In agency land these days it’s now how good you are but what you are.
M&C Saatchi, currently under siege from deputy chairman Vin Murria and her acquisition vehicle AdvancedAdvT (between them they control 22 per cent) is valued at £220m following a recovery in the shares from a low of 30p to around 190p.
Sir Martin Sorrell’s S4 Capital, a relative newcomer (M&C was founded in 1995) is valued at £3bn, even though the remorseless rise in its shares appears to have stalled.
The two companies do more or less the same things but Sorrell, a one-time finance director of the old Saatchi & Saatchi, has repeatedly stressed that S4 should be valued as a tech company, not an ad holding group. Murria, who made her money in tech, wants a similar valuation.
AdvancedAdvT says of its share swap proposal: “The merger, combined with a focus on a data, analytics and digital creative marketing strategy plus M&A, would enable the enlarged group to capitalise on the heightened opportunity to ‘navigate, create and lead meaningful change’ whilst guiding companies on their new digital journey.
“It would defend M&C’s traditional creative base against disruptive competitors and enable the enlarged group to grow market share against its peers. The merger would also enable M&C to resolve the legacy put option issue (local agency entrepreneurs have earn-outs to be paid in shares) as well as providing the cash to accelerate investment in the business and transformational digital-led M&A.”
There is some merit in this even the the M&C board (not Murria obviously) have firmly rejected the proposal. Earn-outs are a convenient way to build a business but potentially lethal if a number of them become due in a downturn, which is exactly what happened to Saatchi & Saatchi (once the biggest agency in the world) prior to the defenestration of Charles and Maurice Saatchi in 1995. Sorrell had been one of the model’s architects.
S4 has adopted a different model, so called mergers with tech businesses paid half in cash and half in shares. S4’s issue is that further deals, especially big ones, will dilute the existing shareholders.
Private-equity backed AdvancedAdvT is saying it has the firepower to raise enough funds to do non-earnout deals, thereby avoiding likely trouble down the line. Booking earnout-related profits too early was one of the main reasons behind M&C’s accountancy horrors revealed in 2019. It’s also saying that, with a tech-focussed management, it will be better at going digital than M&C, now helmed by agency veteran CEO Moray MacLennan.
Murria will have to sweeten the deal considerably to win the M&C board’s backing. M&C is chaired by City veteran Gareth Davis. Or another bidder could emerge.
S4 Capital? Now that would hit the sweet spot as far as a certain former finance director of Saatchi & Saatchi is concerned.