Sectors: Corporate

Green Square’s Barry Dudley analyses how Adam&Eve co-founders James Murphy and David Golding have done it again as they sell NCA to WPP. On February 11, 2020, three people incorporated a company, each holding one of the three shares that made up the whole of the issued share capital. Just one month later, on March 11, the World Health Organisation referred to the spread of Covid-19 as a ‘pandemic.’ They say a time of crisis is a smart time to start a business. Judging by yesterday’s announcement that WPP has acquired New Commercial Arts (NCA), it seems David Golding, Ian Heartfield and James Murphy are very smart. They started with a proposition of “uniting brand and customer creativity to make brands more desirable and easier to buy.” When I headed to the NCA website, it was no surprise to me that they’ve stuck to this – “brand communications” and “customer experience” flash up first, followed by “more desirable” and “easier to buy.” They know what they are good at and they do it very, very well. Having clarity and consistency of offer seems very obvious, but, more often than not, when we at Green Square first spend time with a new client, we find ourselves trying to decipher what they actually do and what sets them apart. There’s no confusion with NCA. So you can be clear, consistent, creative, award-winning, with happy clients – but can you balance all that with making money? Let’s take a look at how NCA has done. The average monthly number of employees in its first 10-and-a-half months trading to December 31, 2020, was an impressive 20. Even more impressively, it had amassed £2.49m of cash and made a profit after tax of over £0.5m. Through 2021, its average number of employees increased to 31, it had turnover of £16.5m, a gross profit of £6.9m and an operating profit of £3.5m (a staggering 51% margin). Cash at the end of that year was a ‘mere’ £5.4m (cash, plus bank term deposits). Another 20 heads were added in 2022, taking the average for that year to 51. Turnover of £34.2m, gross profit of £10.2m (an increase of nearly 50%), but operating profit was down slightly on the prior year at £3.2m as I suspect it played catch up with investment in operations and infrastructure. Yet the year-end cash position stood at £12.5m – that’s some seriously impressive management of working capital, probably helped by clients paying in advance for production costs (and possibly media). The average number of employees for 2023 was up by 12 to 63. Turnover dipped a little, but, most importantly, gross profit was up another 25% to £12.7m. And an operating profit of £3.4m. Those of you who haven’t switched off from all these numbers may be saying that their margin has been declining. You’re right, but arguably it is moving towards a more sustainable place with an operating profit margin of 26.7%. And cash … £12.1m. So, I’d say it has done pretty well. Another thing it has done pretty well at is building a quality management team and aligning that team through equity. The three initial shareholders may have founded NCA, and I’m sure bring their respective forms of magic dust from time to time, but they’ve put equity into the hands of many others – Murphy and Golding equally share the first £1m of any sale proceeds, six other shareholders join them at differing percentages in the next £39m and there are probably at least 10 more that participate in anything above £40m of sale proceeds. Given that they were likely to have had a big lump of surplus cash that will have been paid out as part of the deal, I am sure that the £40m mark will have been surpassed and who would bet against the total deal value at the end of their earn-out being greater than the £100m+ that was reportedly achieved by Adam & Eve when they were acquired by DDB? The parallels with that deal aren’t just financial. When Adam&Eve went to DDB, it was to leverage the energy and entrepreneurialism of Adam&Eve through DDB’s scale – arguably to reinvigorate DDB. Murphy is to become CEO of Ogilvy Group UK… And I wonder what Sir Martin Sorrell may be thinking. Many moons ago, when he was CEO of WPP, it brought a legal action claiming that Murphy, David Golding and Ben Priest, the founding partners of Adam & Eve, were in breach of contract when they set up the agency – it alleged they approached staff and clients of their former agency, RKCR/Y&R (part of WPP), while still bound by the terms of their gardening leave. WPP won, received an apology an out-of-court settlement. I think WPP has won again. Read more

