Services: Green Square

According to reports, the boards of both parties have agreed “unanimously” to the merger/takeover, so it looks a done deal. Once the paperwork is signed, Sapient will be delisted from the NASDAQ and subsumed into the Publicis Groupe (although Sapient co-chairman and CEO Alan J Herrick will become CEO of a new entity, Publicis.Sapient, which will also include Publicis’ existing digital businesses). That $3.7bn is a huge sum, and represents a massive premium. Reported profits for Sapient last year were only $86m on turnover of £1.36bn, although Bloomberg’s market analysis was more flattering, indicating a normalised EBITDA of $160m. But whichever way you look at it, it’s a huge premium – in fact, it’s a doubly huge premium, because Sapient’s market value just before the deal was announced was $2.46bn. So Levy is in effect paying one-and-a-quarter billion dollars more than the market thinks it’s worth and almost three times turnover. Sapient is a very good company; it’s been in the digital space since prehistory (1990!), employs some of the best suits and creatives in the business and has great clients like Audi, Coca-Cola, M&S and Target on its books. But is it worth a premium of about 44 per cent on the shares? And why has Maurice paid so much, and what does it all mean? First of all, to turn to the second question, it means that there will be no revisiting of the failed Publicis/Omnicom merger (if it was unlikely before, it’s impossible now). When the “Publicom” deal collapsed back in May, many of the merger’s critics (who were numerous, and very vocal) said that it was all about ego and legacy-building and nothing to do with adding value for shareholders. Over the past six months, as the dust has cleared and there’s been time for calm reflection, it’s becoming clear that there were actually some legitimate reasons for considering the merger, even if it was too unwieldy and there were too many cultural differences to overcome. The two good reasons for the deal were, from Omnicom’s position, to increase its capability in digital and, from Publicis’ side, to increase its presence in the US, where it has never been particularly strong. Despite the rise of China and other territories, the US is still the biggest and most important advertising market of all. In acquiring Sapient, Publicis now has an enormous bridgehead to build its business in the US and, more importantly, it can do it digitally, which is really what matters. Publicis’ acquisitions in digital over the past two or three years have been very canny, if a tad expensive – LBi, $450m; Rokkan, $575m; Rosetta, $575m; Razorfish, $530m; Digitas $1.3bn; plus Chinese social media agency Nettalk for an undisclosed sum, but likely to have been in eight figures. Now, it could be argued that Publicis has already got very good digital capability Stateside with the likes of RGA and Rosetta, and that this deal is just more of the same. There’s something in that, but I think Levy is thinking more long term – and I’m not just talking about his desire to leave a legacy when he steps down in the next two or three years. What he’s really thinking about is parking his tanks on the digital lawn. I’m willing to be corrected, but I believe that Sapient’s digital unit, SapientNitro, is the largest shop remaining outside one of the big international groups. As prizes go, it was just about the most glittering one still up for grabs; this morning Levy called it “the crown jewel in the quest for digital business”. And it will fit in very nicely with its existing digital businesses, Razorfish RG, Rosetta and Digitas LBi, creating a real digital behemoth that will have Omnicom, WPP and IPG fretting and, perhaps, looking around for properties of their own. However, I’ve no doubt that Sir Martin Sorrell will say that he is sticking by his strategy of making organic acquisitions in new spaces and in new territories, as he did when the Publicis-Omnicom merger was announced last year What’s really interesting about this deal for me though is the thinking it represents. In a world and an industry increasingly disrupted by technology, it’s long been assumed that everyone had to attain scale to survive – hence the rash of M&A and consolidation activity we’ve seen over the past decade. The Publicis-Omnicom merger was, to a degree, all about scale: being the biggest agency with more of the best people with the biggest blue-chip clients. But building an entity of that size was always going to be fraught with political and cultural dissonance, client conflicts, regulatory hurdles and infighting. So, while scale is an important factor in Publicis’ thinking here (consolidation should save it about $50m a year in costs), I think reach is more important. In business, scale and reach are two different things. In marcomms, it’s about putting your clients where their customers are and, at the moment, when said customers are going to be most receptive and responsive to messages. It’s all about helping your clients get to, and grow in, new markets. So, while Publicis.Sapient will be the world’s largest digital agency ($8bn in revenues, 75,000 people worldwide), it will also have the widest reach – in all the world’s important markets, strong in all digital channels and disciplines including mobile – together with a client book full of companies both strong in digital marketing and requiring a helping hand. It can help clients move into new areas: Pubicis’ digital agencies could prove particularly attractive for, say, Chinese brands wanting to break into America and Europe, and help them cut or consolidate costs. When scale and reach are combined, you have power. And as the likes of Google and Facebook try to lure clients away from agencies in order to deal with them directly and grab a larger slice of the marcomms pie, Publicis is now in a better position than arguably anyone else to stand up to the aforementioned tech giants. Sapient has always been strong on strategy, and this could in the long term be Publicis’ ace in terms of building new business and boosting its revenue streams. As I’ve argued before, in a digital world creative is in danger of being seen as a commodity, while strategic thinking is highly valued by clients looking to cope with the digital revolution. Some time ago, Levy told investors and the media that he wanted 50 per cent of Publicis’ revenues to come from digital by about 2018. In its third-quarter results announcement last month, Levy announced the figure was 41.6 per cent. After snapping up Sapient, some observers reckon that this target could be met as soon as next year – three years ahead of schedule. This means that while Publicis is not the largest global agency group (WPP still holds that trophy) it is best-placed to survive in an increasingly digital and increasingly mobile world.

