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The rise and fall, and potential rising again, of Jonathan Stead

A lot has been written about the demise and rebirth of the Rapier marketing agency, not least the excellent analysis by Jeremy Lee following some of the earlier disclosures.

Certain features are probably indisputable.  First and foremost, Jonathan Stead is undoubtedly a good marketeer and proved himself able to build a substantial business.

Secondly, there was a string of client losses that would be nobody’s idea of fun, whether prompted simply by bad luck or by an element of under-performance or by both.   This danger is encapsulated in the overly simple Willott three-legged table principle: unless an agency always has at least four solid clients, the business is likely to collapse.

Thirdly, as is now widely known, the agency was short of capital after Stead had partially bought out his creative director John Townshend and paid himself a big dividend to offset debts he owed to the company.   It is entirely probably that Stead was not expecting clients to exit when he drew that cheque, but it left the agency more vulnerable than was prudent.

But there is a deeper feature that merits consideration.  Rapier was a company owned and run predominantly by one man.   Former senior colleagues seem to have come and gone all too readily. Stead owned most of the shares and was chief executive.   That degree of control can be very useful in enabling decisions to be made and implemented.    But it does place enormous responsibility on the individual to get the decisions right, and that is an unrealistic expectation to place on any one person.

The fact that the company had spent over £1.7 million on Stead’s personal behalf at its peak suggests that it was not always easy for him to distinguish between personal interests and company interests.

And while Stead may be most at ease when running his own show, the downside is that there is no-one with any influence to counsel caution when excessive enthusiasm might put the company at risk or to lend moral support if conditions got tough.

Rapier’s downfall might not have been avoided if there had been another heavyweight partner on board who could command Stead’s respect and complement his undoubted talents, but at least the risk of that downfall would have been considerably reduced.

The new-born joint venture with CHI offers Stead a second chance, this time with a heavyweight partner.   If Stead can cope with sharing power and ownership, there could yet be a happy ending to this sad story.

Bob Willott is editor of “Marketing Services Financial Intelligence

 

A tip for budding entrepreneurs: put sustainability before self

A few months ago it was suggested here that, without some economic recovery, many more businesses would go to the wall.    And so it has come to pass – not the economic recovery, but the collapse of more marketing agencies.

Today we learn that Rapier has failed.  Last week it was Media Shop.  Before that there was Adventis, Quiet Storm and Brilliant Media Group.

Business failure can be attributed to a variety of causes, but the bottom line is that the companies run out of cash.  That’s either because they start with too little capital, or they don’t generate enough income, or they spend too much delivering the goods.   And the likelihood that more cash will go out than come in over any period of time is the fundamental risk that every entrepreneur takes when venturing into business.

So why do companies still persist in being under-capitalised?    Why did the Media Shop management buyout team use the company’s own cash to pay off the previous owners when inevitably that would weaken its balance sheet?    Why did Jonathan Stead withdraw £2.9 million from Rapier soon after his partner John Townshend had left the company?

If people businesses like marketing agencies run up against hard times it is almost certain to be the one occasion when their banks will decline to assist.    So the only prudent way to ensure the capital base is solid enough to sustain the business through that period is for the owners to put or keep a lot of money in its coffers.  That may be as much as between three and six months’ operating costs – enough to allow the wages to be paid while the management takes whatever remedial action is necessary.

One can understand why an entrepreneur who has invested years of energy in building up an agency feels that any profit or cash sitting seemingly unused in the business would be better relocated into his or her private bank account rather than risk losing it.   But that misses the point.   Business is about risk as well as reward.  Risks can only be taken, and rewards can only be extracted, if the business has a sufficiently strong capital base to withstand the consequences.   It’s a simple lesson, but one that too many entrepreneurs seem to ignore.

Sustainability must take precedence over self.

Bob Willott is editor of “Marketing Services Financial Intelligence

As the global giants grow, is it simply gravitation towards the strong?

Today’s report that publicly listed marketing groups around the world enjoyed increasing revenues and profits last year comes as something of a surprise amidst the all-pervading economic gloom.

But perhaps it is no more than confirmation that customers take shelter with strong suppliers in times of financial stress and, by implication, regard publicly listed groups as being stronger than others.

If that is the explanation, it is an over-simplification.   The stock markets of the world are not exempt from their share of weak companies, although there is an implicit assumption that they have passed a rigorous examination of their financial stability before gaining admission.

Look at the London stock exchange where shares in Adventis Group and Asia Digital Holdings have been suspended within the last few weeks.  Beyond the UK, the Australian stock market still lists the former Photon Group (now called Enero Group), despite it having lost another $60 million last year.  And in the US, NASDAQ lists the shares of the Canadian group MDC Partners where some of the best evidence of business continuity is found in the seemingly unending stream of losses from one year to the next.

