WPP Group’s surprising readiness last month to allow CHI’s executives to retain a controlling stake in the business in which it was investing places a question mark over the assumption that the appetites of large stock-market listed groups can only be satisfied by acquiring 100% of every marketing services business that comes within their sights.
Admittedly there have been a few rare occasions when an agency has sold only a minority stake. An example is Bartle Bogle Hegarty in which Leo Burnett (now Publicis) took a 49% stake a decade ago.
Others have bought businesses by instalments – leaving a large slice of the shares with the management, which have subsequently been acquired over a period of years. The acquisition of Freud by Publicis adopted this approach, as did Cossette’s acquisition of Miles Calcraft Briginshaw Duffy and Next Fifteen’s acquisition of Lexis PR.
Early last year WPP invited Jim Kelly and Robert Campbell to parachute themselves into the United network in the hope they could resuscitate the remains of the former Howell Henry in return for a slice of the equity. But the casualty was too far gone.
The question raised by these transactions is: what is the role of share ownership in such people-dependent businesses after an acquirer has swallowed its prey?For many years, big acquirers who have insisted on buying 100% of an entrepreneurial target company have then been faced with the problem of how to motivate the next tier of key personnel long into the future. Typically each acquirer has resorted to offering long-term performance-related prizes.
Frequently those prizes have taken the form of shares in what is generally a remote parent company. Such an arrangement is vastly different in nature from one that encourages current and prospective stars of an acquired company (and their successors) to retain a personal slice of the ownership of that company for the long term.
Figures show that, despite dishing out performance-related shares and share options of immense value, the global groups have been singularly unsuccessful in maintaining their profit margins or – most probably – retaining the important players in their networks and smaller agencies.
The economic cost of share-based incentives at WPP last year absorbed more than 8% of its profits before charging that cost. At Huntsworth the cost was nearer 9%, at M&C Saatchi it was over 6% and at Omnicom it was approaching 5%.
Perhaps it’s too easy for big groups to offer incentives to managers of their subsidiary companies with the hope of boosting profits in the near term. Inevitably there comes a point when the constant pursuit of higher profits can begin to undermine the quality of the business.
To motivate talented young people, it is necessary to create an environment that encourages free expression and risk-taking. Such people want to belong to something famous – or at least a company that enjoys a top-class reputation and has a culture to match. And owning part of it makes a difference. They enjoy taking risks and the adrenaline rush that goes with it. They want to be recognised for success. And they want to rub shoulders with acknowledged star players, not just a bunch of executives who are so obviously and single-mindedly committed to satisfying their remote masters’ demand for ever-increasing profits.
Too many networks seem to be getting bogged down in indifferent creative standards and bureaucratic processes. Such networks tend to attract or retain only those managers who are comfortable with that type of culture. So why don’t more of the acquisitive companies set aside part of the share capital of acquired subsidiaries to be held by key personnel? Why don’t they embrace the type of approach that Sir Martin Sorrell is beginning to flirt with?
Most chief executives of public companies will say they buy other businesses to increase the group’s profits to satisfy the expectations of their outside shareholders. So they want to own as much of each acquisition as possible, thereby boosting the group’s earnings and its share price. It never seems to occur to them that owning 80% of a humming, self-confident, growing operation will probably yield a better long-term return than owning 100% of a tired subsidiary run by yes-men and uninspiring managers, and where the best talent has already left for a more exciting workplace.
Bob Willott is editor of Marketing Services Financial Intelligence