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WPP: Still in the Hunt


WPP Group (WPPGY) CEO Martin S. Sorrell knows a bargain when he sees one. Over 17 years, his dealmaking finesse -- he has acquired or made major investments in 30 companies in the past two years alone -- has built WPP into the world's second-largest advertising and marketing services company. His latest target: Cordiant Communications (CDA) Group PLC, the struggling British advertising agency for which sorrell bid $442 million on June 19. It's easy to see why Sorrell covets Cordiant. The two companies share a host of big-name clients, such as Pfizer (PFE), Heineken (HINKY), and Johnson & Johnson (JNJ). Cordiant also owns valuable operations in Asia and Latin America, regions where Sorrell wants to expand, and boasts an expertise in growing fields such as health-care communications and direct marketing. "Cordiant will help us strengthen existing client relationships and further our strategic goals," says Sorrell.

But the battle for Cordiant is shaping up to be tougher than anyone, including Sorrell, expected. Although Cordiant's board and a majority of its debt holders have agreed to WPP's takeover, Cordiant's largest shareholder, British fund manager Active Value, may stymie Sorrell's plans. On June 24, Active Value, which is nursing $58 million in losses from its investment in Cordiant, upped its stake to 24.53%, just short of the 25% required by London Stock Exchange rules to block any takeover. While Active Value declined to comment, sources familiar with the deal say the fund manager is unhappy with the paltry $16.6 million in WPP shares being offered to Cordiant's equity holders. The remainder of WPP's $442 million bid for Cordiant is being offered to bondholders. Cordiant's shareholders have watched the stock fall from $6.79 at the March, 2000, peak to around 3 cents today. "This is a cheap deal that adds value for WPP's shareholders," says Anthony de Larrinaga, a media analyst at SG Equity Research (queried) in London.

Cordiant, with only $498 million in revenues after accounting for client losses and asset disposals, is tiny compared with the $6.5 billion WPP. But winning it will secure WPP's size advantage over Interpublic Group (IPG) of Cos. -- plus its No.2 position in the global ad industry -- and help Sorrell achieve his ambitions to offer clients a broader range of services in more countries. Sorrell has built WPP into a one-stop communications giant, cross-selling services from advertising to market research to a roster of blue-chip clients such as Ford (F) Nestl? (NSRGY) and SAP (SAP) Sorrell hopes to rev up growth by expanding WPP's reach in the fast-growing consumer markets of Asia and Latin America. Buying Cordiant, which has a major presence in both markets through its Bates Worldwide (CDA) unit, would enhance WPP's position and help meet Sorrell's goal of deriving one-third of revenues from Asia, Latin America, the Middle East, and Africa, up from 20% now.

At the same time, Sorrell is focusing more of WPP's business on marketing services such as public relations, branding, and market research. WPP may have made its name in advertising -- it owns some of the industry's biggest names, including Ogilvy, J. Walter Thompson, and Young & Rubicam -- but marketing services are its bread and butter, accounting for 53% of overall revenues. Because these businesses are entirely fee-based, they offer a more predictable revenue stream that will help cushion WPP from future downturns in the more cyclical ad business. Sorrell's goal is to generate two-thirds of WPP's revenues from such nonadvertising businesses within 5 to 10 years. He also wants to bolster revenues from hot growth areas such as direct marketing and Web-based communications. Thanks to the falloff in global equity markets, Sorrell expects to find a number of acquisition opportunities in these areas. "Clients increasingly are looking for justification of their advertising and marketing services expenditure, which is why the market research tools we supply will become more important," Sorrell says.

It's an ambitious but shrewd strategy to ensure that WPP keeps its edge after the worst advertising market in decades. The past two years have been tough for both WPP and the industry in general. The slowdown in the global economy hit advertising companies hard as clients took a knife to costs. Advertising and marketing were often the first parts of the budget to be scrapped. In 2002, WPP's revenues fell 3% and pretax profit plunged 19%, to $666 million. And this year isn't much better. Sorrell expects no growth before business picks up again in 2004.

Within the industry, he has a reputation as the voice of gloom. But lately, Sorrell is sounding positively bullish. Longer term, he believes a number of trends are coming together that bode well for WPP. "In a low-inflation, relatively high-unemployment economy where there is very little pricing power, companies need to find new ways to differentiate themselves in an undifferentiated market," he says. "What we do is becoming more important." Now, with the first signs of life emerging in the long-moribund ad market, WPP is well placed to benefit -- with or without Cordiant. By Kerry Capell in London


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