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Layoffs by the thousands. Losses in tens of millions. After a year that pushed the ad world to the brink, WPP's Martin Sorrell has a plan to seize the upside of the downturn.
The end of the year is usually nirvana in the advertising business. Commercial-jammed airwaves, ad-rich newspapers and magazines, bonuses, holiday parties, unbridled optimism. For the leaders of the industry, it's also a time to gather before Wall Street and offer glowing predictions of things to come.
Even this past December, at the end of the worst year in memory for the ad industry, there were glimmers of the usual optimism at the annual UBS Warburg Media Week Conference, held at New York's Grand Hyatt. A parade of investor types and media moguls, from Viacom president Mel Karmazin to AOL Time Warner's Steve Case, spoke of a turnaround in 2002 - no more magazines dying for lack of ad support, newspaper classifieds picking up, Fox selling the rest of its $2 million-a-pop Super Bowl spots in time for kickoff.
Then Martin Sorrell got up to the dais. As the CEO of WPP Group - a collection of dozens of ad shops, branding firms, and PR and direct marketing agencies doing work for clients like Ford, Unilever, American Express, IBM, Kodak, Nestlé, and Philip Morris - he was the voice of authority, the luncheon keynote speaker who could offer justification for all the hope and send everyone home smiling.
Or not. WPP agencies slashed 4,000 positions last year as the economy slowed, and lost $30 million in revenue in the wake of September's events. And here was Sorrell to say things would only get worse. The company's 10-year string of improving margins would end. So, too, would its streak of 15 percent annual growth in operating profits. "Fear and uncertainty rule a lot of client thinking today. I don't see any of the rays of sunshine that others see," he said. "September 11 will live with us for many years. It puts sand in the system. It's a friction that slows global growth." It was enough to make a roomful of money managers choke on their prime rib.
If there was anything encouraging about Sorrell's speech, it was his poise. Advertising has been among the industries hardest hit by the recession and terrorist attacks. And yet Sorrell spoke with the confidence of a man who knows that a downturn can be a great time to retrench and build. The recession of the early '90s nearly killed WPP, but the company survived, emerging with an aggressive acquisition and expansion strategy. In the decade since, Sorrell has boosted annual revenue from $250 million to the neighborhood of $7 billion.
What makes WPP so interesting is that its plan to emerge from the current slump, like its growth over the past decade, comes straight out of the new economy playbook. Sorrell continues to look for takeover opportunities, seeking to buy marketing and PR firms on the cheap, while their valuations are low. (Such firms tend to offer higher returns than traditional ad agencies.) He'll exploit the massive quantities of data available in today's information society to build out WPP's formidable research division. And he'll widen his company's global march - on the Web and on the ground. "If you want to increase your share, you either have to take it from someone else or you have to grow geographically," Sorrell says. "The untapped resources, the untapped consumers, are in Asia and Latin America."
The question is not whether Sorrell can carry out such a scheme - it's whether he can do it again.
Of course Sorrell's pursuit of mergers and acquisitions is not unique. Both of WPP's largest rivals, Omnicom Group (a big-bang merger between DDB Needham and BBDO in 1986) and Interpublic Group (a 1950s amalgamation of two large ad agencies, McCann-Erickson and Marschalk and Pratt), have also grown like kudzu. The three companies all hover around $7 billion in annual revenue. But while Omnicom and Interpublic greatly rely on the advertising business, Sorrell has focused on increasing WPP's stake in research, PR, branding, and even custom publishing and sports marketing. "We are no longer appropriately described as an advertising agency," he says.
In his bespoke suits, Sir Martin Sorrell - he was knighted two years ago, along with Richard Branson, Sean Connery, and a few dozen others deemed to have advanced Britain's stature - comes across as a buttoned-down sort of fellow. At 57, he's more at home citing Michael Porter on the competitive advantage of nations than he is recounting the latest Ford Explorer TV spot. He vacations at his second home in Saint-Paul-de-Vence in southern France and plays cricket with a team he manages in suburban London. He's never penned a line of copy or conducted a pitch to win a client's business. But make no mistake: Marketing is his life. The British advertising publication Campaign calls him "one of the most famous workaholics on the planet."
