Services: Green Square

We’re very pleased to be sponsoring the “Excellence in Pro Bono Working” award at tomorrow’s Communiqué Awards with Passion Partnership. In May’s edition of PM Live, Tony Walford shares his thoughts on the ongoing consolidation in the healthcare marketing industry. Healthcare and medical communications have long been favoured sectors for investors. Unlike many of the things we purchase and consume, medicines and healthcare products are often necessities, and thus far more recession-proof than those products representing discretionary spend. Combine the fact that pharmaceutical firms have big (and global) marketing budgets in recognition of the specialised skillsets and regulatory knowledge necessary to market in this vertical, and you naturally have a subset of the marketing communications industry that is very attractive to those looking to invest. Over the last 30 years we’ve seen increasing consolidation of agencies within this sector. Following the introduction of stricter regulations in the early 2000s, agencies moved away from traditional medicine advertising and PR, instead focusing more on medical education, targeting healthcare practitioners and ensuring compliance. During this period, agencies and acquirers became more discerning in what they were respectively providing and acquiring. In more recent years we have seen a sharp uptick in technological advances in data analytics and digital marketing, meaning agencies that provide clients with measurable campaign data and insight have become of great interest, and we’re now seeing agencies investing time into understanding how AI techniques can be used to best effect in a marketing context, not only to become more efficient internally, but also to benefit their clients. Agencies that develop proprietary techniques and IP to exploit their advantage are top of acquirers’ wish lists. We’ve witnessed an evolution from the traditional marketing of drug therapies in a rarefied environment to a highly sophisticated, technology-driven marketing approach, with fully tracked campaigns being optimised in real time to deliver true ROI. It’s obvious why healthcare and life sciences marketing businesses are so attractive to investors and it’s no longer an area dominated by marcoms groups. There’s the PE-backed healthcare management consultancies, such as Blue Matter and Trinity, healthcare service providers (CROs) including Eversana and IQVIA, and healthcare communications groups, including OPEN Health, Real Chemistry and Spectrum Science. There’s no shortage of acquirers for quality assets. That said, acquirers’ focus continually shifts as marketing skills develop and the hottest new thing today can quickly become tomorrow’s old hat. When selling an agency, the trick is not to leave it too late and to sell while still in the growth phase. This is particularly pertinent when selling into a private equity-backed roll-up that is looking to exit in the near term (three to five years) as it is extremely growth focused. That’s not to say specialist expertise is not of interest, simply that if the roll-up’s own exit is near term, then maintaining the ‘hockey-stick’ P&L graph is vitally important to them. While all healthcare disciplines are driven by growth, those that have longer-term ownership profiles (for example publicly listed, large PE or family office backed) tend to have more of an eye on particular skills an agency brings and how it fills gaps in their armoury. The drive here is to get through procurement and onto a roster to acquire significant clients, drive long-term retention and cross-sell offerings once in the door. Thus, being able to cover as broad a healthcare marketing church as possible is very important to them. In conclusion, the last few decades have seen healthcare and pharma marketing become increasingly sophisticated with a plethora of companies and groups developing and offering these services. It remains one of the hottest disciplines for M&A within the marketing sector and, despite current micro- and macro-economic and global concerns, we are not seeing any slowdown in interest in the sector, with those agencies of scale and specialist disciplines being of most interest.          