Marginal organic growth in Dentsu’s H2 results masks a business that may just be regaining some momentum, suggests Green Square’s Barry Dudley as he looks at the Japanese holding company’s latest numbers. At first sight, an organic growth in revenue of 0.2% in Q2 seems an odd thing to lead your results announcement with. Or maintaining the guidance for the full year at a mere 1%. But for Dentsu, it’s a pretty big moment because in all of the previous five quarters, it had shrunk – by 1.6% in Q1 2023, 4.7% in Q2, 6.0% in Q3, 6.6% in Q4 and 3.7% in Q1 2024. Strength in the home market of Japan sits behind this, in particular “continued recovery in internet advertising,” so H1 organic growth of 2.1% was healthy – Japan represents 40% of net revenue. But all other geographies declined across H1: Americas down 5.1%, EMEA down 0.9% and APAC down 6.6%. The Americas “has continued its recovery, recording a number of new client wins” and it is hoped there will be a return to growth in H2 – encouraging for Dentsu’s second biggest market. EMEA also seems to be turning a corner, with the 0.9% H1 decline consisting of a 9.4% drop in Q1 but a 7.8% organic growth in Q2, with “stronger than expected Media performance in some local markets” being part of the story here. APAC would appear to be the region that still needs fixing, with pretty scary declines in all of the last six quarters of between 6.2% and 9.1%. The focus here is on “long term recovery,” but perhaps there’s a shorter-term in organic strategy (acquisitions) to reset the trajectory. There is reference to exporting its Business Transformation offering out of Japan into other markets and “expanding globally” Dentsu Lab, “the group’s creativity and innovation proposition.” For me, it’s the latter that will likely fuel the future. Being “positioned at the convergence of marketing, technology and consulting,” it is taking on the consulting and tech giants, not just the other marketing groups (and independents). What will set Dentsu apart is how “creativity and innovation” is applied within all this. And what of the share price given the stock market turmoil in recent weeks – closing at 3,870¥ today after the results were announced, this is almost exactly where things were at on the close of business on Friday, August 2 (3,872¥) before the market meltdown the following Monday. There’ll be more twists and turns to come, I’m sure, but for the moment, Dentsu seems to be gathering some positive momentum. Read more

The latest financial updates again show the full range of fortunes being experienced across the major marketing groups, as Green Square’s Barry Dudley explains. On today’s WPP results call, Mark Read, the CEO, used words such as “satisfactory” and “firm.” And along with CFO Joanne Wilson, the term “headwinds” cropped up pretty often. So, it was no surprise to hear that LFL (like-for-like, another term for organic) revenues less pass-through costs were down 1% for H2 and down 0.5% in Q2. One of the biggest factors behind this was a 24.2% decline in China in Q2 – a stark contrast to Publicis’s announcement a couple of weeks ago, where China was its highest growth geography at 10.5%. The “rest of the world” and the UK were also down by 5.3% and 2.2%, respectively, but all other geographies were up: North America 2.0%, Western Continental Europe 0.3% and India a strong 9.1%. We saw some rather big global stock market drops on Monday, with Japan down 12% off the back of a US slowdown/talk of recession. While things seem to have stabilized, there is a good chance that this will be a factor for all businesses in H2 2024. All of this has led to a downward revision in WPP’s full-year guidance of -1.0% to 0% growth in LFL revenues less pass-through costs. Read talked through WPP’s strategic progress. Unsurprisingly, AI came first alongside WPP Open – it was refreshing to hear how they are using AI in “how consumers experience work,” not just how it may save costs operationally or make production more efficient (which were there, too). Seeing an AI-generated Jose Mourinho in an ad was a welcome break in the call. Next up was the focus on progress within VML, Burson and GroupM, which now represent a whopping 70% of WPP’s sales. Along with the sale of FGS Global – for £604m cash after tax – the streamlining of the group is continuing apace. Then came the awards, in particular WPP’s successes at Cannes Lions this year, which were impressive. So, how does all this stack up with Stagwell, the self-styled “challenger holding company,” whose results were announced late last week? Well, they were much more at the bullish end of the spectrum. Organic net revenue growth – one of the best indicators of the trajectory of a business – was a very modest 1.2% in Q2. But this is off the back of 8% in Q1 and, most importantly, Stagwell reaffirmed its guidance on organic net revenue growth for the year of 5% to 7%. So, it is hoping for a strong H2. The CEO, Mark Penn, referenced three things that will hopefully fuel this – a “flood of new business wins at the end of Q2,” which included General Motors work for 72andSunny and Anomaly, “media margin in the back end [of the year]” and strong performance expected in Advocacy. Penn’s demeanor on the earnings call was very much one of someone presiding over a business that has momentum. Biden stepping out of the presidential race has reignited the Democratic party’s prospects, which Penn believes will flow through into what is already very strong growth in Stagwell’s Advocacy segment – 42% year on year. And new business, in general, seems to have moved to another level: “Average size of new business wins increased 65% YoY; 57% increase in deals exceeding $1m.” This certainly seems to be backing the “challenger holding company” mantra. Read more