Most people are drawn to the creative side of advertising and marketing. With an economics degree from Cambridge and a Harvard MBA, Sorrell saw the beauty of the business side - a great generator of cash, without costly factories, R&D budgets, or inventory to lug around. "You can't think of many businesses that have the scope that we do," he says from a conference room at WPP headquarters off London's Berkeley Square. "Today I'll talk to one major client in America and another one in Hong Kong. You sit here in London - you're not at the center, but you're connected to major events."
In 1977, Sorrell joined Saatchi & Saatchi as the chief of finance, sizing up acquisitions for the flamboyant British ad agency while tending to bankers and investors. In 1986, he spotted a minuscule, publicly traded manufacturer of wire shopping baskets known as Wire & Plastic Products. He bought control of the company, left Saatchi, and turned WPP into a handy vehicle to acquire marketing firms. He used his Saatchi credentials and Wall Street's cash to pull off huge (and hostile) takeovers of two of the industry's most famous names, J. Walter Thompson and Ogilvy & Mather. Suddenly he found himself running the largest advertising company the world had ever seen.
And then, just as swiftly as WPP's success came, it nearly disappeared. In the early '90s, debts mounted, profits vanished, and the firm's share price plummeted more than 90 percent. But Sorrell remained calm. "What was impressive were the indefatigable conversations he had with bankers, analysts, and journalists, and the knowledge he demonstrated about every part of the business," says Jeremy Bullmore, a WPP director and former chair of J. Walter Thompson in London. "There must have been a few saying his head must go. But nobody argued that the company could be better run by anyone else."
Sorrell proved his mettle by focusing on the numbers. He persuaded his bankers to swap 25 percent of their debt for equity and established the financial metrics that WPP has followed since - calling for 15 percent annual growth in operating profits through a combination of increased revenue at each shop, margin improvements, and, of course, acquisitions. "That's why we like WPP," says one US fund manager with a sizable position in the company. "Sorrell's a real finance guy. He understands return on capital, and he's disciplined." Another longtime fan is Robert Hagstrom, portfolio manager at Legg Mason, which owns 4.1 percent of WPP shares and has recouped five times its original investment. "We have huge regard for Martin," says Hagstrom. "He has the right strategies in place to reward shareholders."
Today, the WPP empire consists of some of the biggest names in marketing, from J. Walter Thompson and Ogilvy & Mather to Young & Rubicam, Landor Associates, Hill & Knowlton, and Wunderman. Many of those companies became part of WPP as a result of hostile takeovers. Critics have knocked Sorrell for using this tactic in a talent-based business where, the cliché has it, all the assets go down the elevator each night. But Sorrell's acquisitions have worked because he sees to it that the clients stay put after the agency's ownership changes hands.
A sharper critique of Sorrell comes from the freewheeling types that populate the ad business. They say his calculating nature may be good for business, but not for creativity - and the proof can be found in the quality of the work that WPP agencies produce. Year after year the Omnicom agencies - mainly BBDO; Goodby, Silverstein; and TBWA Chiat/Day - go home with the awards for the best advertising. WPP agencies have done some good ads (most notably Ogilvy & Mather's long-running letterbox campaign for IBM), but their most impressive work has come in their financial statements.
Even before the recession and the September attacks, the ad industry was in serious transition. Long gone are the days when the television served as the communal campfire. Today's media landscape is highly fragmented, allowing marketers to target, say, stay-at-home moms on the Lifetime network and beer 'n' babes-obsessed frat boys in Maxim. But it's also intensely crowded, and figuring out which vehicle works best for what audience is a challenge. Meanwhile, marketers face greater pressure to justify their budgets with quantifiable results. They are no longer content to buy ads by the ton, hoping the repetition will pay off. Now, they want to know which ad, sponsorship, or news story makes someone buy.
