- WPP expects to spend £200m-400m a year on acquisitions, with a focus on technology
- The strategy could put it in direct competition with Sir Martin Sorrell’s S4 Capital
WPP (WPP) was, by its own admission, late off the mark in keeping up with the digital trends that reshaped its clients' businesses. “Our offer was not yet in the place where they were spending more money”, conceded chief executive Mark Read, in an hours-long presentation that laid out the group’s new growth plan.
Mr Read, who stepped into his role two years ago after the messy departure of Sir Martin Sorrell, has outlined a strategy that is not dissimilar to his predecessor’s thinking.
WPP says that it now aims to spend anywhere between £200m-£400m on acquisitions a year, with an emphasis on marketing technology and ecommerce targets. This is not unlike Sir Martin’s strategy at S4 Capital (SFOR), the digitally focused marketing company, which he founded in the same year that he left WPP. True to form, Sir Martin has put M&A at the heart of S4 Capital's growth strategy: announcing the acquisitions of seven companies over the course of this year alone. And although S4's revenues came in at £215m in 2019, compared to WPP’s whopping £13.2bn, it already boasts a market value of £2.6bn.
As such, it seems that there are two media titans on the LSE that are on the hunt for smaller marketing companies with a compelling edge in technology. And they are spoilt for choice: Aim is littered with high-quality, tech-driven companies. Take Dotdigital (DOTD), a software provider that creates data-led, personalised marketing campaigns, which has been buoyed by the acceleration of digital trends in consumption, with cash profits up by a quarter in its 2020 financial year.
This explains why the company's shares are up by more than 50 per cent in the year to date, and currently sit near their all-time high. True, this might give potential buyers reason to hesitate - companies such as Dotdigital are not exactly cheap. Its current market value of £464m exceeds WPP’s upper end of its new annual M&A budget.
But WPP and S4Capital are not the only ones that will be looking for opportunities in the overlap between tech and advertising. Big global consulting firms like Accenture (US:ACN) have squeezed into the market, too. The group has acquired a number of key players in the space, including advertising company Droga5 and B2B marketing agency Yesler in the past few years.
A crowded list of potential acquirers is great news for small media companies who are looking to expand their scale – often a key reason why a lot of UK tech firms are so willing to be taken over by larger US groups. And the market is not particularly young: ecommerce penetration already sat at 30 per cent in the UK back in 2015. In a sector that is both rapidly growing and consolidating, premiums for these companies are not likely to dip any time soon.
This is arguably a good thing for WPP, which has £1.6bn worth of cash on hand, although net debt sits at £2.7bn. Still, the sheer scale of its balance sheet could work in its favour in acquiring attractive companies. But its reputation for a slow reaction to digital transformation might leave corporate boards and shareholders reluctant to accept it as a new parent.
This will be a difficult image to shake off. Mr Read is trying to transform a company that has lost more than half of its market value since its peak in 2017. His new growth plan follows a two year process of trying to simplify WPP’s sprawling structure, including through the sale of its market research unit Kantar.
If successful, WPP hopes it will achieve 3 to 4 per cent annual growth in revenue less pass-through costs from 2023, as well as double-digit headline EPS growth over the next three years. Mr Read could change investors’ perception of WPP as a sluggish beast still stuck in a declining traditional advertising sector, into a leader in smart, data-led marketing services. But a delayed response in a highly competitive arena means that this will be a difficult feat. Instead, we think the most likely beneficiaries from WPP’s new growth plan will be Aim investors with a hand in smaller, smarter firms.