As part of The Drum’s Health & Pharma Focus, Green Square’s Tony Walford analyses mergers and acquisitions in the sector and looks at what is driving investor interest. Given medicines and therapy purchases are often necessity purchases, less prone to reductions in discretionary spend, and coupled with the significant size of pharma marketing budgets, it becomes obvious why healthcare marketing has always been high up on investors’ wish lists. Historically, medical communications tended to be the preserve of the network advertising groups, all of which have their own healthcare subsets containing various specialist agencies (think Omnicom Health Group, Publicis Health, Havas Health and You – the list goes on), but given the attractiveness of the sector, it’s no surprise we’ve seen a rise in the number of PE firms entering the fray. Some of these are huge $500m revenue life science commercialization firms, such as Eversana (backed by JLL/Water Street) and Blackstone-backed Precision Medical Group, but there are also more marketing-focused groups of varying size, many of which are just as significant. For example, take Avalere Health, previously known as Fishawack. Following an LDC-backed MBO in 2017, it made several strategic acquisitions before reaching a pivot point in 2020 when more substantial investment was needed. This came in the form of Bridgepoint and it has since undergone significant transformation, having acquired 19 agencies and consultancies globally and employing over 1,500 staff. OpenHealth started in 2011 as a joint venture between Chime and its founders. The management team scaled it through acquisition before selling it to Amulet Capital in 2018. Having scaled it further, Amulet subsequently sold it to Astorg in 2022. It’s now around $250m in turnover with over 1,400 staff. Real Chemistry is a major player in the healthcare-integrated communications space and, with New Mountain’s backing since 2019, has invested further into its AI and data analytics capabilities, enhancing its service offerings. At its current 2,000 people and $600m turnover, it’s yet another example of how the right investment-backed strategy can achieve real scale. You can see the trend here. Then there are the more mid-market players, such as Knox Lane-backed groups Spectrum Science and Fingerpaint, Waterland’s Sciris and Levine’s Prime Global. These firms have historically focused on investing in agencies delivering at least £2m profit, but there’s some new and entrepreneurial players entering the mix who are happy to look at smaller opportunities where the skills are a fit for what they are looking to build. When it comes to selling a healthcare agency, there’s no one size fits all. That said, the majority of acquirers are looking for at least £1m EBITDA (and preferably at least twice that) for it to move the needle in terms of their own scale, unless it’s a niche offering or in a market they don’t already cover. So, what’s the market currently doing? In 2023, partly impacted by the hike in debt funding costs and combined with many pharma companies reining in spend, which impacted some agencies’ revenues and profits, the headline number of deals declined. That said, it was still a busy year across the piece with 28 healthcare marketing transactions of note being completed. 2024 has started well and, again, it is predominantly the PE-backed acquirers leading the charge. Eight of the nine marketing-specific deals since January have involved PE and it has been a blend of healthcare comms, digital healthcare, market access and payer advisory agencies being bought. In some ways, we should probably stop referring to these groups as being ‘PE.’ The reality is they are now big trade buyers in their own right and sit at the acquisition table next to the publicly listed outfits – it’s become a bit irrelevant where the funding is from. At Green Square, we’re finding digital health is a particularly active and sought-after area, with a growing focus on AI applications. This includes increasing interest in teletherapy platforms and mental health apps, which are attracting significant investment. AI-driven health tech is one of the hottest topics right now as acquirers seek to gain a competitive edge by incorporating these technologies into their existing marketing offerings, driving better insight and faster results for their clients. Overall, M&A activity in healthcare marketing is likely to remain very dynamic, with those agencies that have specialist disciplines, particularly in data and tech, or of scale, being the most sought-after. We’re seeing no reduction in appetite from buyers and, coupled with potential Capital Gains Tax changes on the horizon for those based in the UK, it’s a good time for independent agencies to consider going to market. Read more

Stagwell’s latest agency acquisition is Pros in Brazil, its first in the potentially lucrative Latin America market. With the deals coming thick and fast, Green Square founder, Tony Walford, puts Mark Penn’s latest deal into context. This morning’s news of Allison’s acquisition of São Paulo’s PROS Agency is the fourth acquisition by Stagwell this year and comes hot on the heels of last November’s Movers+Shakers, Anomaly Alliance’s acquisition of French digital shop What’s Next Partners (WNP), Allison buying the UK Sidekick and Constellation’s purchase of US-based Team Epiphany.

Stagwell has significant growth ambitions, as recent reports of founder Mark Penn approaching a potential merger with S4 Capital show. With a technological focus, it currently employs around 13,000 people across more than 34 countries within agencies such as Anomaly, 72&Sunny, Forsman & Bodenfors, Doner and Gale. Speaking to ADWEEK, Penn would not comment on any progress of a potential $700m merger offer, repeating that it’s “pencils down.” But, M&A is on the cards, with a “steady stream of strategic acquisitions” planned, as well as growth in Europe and, like many agencies, figuring out AI. International expansion is a priority, said Penn, following end-of-year results that saw international revenue grow by 13% last year, largely driven by EMEA, where growth was 17% for the year. Overall, he forecasts 5% to 7% organic revenue growth, expecting clients to increase their spending after a challenging year for marketing services, where tech companies, in particular, have reduced spending. “We’re diversifying our geographic footprint. [At the moment] we’re at about 20/80 U.S. to global/U.S but we want to get that to about 60/40… as soon as possible,” he said. That’s buoyed by recent M&A activity like buying creative agency Movers+Shakers for a reported $50 million, as well as culturalist agency Team Epiphany, European-based specialist agency group Sidekick and French digital agency What Next Partners. According to Green Square partner Barry Dudley, any move to merge with S4 Capital would be focused on growing scale and take the resulting company to around 22,000 people, placing it on a similar size to that of Havas, another rumored suitor for Martin Sorrel’s empire. Sorrell has dismissed the offers saying there had been “no credible takeover approaches”. “All of the big groups will have been circling one way or another,” said Dudley. “S4C would undoubtedly bring new capabilities and expertise, but I don’t think this would be the main driver.”