Inevitably during this recent recession the marketing industry has been experiencing a shakeout of the weak, whether into insolvency or the comforting arms of a stronger group.  Thus the stronger agencies not only acquire more clients but also have the opportunity to acquire failing competitors.   And, notwithstanding the exceptions cited above, some of the strongest companies will be those that have been admitted to a public stock market.

So while it is good to see the overall growth in revenue and profits among the publicly listed groups around the world last year, the most prudent interpretation would be that much of the growth has been at the expense of the weak and that total marketing spend remains fairly subdued.

Bob Willott is editor of “Marketing Services Financial Intelligence

Coping with recession: a tale of two companies

Two contrasting financial results emerged this week.  Huntsworth announced much improved profits on static turnover.  The Engine Group reported a much increased loss from much increased turnover.

On the face of it Huntsworth had responded effectively to tougher conditions experienced last year when it was forced to issue a profit warning.  The tough conditions may not have abated, but action appears to have been taken to bring operating costs back into line.

At Engine the circumstances were a little different, but not a lot.  Last year it was continuing on its expansion trail, making acquisitions and venturing into overseas markets just when the domestic economy went into decline.  It suffered from a double whammy – income slowing down while expenditure was on the increase.

Thus the picture at Engine was probably a little more complicated than at Huntsworth because, while the recession was eroding the existing revenue base, the impact was offset by additional revenues derived from acquisitions.

What is now self evident is that the Engine cost base was growing even faster than its revenue.   Leaving aside peripheral operating costs like amortisation and share incentive scheme charges, normal operating costs grew by 20% in 2011 while revenue grew by 12%.   That’s not a very good recipe for ongoing success.  Engine’s chief executive Peter Scott claims that much of the damage was done in the first half of 2011 and that it “masked a strong recovery in performance in the second half” and beyond.

The situation was made worse by the growing pile of debt that Engine was running up from its acquisitions.  Unlike Huntsworth, Engine’s interest charges grew very substantially just when profits were on the slide.  Hence the £5.2m loss for the year.

The unanswered question is this:  can Engine imitate Huntsworth and bring its cost base back into line with revenue?  Scott says there has been an improvement in underlying business performance as action was taken to reduce costs, strengthen management and focus on core strengths.   We may have to wait a year to see how effective those measures have been.

Bob Willott is editor of “Marketing Services Financial Intelligence

Triple trouble: stagnant revenue, no profit growth and over-expensive acquisitions

A week ago, a rash of big acquisitions prompted the notion that the acquirers were buying at recession riven prices in the expectation that an economic upturn was about to occur.

Since then the majority of results announcements have suggested that revenue growth had been hard to achieve and few gave any support to the idea of recovery being just around the corner.  Indeed all the talk is of a triple dip recession.

Publicis had already admitted to revising downwards its growth forecasts as a result of “the global economic slowdown, the financial crisis in Europe and the difficulties encountered in a number of economic sectors”.

Then last Thursday Interpublic announced that revenue during the quarter to 30 June had slipped by 1.4% when compared with the same quarter last year and profits were static, although chairman Michael Roth tried to paint a more optimistic picture about the future.

On Tuesday Creston confirmed that a fall in retained business revenue towards the end of the last financial year had had an adverse impact on the first quarter’s performance in the current financial year with like-for-like revenue down by 7%.

So one of two conclusions can be drawn.  Either we are simply witnessing the tail end of a recession but will soon experience better times, or the tough conditions are likely to continue in which case expensive acquisitions will take longer than expected to justify their purchase prices (if ever).  Just at the moment the gloomier of those two alternatives feels the most likely.

Bob Willott is editor of “Marketing Services Financial Intelligence

 

Big bids: a sign that the recessionary cycle is coming to an end?

For no obvious reason Britain’s recessions come in roughly 10 year cycles at the start of each decade.  And the latest was no exception.  So what is it that has prompted companies like Dentsu, WPP and Publicis to go an acquisition spree when business is at its most depressed?

Why should Dentsu dip into its coffers and splash out £3.2 billion on Aegis Group at such a time?   Why did WPP choose last month to snatch up AKQA for £343 million?   And why would Publicis choose this moment to buy out the remaining employee shareholders at BBH?

The most rational explanation would be that all three buyers thought the prices were quite attractive at the moment, dampened perhaps by the sluggish market conditions.   But that alone might not be enough.  What if the sluggishness continues for a few years more?

The most favourable interpretation would be that the likes of WPP, Dentsu and Publicis reckon that market conditions are on the verge of a revival.   If so they will be able to boast that they bought near the bottom end of the market and will reap the benefits of the upturn.

We should all hope that this proves to be a sound explanation, otherwise there will be some very red faces around several board room tables.  Meanwhile, as we all catch Olympic fever and throw caution to the wind, let’s hope the latest marketing depression is coming to an end.

