SAATCHI: THE HOUSE THAT HUBRIS WRECKED
Goldman tells a riveting story from the perspectives of its many participants. There are problems, though: Conflicting Accounts offers a wealth of information but doesn't organize it well. At times, readers from outside the ad business may find themselves lost amid the insider gossip, multitude of characters, and complex machinations. And there's precious little insight into the motivations of the brothers, who appear not to have cooperated with the author.
Goldman lays the blame for the ad group's demise squarely at the brothers' feet. Charles and Maurice are the sons of an Iraqi Jew who emigrated to London in 1947, where he owned textile mills. Charles went into copywriting, and younger brother Maurice sold ad space in trade journals. In 1970, at 27 and 25, respectively, they pooled their talents to create Saatchi & Saatchi, hiring such future luminaries as Tim Bell, whose public-relations firm now represents the cream of British society, and Martin Sorrell, now chairman of rival WPP Group.
No question, the upstart agency's output was good. Its ''Labour Isn't Working'' campaign is credited with bringing Margaret Thatcher to power in 1979. Problem was, the brothers set their sights on building the biggest, not necessarily the best, ad shop in the world.
They began using the stock market to fund a huge acquisition binge. Typically, they issued new stock to existing shareholders and used the proceeds to buy smaller agencies. They usually paid out half the asking price in cash and covered the rest in installments over 10 years--draining future cash flow when it would be needed the most. In the U.S., they acquired Backer & Spielvogel, Dancer Fitzgerald, and Ted Bates Advertising. They branched out into other areas, snatching up management consults Hay Group, the Yankelovich pollsters, and the Kobs & Draft direct-marketing shop.
By 1986, Saatchi & Saatchi had spent $1 billion to acquire 37 companies. It had 18,000 employees in 500 offices in 65 countries. But as Goldman tells it, the brothers quickly ignored each new purchase. They did nothing to manage client conflicts, and they hired managers who knew little about advertising since those were easier to manipulate.
Meanwhile, the duo began withdrawing from day-to-day operations. Maurice continued to advise his favorite clients, British Airways, Mars, and Procter & Gamble, but Charles became a total recluse. Despite being chairman, he never once attended a board meeting. Goldman reveals that Charles' shyness was pure shtick: He really led an active social life and spent his time building one of the world's largest modern art collections.
In 1987, events took an almost farcical turn. The Saatchis made a bid for Midland Bank, then Britain's fourth-largest, with $77 billion in assets. They failed miserably and were rightly derided by City of London financial wizards. Simultaneously, the company started having serious cash-flow problems, clients began jumping ship, and the recession hit. The Saatchis never regained their footing, despite hiring caretaker CEOs to cut costs and lay off thousands. The firm dipped close to bankruptcy several times, and yet the brothers continued to blow money.
At this time, bottom-feeding mutual funds, including those managed by American David Herro, began buying up Saatchi's shares, which had fallen from a high of $12 to $2. Herro had high hopes for a Saatchi turnaround, but was horrified by Maurice's antics. With 12% of the company's shares in his portfolio, Herro would ultimately lead the charge to get rid of the brothers. Through it all, the board did little, mostly because Maurice had packed it with yes-men, according to Goldman.
The denouement came at a December, 1994, board meeting. The last straw was a lucrative stock-option package that Maurice negotiated for himself, despite years of losses. He was dumped. His brother and three key executives left with him and precipitated an ugly war that profited no one. The brothers formed M&C Saatchi--but although they managed to lure away British Airways and other key clients, they are unlikely to ever repair their image. Their old company, now Cordiant, continues to struggle.
The Saatchi brothers were not alone in making mistakes. Herro especially failed to note big differences in British corporate governance, whose unwritten rules then did not condone the forced ousting of management--particularly by Americans. Shareholders can see what happens when they act too late and then try to adjust by making overly aggressive demands, as Herro did. Board members, too, should view the Saatchi drama as an example of how not to govern a company. Others can just enjoy this incredible tale for its pure entertainment value. It's better than fiction.
By Paula Dwyer
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.