A focus on European growth

In September, Stagwell announced the promotion of its media agency Assembly’s CEO James Townsend to CEO of EMEA. He will be based out of the newly opened London hub, supporting the 20 agencies operating in the region. “We expect our growth to come from share gains within Europe,” Penn said. “Already we see the kinds of pitches and opportunities that we’re getting once people realize the diversified talent we have there.” Currently, its roster of clients in Europe includes BMW, Unilever, Netflix, P&G, Lenovo, Diageo, Google, Estee Lauder and Volvo. “There’s a huge opportunity and momentum building in our EMEA business where we intend to be an alternative to the established competition,” Townsend claimed. Within Townsend’s new remit is M&A as well as a focus on unlocking greater vertical integration across agencies to help clients do more with less and navigate an increasingly fragmented media landscape. Procurement specialist Tina Fegent, who has handled agency pitches involving Stagwell believes that while there is a desire for digital expertise, not all clients want their agency partner to be digital-first. “Brands want a mix,” she said. “The individual agencies are strong, especially in the States,” said Fegent, “but they need to be more connected and talking more about clients that are already using them across multiple agencies.” A return of the business’ Sport Beach activation at Cannes Lions for a second year is another example of Stagwell’s growing ambitions, with Penn describing plans for this summer as “Sports Beach Plus” as it aims to go bigger.

AI to recreate the customer experience

Stagwell has recently worked with Google and Oracle to develop AI applications to add to its tech stack. “We don’t forsake or minimize the role of human creativity,” said Penn. “We believe you’ve got to have high levels of talent and technology and combine those into a modern offering.” Rather than generating creative assets or efficient market research, he views AI as useful for recreating the customer experience and brand connection. “There are many companies now that do no external advertising, their entire brand image is created through the experience that people have interacting with them online, that experience is going to fundamentally change,” he said. Read more

S4 Capital has reported a 25% drop in core earnings after what the group described as a “difficult” 2023. Will things get any easier in 2024? Green Square’s Tony Walford examines its prospects and explores whether a mooted mega-merger could offer salvation. Sir Martin Sorrell is an incredibly resilient character, indeed potentially the most resilient of our industry over the last 50 years. His career includes being ‘the third Saatchi’ in the ’70s, where he completed multiple acquisitions, through to creating WPP in the ’80s (and building it to be the largest marketing group in the world), to creating his current digital group, S4. His career has seen him deal with many issues, from personal slants following hostile takeovers, criticism from institutional shareholders over his employment contract, shareholder revolts over his remuneration, and the famous Shepherd’s Market personal misconduct accusation. The latter led to him being ousted from WPP and creating S4, the vehicle he used to buy the highly regarded creative production outfit Media.Monks and subsequently making MightyHive S4’s first digital media buy. S4 has since completed over 30 acquisitions on a funding model that includes a mix of cash and S4 shares and no earnouts – the idea is the earnout is effectively replaced by the future increase in value of the shares received by those selling in. However, S4’s share price has declined from 878p in September 2021 to today’s 40p, following myriad issues that started with delayed audit reports on fears of poor financial controls and accounting practices, through to repeated profit warnings and worries over Sorrell’s own health. Today’s results announcement was really nothing new – more tales of woe, clients spending less due to recessionary fears, challenging macroeconomic issues, revenues for 2024 anticipated to be down again, but operational profits expected to hold constant. There was no joy in there aside from its debt at £180m being at the bottom end of expectations – a little ray of light in a high-interest rate environment – and a possible first dividend if the second half of 2024 looks good. So, where does this leave S4? There have been rumors of a bid by Stagwell at a premium to S4’s current £240m market value. Sorrell has dismissed this by saying he has not received a credible approach, but surely others must be circling. Despite the current share price languishing around the 40p mark, S4 has some great talent from smart acquisitions. It has a solid blue-chip client base, 10 of which are each delivering over $20m in revenue (albeit a very significant chunk of S4’s revenue comes from the tech sector, which is facing its own challenges) and it has taken action on cost reduction. Thus, it remains an attractive proposition for many competitors that could do with this expertise and client base, which is why I expect to see more approaches over the coming months. It’s hard to see where S4 can go from here on its own. As mentioned earlier, its model has been built on acquisition, buying agencies with a fairly big chunk (up to 50%) in S4 shares. When your share price is 800p+, you don’t have to issue that many to get to a decent value. When it’s 40p, you have to issue 20 times that number to get to the same price. So, S4’s hands are tied unless it’s prepared to significantly dilute – not a very attractive thought. And what will those who took shares at 800p be thinking? Not only has the share consideration element they received dropped by 95%, but they must question if it is ever going to recover. And given S4’s repeated profit warnings, who would want to become part of that group at this moment in time? But you could argue for the share price, the only way is up. I’ve said it before – underestimate Sorrell at your peril. He is the King of Resilience and I hope that the next piece Green Square writes on S4 is a more positive one… not least because I am also a shareholder. Read more