Bob Willott is editor of “Marketing Services Financial Intelligence

Dentsu’s Aegis bid: a brave decision

Dentsu’s planned takeover of Aegis Group is what in Yes Minister parlance might be described as a “brave decision”.

Dentsu’s track record has been one of solid success in providing traditional marketing services in its home territory of Japan– leaving aside the Tsunami and the economic recession – but of less success when it has embarked on sizeable acquisitions outside that comfort zone.

In the digital market it bought the Japanese media agency Cyber Communications only to suffer a near £100 million write down afterwards.  More recently it has been collaborating with other major marketing groups in a Japanese search marketing joint venture and seemed nervous about taking too many more big risks in the digital market on its own.  For example, there were reports that Dentsu had been interested in buying AKQA, but that the asking price had been regarded as too high.  Nevertheless Dentsu has bought smaller digital businesses like Steak and AdJug in the UK.

In traditional marketing disciplines, Dentsu has made many attempts to extend its coverage on a global scale.  Best known was the investment in BCom3 – the holding company for Leo Burnett and D’Arcy Masius – that would have entitled Dentsu to take control of BCom3 in due course if the arrival of Publicis had not thwarted that global expansion strategy.

Earlier there had been several acquisitions in the UK, including CDP and Travis Sully, but they proved costly experiences that offered little scope for growth beyond servicing existing Japanese clients.

Most recently Dentsu acquired the advertising agencies McGarry Bowen and ML Rogers in the United States and has decided to rebrand the rump of its European advertising agencies with the McGarry Bowen name.

Clearly the history of Dentsu’s unfulfilled global ambitions could lead only in one of two directions.  Either Dentsu would have to remain content with a Far Eastern business that exploited the growth prospects in that region, but with serious limitations on servicing clients on a global basis, or it would have to make one last big attempt to take on the world.   Put another way, either Dentsu had to buy its way into the world league or face the risks and limitations associated with focussing on a regional market alone.

We now know which way that decision went – a £3.2 billion gamble in buying Aegis Group.   There are some obvious benefits, not least an established global network with management and reporting systems in place.  That is reminiscent of the days when a small UK public company called WPP, owner of a collection of design consultancies, announced it was buying the worldwide network of JWT (although in that case there was the bonus of an undervalued property asset that came with it).  There is also the substantial portfolio of digital assets that Aegis has acquired over the years.

But there are also some uncertainties.  Will the key managers stay?  Jerry Buhlmann has promised nothing beyond 2013.  And how will Dentsu fill the creative advertising vacuum that will remain in western Europe and other territories?   Aegis had very little creative resource beyond the Glue brand and so Dentsu will be even more reliant on a rapid expansion of McGarry Bowen.

It will be a very big challenge for Dentsu, but if it pulls it off there is no doubt that it will become a seriously big global player alongside the five others.

Bob Willott is editor of “Marketing Services Financial Intelligence”.

Who will buy the last big digital independent?

With AKQA’s shareholders extracting a juicy $540 million from WPP, it’s hardly surprising that other would-be acquirers are swarming round the only other obvious large candidate likely to be for sale – LBi International – like bees round a honeypot.

AKQA made a profit before tax, interest, depreciation and amortisation (EBITDA) of $35 million last year.  LBi made about $37 million on a similar basis.   Both agencies have proven expertise in the technological and marketing aspects of digital.

So who is likely to be waving around a fat cheque book that might tempt LBi shareholders to sell?    The most obvious candidate is Dentsu, having withdrawn from the bidding for AKQA last year but conscious of the need to beef up its digital marketing offer.   But Dentsu is rather nervous about doling out big bucks to western entrepreneurs, having had its fingers burned several times in the past.  So it is hard to envisage Dentsu parting with anyway near $500 million in cash and it is not very keen on offering many of its own shares in lieu.

That leaves Interpublic, Havas, Omnicom and even Publicis, although the Publicis appetite for digital acquisitions has probably been fully satisfied with the collection of companies it has bought so far.

Interpublic has an improving balance sheet, but is probably still very nervous about doing any big deals.  Yet it was Interpublic that first invested in LBi when it started up as IconMedialab, only to retreat with a financially bloody nose.  And today’s LBi bears no resemblance to the business in which Interpublic invested all those years ago.   At present Interpublic’s digital expertise is almost entirely embedded in mainstream agencies, so it might be tempted to follow the Publicis and WPP lead and buy a strong technical shop that would be available to service all the group’s clients and bolster the expertise embedded in existing agencies.  The only problem is the money.