This is the kind of environment that plays to Sorrell's numbers-based, results-oriented approach. Nine years ago, he created WPP's research division, Kantar Group, to help marketers understand their customers better. Kantar's revenue was up 11 percent last year, to $1.1 billion - about 17 percent of WPP's total business. (Interpublic brings in about $600 million from research, Omnicom almost nothing.) Kantar crunches retail and ecommerce data to shed light on consumer spending patterns, and offers clients everything from TV audience measurements in 28 countries and Internet response panels to customer satisfaction surveys, copy testing, ad tracking, and brand evaluation. "What WPP had that we didn't was research," says Young & Rubicam chief executive Michael Dolan, pointing to one reason for his agency's acquiescence to WPP's $4.7 billion takeover bid in 2000. "They have the best collection of assets in that category."
WPP has also built the broadest worldwide network to handle the rise of a global consumer culture. Its accounts in Asia and Latin America showed 9 percent growth in the first three quarters of 2001, compared with a 3 percent decline in its North America accounts. According to Credit Suisse First Boston, WPP now gets 17 percent of its revenue from Asia and Latin America, versus Interpublic's 13 percent and Omnicom's 7 percent. Sorrell plans to increase its stake to 33 percent by 2010. It's a tall order, but emerging markets in the East should grow faster than the West in coming years. "Look, you've got 1 billion people in India, 1.3 billion in China," he says. "By 2014, two-thirds of the world's population will be in Asia."
Sorrell's company has already pried open Japan, the world's second-biggest media market after the US, by taking a 20 percent stake in Asatsu, Japan's third-largest agency. Meanwhile, WPP company MindShare Worldwide, which controls $35 billion in client spending on behalf of WPP agencies, has 60 media planners in Tokyo doing research for clients.
China also offers great opportunity. Its entry into the World Trade Organization promises to attract multinational companies offering everything from cars and financial services to telecom equipment. Sorrell expects the 2008 Olympics in Beijing to be a watershed event for local marketers, and he's ready. MindShare is already China's largest media buyer, and all told, WPP companies employ 1,100 people on the mainland and 800 more in Hong Kong.
Sorrell is also increasing WPP's Web activity. Revenue from interactive projects - such as corporate site design and support of offline campaigns - doubled in 2000, to more than $300 million. That number rose only slightly last year, but wpp.com expects 25 percent annual growth, thanks in large part to large clients that are devoted to Internet marketing, like American Express, IBM, and Motorola. Sorrell also expects the Web to continue to reduce overhead by allowing WPP agencies and clients to collaborate on marketing campaigns in real time.
Growing the research division, building up Web operations, going global - that's just part of Sorrell's plan. He remains committed to growth through acquisition. Last year, WPP picked up names like Forward, MCA, Penn Schoen & Berland, and Global Sportnet - deals done in the UK, US, and Germany that added to WPP's stable in custom publishing, internal communications, polling, and sports marketing. Those were smart purchases, but small potatoes. Sorrell's goal is to reel in a big company to burnish WPP's top line.
That was the thinking behind last year's purchase of the European media buying company Tempus Group. WPP won a bidding war when another suitor backed out. But then the aftermath of September 11 dramatically reduced Tempus' value, and Sorrell was left holding the bag. Analysts estimate that the $640 million WPP paid for Tempus was twice what the company is worth today.
Despite the occasional misstep, Sorrell is regarded as an accomplished businessman who could easily run a larger company - he was even recently rumored to be a candidate for the top spot at British retail giant Marks & Spencer. But those close to him say he's committed to WPP - especially now. "He's never happier than when times are tough," says Rupert Howell, joint chief executive of Chime Communications, a leading British PR and advertising firm in which WPP has a stake. Which means Martin Sorrell must be overjoyed right about now.
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