Most of the big agency groups won’t admit it publicly but all of them track stock market valuations closely.
When WPP lost its status as the world’s most valuable agency group to Omnicom in October 2018, it was a symbolic moment that reflected the struggles not only of WPP but also of the wider agency sector in the face of digital disruption.
In 2019, the last “normal” year before the pandemic, four of the “big six”, Dentsu, Havas, Publicis Groupe and WPP, reported declining organic revenues. Only Omnicom and Interpublic grew.
Now, however, after six quarters of the virus, the picture is changing. After the initial shock of the first lockdown, when adspend and share prices plunged, the world economy is rebounding strongly.
Importantly, some agency groups have been performing better than others since the start of the crisis.
Interpublic, under new chief executive Philippe Krakowsky, has continued to do well. But Publicis Groupe, led by Arthur Sadoun, and WPP, run by Mark Read, have both improved.
All three CEOs reported revenue growth in Q2 and Q3 2021 that was ahead of 2019 levels and accelerating. Organic revenues were up between 5% and 10% in Q3 versus two years ago.
By contrast, Omnicom, led by long-serving John Wren, has been a laggard since the start of Covid, and revenues remain below pre-pandemic levels in 2021 on a so-called “two-year” stack basis versus 2019.
That has been reflected in the share price performance and market capitalisation of these "top four" of the "big six" since the summer.
Campaign reported last month how Publicis Groupe had overtaken Omnicom for a sustained period, following the Q2 earnings season, to become the world’s most valuable agency group.
Publicis’ stock price has nearly trebled from a low of €22 at the start of the pandemic to €60.
But the French group faces competition from WPP, which has caught up fast on the strength of its Q3 results.
The two companies have been neck and neck in terms of stock market valuations since the end of October.
The British group is currently narrowly ahead, thanks in part to the significant expansion of its Coca-Cola relationship earlier this month. It beat Publicis Groupe in the final round of the pitch to win the majority of the $4bn integrated account.
WPP’s share price rose to £11 last week – more than double its low point of £5 at the start of Covid and its highest level since 2018 in the immediate aftermath of Sir Martin Sorrell’s exit.
Based on their share prices this week, WPP is valued at £12.9bn ($17.3bn) and Publicis Groupe at €15.2bn ($17.2bn).
Omnicom has slipped to third place with a valuation of $14.5bn. The stock price has dropped 20% since May.
What’s more, Interpublic is not far behind on $14.1bn. Its share price is up about 50% this year.
At one point a couple of weeks ago, the gap between the two US rivals briefly narrowed to only $100m.
That has been focusing minds at Omnicom, which promoted media chief Daryl Simm to global chief operating officer at the start of November and, in a significant move, flagged that he is in a strong position to succeed Wren.
Suddenly, there could be a four-way fight to be the world’s most valuable agency group – with only a couple of billion dollars separating the quartet.
Japan’s Dentsu remains some way behind, with a $10bn valuation, while Havas, the smallest, is a subsidiary of French entertainment giant Vivendi.
There are caveats when it comes to comparing market caps.
Foreign exchange rates and share buybacks affect valuations over time. Both WPP and Omnicom have bought back shares this year whereas Publicis and Interpublic have not.
WPP has also shrunk in size by making disposals, including a majority stake in Kantar, while Publicis has bought Epsilon and Interpublic acquired Acxiom.
Looking at the wider landscape, it is too soon to say that the established agency sector has overcome its structural problems. For example, WPP’s share price is still far below its 2017 peak of £19, when the company was valued at £24bn.
But rising share prices help to boost sentiment. “It matters in as much as the agency sector becomes larger overall and therefore more attractive to new investors – both because of enhanced liquidity and also because a bigger sub-sector attracts more capital and interest relative to dwindling sectors,” Lorna Tilbian, chair of Dowgate Capital, the stockbroker for Sorrell’s new firm, S4 Capital, says.
“Basically, bigger, more liquid stocks and sectors are more attractive to investors,” Tilbian adds.
Lots of challenges that pre-dated the pandemic still persist: clients need faster, more flexible partners to cope with digital disruption and can bypass agencies by bringing services in-house and buying direct from Google and Facebook.
Meanwhile, new entrants keep growing, such as Accenture Interactive (now a $12.5bn-a-year revenue business, according to its most recent earnings), You & Mr Jones and S4 Capital.
And there is some evidence that advertisers are more willing to take a chance on independents and start-ups (witness how Uncommon Creative Studio beat WPP to British Airways’ ad account in October).
But the pandemic has arguably brought some benefits, too. Clients have a new-found appreciation for agencies of all sizes because they helped brands to communicate and keep trading during the crisis, and the big agency groups are in better shape, because they were able to restructure and expand in fast-growth areas such as customer experience, data, ecommerce and marketing technology.
Size still matters for a growing number of big clients such as Coca-Cola, Facebook, Google, Mercedes-Benz and Stellantis, which have all looked to integrate and consolidate their agency relationships globally in the last six months.
When Coca-Cola announced the result of its recent review, it said WPP’s greater global scale was an important factor – something that will have been noted by its rivals, which all employ considerably fewer people than its 100,000-strong workforce.
For all the romance about agency entrepreneurs winning disruptor brands, we have also seen many of the world’s very biggest companies, notably the ad-funded tech platforms, get much bigger since the pandemic and these trillion-dollar giants often want big agency partners.
Faith in the agency model
That brings us to an intriguing point about market caps and M&A: a rising share price means a company has greater control over its destiny, whether it is making acquisitions and recruiting talent or resisting calls for a break-up or sale.
Campaign has reported how CVC, the private equity firm, and Vivendi have both taken a look at Publicis Groupe in the last 12 months (denials have been less than comprehensive).
Seven years on from the collapse of the Publicis-Omnicom merger, there is still financial, if not cultural, logic to a mega-merger. “It doesn’t help that there are six of us,” one agency chief says.
Looking ahead, the medium-term forecasts for the global ad market are strong because of digital growth and innovation.
And smart brands recognise they should put a premium on creativity because they need ideas to stand out in the ultra-competitive online marketplace.
That’s why the new breed of advertising companies, from The Trade Desk to S4 Capital, have positioned themselves as being a “royalty” on the growth of the tech giants and have seen their share prices leap during the pandemic.
Others such as privately-owned You & Mr Jones and Dept are said to be looking at routes to the stock market among their options.
All of which proves that investors have faith in the agency model when companies can show growth, and that includes the world’s biggest agency groups.
Gideon Spanier is UK editor-in-chief of Campaign