Havas is hard to read.  Its digital capability is found primarily at EHS 4D, whatever that means.  Havas says EHS 4D is “one of the world’s most established and renowned digitally- and data-driven relationship marketing agencies”, in which case it’s been hiding its light under a bushel for far too long.   The Havas balance sheet last December included a pile of cash, but it was probably just passing through on its way to media owners.   In theory the Havas balance sheet could stand some more borrowings, especially if some additional share capital could be raised as well, but does it have the courage?   Perhaps Vincent Bolloré would be better off selling his 26% shareholding in Aegis Group and using the $700 million proceeds to focus on digital marketing instead?

If none of Dentsu, Interpublic, Havas and Publicis are interested in LBi, that only leaves Omnicom.  It had a nasty experience in the early days of digital and has kept a fairly low profile since.  Its main digital marketing agency is Agency Republic, but that’s not the only investment.  Did Omnicom take a serious look at AKQA and, like Dentsu, walk away because it looked too expensive?  That would be quite typical.   But now there is really only LBi left in the market that is a seriously large and established digital business combining technical and marketing expertise under its roof, and Omnicom might feel it is time to break the habit of (almost) a lifetime and make a big investment.

Whoever the suitor(s) may be, we shall probably soon know.

Bob Willott is editor of “Marketing Services Financial Intelligence

Some lessons for Sorrell and Government

Sir Martin Sorrell has been very successful, if building WPP into the biggest marketing group in the world is anything to go by. But there are few things he hasn’t done and that’s probably why he found himself in hot water this week when trying to justify a 37% rise in the total reward package he received in 2011.

For example, he hasn’t improved the price of his company’s shares – they were quoted at 837p in January 2001 and were quoted at 768p on 12 June 2012 – even if he has provided useful dividends in the meantime.

He hasn’t achieved the profit margins that were traditionally expected of the industry (although he’s not alone in that).

He hasn’t given the clearest possible picture of the total amount that he and other executives have each earned in salaries, bonuses and share awards in any year, irrespective of when it may be paid.

And he’s tried to bulldozer his way through a barrier of adverse public opinion, well informed or otherwise.

So that’s why things need to change, not just at WPP but throughout UK public companies.

Why should such companies appoint a remuneration committee from among their own to approve executive rewards schemes?   Shouldn’t the shareholders have a more direct say in the process, not just in approving the committee’s report at an annual meeting – or refusing to do so as in the case of WPP – but also in having directly appointed seats on the committee itself?  On the continent, a “supervisory” role is often performed by a senior board of stakeholders in a two-tier structure.

Why should shareholders be bombarded with pages of information about remuneration arrangements – much of it now required by law – without being given the one simple, but important figure, of how much in total was earned by each top executive in all forms, whether paid in the year or not?

It is time for Government intervention, but sensible intervention rather than a jerk of the knee.

Bob Willott is editor of “Marketing Services Financial Intelligence”.

What’s in a name, when it’s DDB?

The Omnicom network that trades as DDB may still ring a few bells with adland veterans who remember Doyle Dane Bernbach.  But the three letters are hardly likely to create any meaningful positive reactions from today’s marketing executives.  It’s something that Adam & Eve needs to think about as the agency celebrates joining the DDB network.

Doubtless the DDB abbreviation originated as a colloquialism within the industry like so many others -  JWT, Y&R, BBH, AMV and so on – while initially the real names remained over the door.  Real names imply personalities – people with ideas, creative tensions, and individualism – in fact all the qualities that should be associated with the creative arts.

But Omnicom and other global groups clearly have a different view.  Omnicom must think that DDB is better than Doyle Dane Bernbach.  Perhaps the group was unduly influenced by the successful abbreviation of Batten, Barton, Durstine & Osborn to BBDO after the merger of Batten Company with Barton, Durstine & Osborn in 1928.

Before it became part of Omnicom’s DDB network in 1989 Boase Massimi Pollitt had personality.  It meant things to people.  And it was several years after the sale to Omnicom that the group adopted the abbreviation BMP DDB that later became DDB.   Today DDB generates few of the emotions that were associated with Boase Massimi Pollitt in its hey day, let alone Doyle Dane Bernbach.

Mergers are often the root cause of corporate abbreviations.  It’s a way of avoiding ego spats about whose names should stay over the door in the absence of a very big door.  It’s also a way of discouraging too much individuality from getting in the way of global network management.   But abbreviations really don’t work in the creative industry.  By all means let fans and staff abbreviate out of affection, but remember that it is a mark of affection – something to be valued just like nicknames can be.  Using a nickname does not normally prompt its owner to change the original name.

Once the full name is banished, so too are banished many of the perceptions that go with it.  A creative agency is first and foremost an aggregation of people and personalities that deliver outputs that affect the human psyche.  On their own no combination of letters will ever do that.

The biblical story of Adam and Eve has survived much longer than any agency group is likely to do, because the names impart a human message.  A&E DDB would convey a very different message.  Would Omnicom’s latest acquisition really want to be confused with a hospital case?

Bob Willott is editor of “Marketing Services Financial Intelligence”.

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