Poor results for two AIM-listed marketing services companies could have an impact on how investors view the whole sector, meaning businesses considering a float must convince investors they are in it for more than just the money, says Bob Willott
Within the past few weeks shares in two marketing services companies listed on AIM have slumped after announcing that predicted profits were no longer going to be achieved.
Market research business EQ Group warned that profits for the current year would be significantly below earlier expectations, while wireless data services provider WIN said it expected to fall about &£600,000 short of its target for the first half.
At the same time the stock market itself is feeling unsettled in the face of global economic uncertainties, and any market wobble hits hardest those companies that are perceived to be most vulnerable. Often a whole sector will sink if investors lose confidence in its underlying credentials – witness the dot-com crash of 2000.
Is the marketing services sector giving the market good cause to question the true worth of businesses that have come to AIM in recent years? Certainly the sector has under-performed in the market as a whole and seems likely to continue doing so for the time being.
According to the latest index published by Marketing Services Financial Intel-ligence, shares in the sector fell by 1.6% between January 2005 and mid-June this year while the FTSE All Share Index climbed by 19%. This pattern was repeated in the latest month when the market as a whole fell by 5.5% but the marketing services sector fell more sharply by 7.1%.
Partly the poor market performance reflects concerns that the industry may be nearing the top of its cycle. Partly it reflects the uncertainties emanating from the shift from old to new media. But on top of this remains a question of whether today’s stock market newcomers have enough substance. Few of the companies have an established track record as a business entity. Instead many have been given the derogatory-sounding label of “aggregators”.
To financial dealers that word means vehicles that vacuum up existing businesses into a sizeable group that will hopefully appeal to investors (and make a lot of money for its creators). The word is also similar to “aggregate” – a mixture of sand and gravel. Sand is renowned for its shifting qualities and gravel is a substance the elements of which never mix. That’s not a bad description of what can go wrong if the building of a public company is no more than a financially driven aggregation. It’s the danger that every aggregator has had to guard against. Sir Martin Sorrell overcame it a long time ago when he acquired well-established groups such as J Walter Thompson, Ogilvy & Mather and Young & Rubicam. But among younger stock market players like Cagney, Cello, Creston, Media Square and Mission, some still have a long way to go.
Compare today’s clutch of stock market newcomers with those of 30 years ago. In those days, most were single discipline marketing businesses – names like Boase Massimi Pollitt, Saatchi & Saatchi, Lowe Howard-Spink, Wight Collins Rutherford Scott, Shandwick, Fitch and Clarke Hooper. Nobody doubted their ability to do the business. What many of them did not have – Abbott Mead Vickers being a notable exception – were adequate skills and experience to build a business that could both preserve the integrity of its output and satisfy the ever-hungry stomachs of the investment community. They expanded fast through acquisitions and then, one by one, they disappeared into bigger groups or, occasionally, into oblivion.
Few of today’s stock market newcomers are famously proven marketing businesses, whether single-discipline or aggregator. Most have been put together by people driven primarily by financial aspirations rather than by a passion for marketing. Of course, that does not mean there are no good marketing people involved. But the emphasis is different/ it is geared to what the City wants, namely consistent fast growth in earnings per share.
Yet for any business to last it needs to be built on secure foundations. It needs to be market leading in its expertise. It needs to retain the loyal commitment of brilliant personnel who are there not just for the money but for the satisfaction of delivering the marketing goods. Can a collection of companies deliver that when so many involved have sold their businesses and often their commitment with it?Based on last week’s good results Creston would say it can.
The exponents of aggregation argue that they retain commitment by insisting that the vendors of companies they acquire take some of their value in the form of shares in the acquirer. That is obviously a sensible move, but wise vendors will always insist that they take out enough cash to secure their future anyway.
Look again at EQ Group. Not only has it issued a profit warning, but two key vendors of one of it biggest subsidiaries are leaving within weeks of receiving their last earnout cheques, despite the fact that 50% of the sale price was settled in EQ shares. That doesn’t encourage confidence in the longer-term prospects of the group. And it won’t be forgotten in the City for a little while either. â¢