Of the four countries, the one that is perhaps easiest for us in “the developed West” to understand is Brazil. China is wildly successful, but is a highly centralised, controlling state. Russia has a touch of the lawless Old West about it while India, although more open and democratic, is chaotic. But Brazil is a relatively stable Western-style democracy, rich in human and natural resources, with European colonial roots and a Romance language (Portuguese). Although it does have its fair share of problems, it does have enormous potential. So it’s perhaps no surprise to learn that that most canny of marcomms investors, Sir Martin Sorrell, has been investing quite heavily in the South American giant recently (Brazil is also WPP’s eighth-biggest market globally with sales of more than $650m a year) – in fact, WPP has bought no fewer than three Brazilian agencies in as many weeks. All of them are in growth areas, in keeping with WPP’s oft-quoted business strategy. The most recent was in the area that will be the fast-growing and most hotly-contested of the next few years – data. Kantar Health, WPP’s wholly-owned global healthcare consulting firm, acquired Focus Assistência Médica S/S Ltda. and Classe Assistência Médica S/S Ltda. (we’ll call it “Evidências” for brevity), a leading healthcare research company based in the South-Eastern cities of Campinas and São Paulo. As ever with WPP, the details of the deal have not been disclosed, but Evidências’ unaudited revenues for the year ended 31 December 2013 were approximately 5.8 million Brazilian Real (about £1.5m) with gross assets of approximately 0.9 million Real (£223,000) at the same date. So not a huge deal in all likelihood, but an important one. Founded in 1998, the company employs 22 people and provides consultancy and research services in pharmaco-economic studies and analysis, local dossier submission packages, professional writing, market access and training. It works with all segments of the Brazilian healthcare market, including health insurers, government bodies, hospitals and providers, and pharmaceutical and medical device manufacturers. WPP says in a statement: “The acquisition expands Kantar Health’s presence in an important fast-growth market and provides the company with new capabilities in cost effectiveness and budget impact economic models. It also continues WPP’s strategy of investing in fast growing markets and its commitment to developing its strategic networks throughout the dynamic Brazilian market.” What’s also interesting is how WPP has been slowly reinventing Kantar – once the “market research” unit of WPP, it is now moving towards a consulting, insight and data analytics model – or, as the group calls it, “[our] data investment management division”. With the data and pharma boxes ticked, we move on to digital and mobile. JWT, one of WPP’s biggest global ad networks, bought a majority stake of Cairos Usabilidade Eireli (known as “Try”), a user experience agency in Brazil that designs and develops custom web, mobile, desktop and touch-enabled applications. Try’s unaudited revenues for the year ended 31 December 2013 were approximately 2.5 million Real (£620,000). Again, not a huge acquisition, but Try does have a very good client book, including a number of successful Brazilian and international businesses such as Itaú Bank, Porto Seguro, Electrolux, SKY, Serasa-Experian, Havaianas, Prontmed, and Kate Spade. Founded in 2003, the company employs 22 people and is based in São Paulo. Try provides consultancy to their clients in user experience, interaction design and prototyping – so again, it is more than “just” an agency. Sir Martin’s third September Brazilian acquisition was another JWT deal, this time in another important market – search. Internet penetration in Brazil lags behind many developing economies – it’s just 45.6 per cent – so there is plenty of growth to be had in search, and search engine marketing lags behind other territories. So the announcement of the acquisition of a majority stake of Mídia 123 Serviços de Publicidade Via Internet Ltda. (better known as “Blinks”), a leading search engine marketing agency, was another indication of the holding group’s seriousness about becoming a major force in Brazil. Blinks’ unaudited revenues for the year ended 31 December 2013 were 11.2 million Real (£2.8m) with gross assets of approximately 3.3 million Real (£819,000) at the same date, making it the biggest of the three acquisitions Clients include local companies Bom Negócio, CVC, Netfarma, Giuliana, and Sem Parar. As well as more familiar names like office supply giant Staples. Founded in 2009, the company employs 81 people and is based in São Paulo. Blinks specialises in sponsored-links campaigns and other performance-based advertising. As internet penetration in Brazil grows, brands and companies will have to focus on effective search-engine marketing (SEM) to achieve the best search engine rankings. As a result, clients are increasingly turning to established SEM solutions, such as those provided by Blinks, to play a strategic role in maximising their internet presence and the all-important return on investment; and, by coming to the party relatively early, WPP has stolen a lead on its rivals.