublic might welcome an opportunity to turn its minority stake into cash or at least into marketable shares? If they don't want to sell out, how else will they capitalise on their success? After all, only Bartle Bogle Hegarty has succeeded in realising substantial value from selling some of its shares to global groups while retaining overall ownership control.
- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.
M&C Saatchi Worldwide's profit record
Year ended Turnover Post-tax profit Profit after
31 December before dividends adjusting directors'
to shareholders remuneration to
in group companies constant amount*
pounds '000 pounds '000 pounds '000
2000 111,057 3,118 4,596
2001 95,074 3,485 3,453
2002 98,301 4,218 4,702
2003 (estimate) n/a 4,600 5,100
* Assumes £300,000 per director less corporation tax at 30 per