WPP boss Mark Read says the holding company’s 2023 figures show it weathered a tough year. However, analysts suggest there are still plenty of questions to be answered about operating models and AI. Despite a “tough year” for much of its agency portfolio and exposure to lower tech client spending in the US, WPP chief executive officer Mark Read says the British holding company has put in “a resilient performance” in its last year in business. WPP, the parent firm behind agency brands such as VML, Ogilvy and GroupM, released preliminary figures for its 2023 commercial performance today (Thursday). The group employs around 115,000 staff worldwide, making it the largest agency employer in the industry. Revenue less pass-through costs, a measure broadly equivalent to net revenue, at the holding company, came to £11.8bn ($14.9bn) – an increase of 0.9% on last year’s performance, in line with previous expectations. But harsh trading conditions meant the group brought in $4.5bn in net new business revenues, down on $5.9bn in 2022. Speaking to The Drum, Read says: “We had two very strong years of growth coming off Covid, and there’s no doubt that 2023’s been a little more challenging for us. A bit like the technology companies, we’ve been in something of a year of adjustment. Maybe, given the strong growth post-Covid, that shouldn’t be surprising.” The earnings report follows an earlier release of figures in January when the firm held a capital markets day intended to entice and reassure shareholders. The company expects revenue less pass-through costs to increase between 0 and 1% this year, while its margin is estimated to increase by 0.2-0.4%. Growth at the group – as has been the case among several of its competitors, including Interpublic Group and Dentsu – was slower last year, partly due to the tech sector downturn. Lower spending in other areas also held back WPP revenues. Revenues from retail clients fell 11.3% compared with 2023, while financial services, healthcare and pharmaceutical client revenues also fell in the fourth quarter of the year. Revenues from WPP’s ‘global integrated agencies,’ which include GroupM, Ogilvy, and AKQA, accounted for 83% of its revenue. But underperformance at key agency brands dragged revenue growth down; without GroupM, that portion of WPP’s business saw revenue less pass-through costs fall for the last three quarters. Wins at Ogilvy – including clients such as H&R Block, Mondelez, SC Johnson and Verizon – were offset by the commercial performance of AKQA and VML. Read says a turnaround in fortunes at the latter shops would depend more on market trends than on operating models. “I don’t think it’s about what one has done well and one has done poorly,“ he says. “Ogilvy has benefited from a strong, creative renaissance… a really good track record of winning new business. VML and AKQA have suffered from their exposure to technology clients, and project-related technology spend has probably hit them a little bit harder than Ogilvy,” he says. “Ogilvy has been a standout performer.”

Questions over AI and restructure scheme

The holding company’s significant cash investments in AI capabilities have already begun to improve commercial performance at VML and AKQA, Read claims. But details beyond what was already unveiled at the firm’s January capital markets event are few and far between. “[AKQA and VML] are benefitting from [the investments] already. We now have 30,000 people across the company using WPP Open, many of whom work at VML and AKQA… we’re seeing benefits already from those programs in terms of our new business performance,” he says. ”It’s still early days to see a long-term impact on the business overall, but we’re absolutely committed to our investments in that area.” Short-term impacts are also unclear. According to Nick Berry, partner at M&A consultancy Green Square, the impact of WPP’s AI investment “isn’t filtering down into the numbers in a tangible way as yet.“ “There isn’t anything specific in terms of job losses or job creation. How is it going to change their engagement with clients? What’s it going to change in terms of their operating model?“ For the meantime, the firm is committed to internal investment in AI, rather than adding expertise through agency acquisitions, Read says. “I don’t know if there’s a path today to really develop your AI business through M&A,” he says. “We were fortunate to acquire Satalia two and a half years ago. I don’t know that there are things available to buy today that would bring us the expertise that that team has been able to bring.” Though WPP’s results fell within predicted ranges, its share price had fallen 4.7% at the time of writing. Berry says that reception stems from expectations among shareholders of better-than-predicted results and the amortization costs of WPP’s VML merger. “They expect surprises. [WPP] has not revised what they think 2024 is going to look like; delivering what was expected gets you hammered. You’ve got to have another story,“ he says. Amortization costs relate to intangible assets – such as agency brands. WPP estimates that the VML and Burson mergers incurred a one-off amortization of £728m ($918m) in 2023, a figure that includes millions of dollars used to buy the companies initially. “That’s £346m of what was spent to buy those brands that has now gone. And they’re the sorts of things that bug the City,“ says Berry. Despite the cost of last year’s big mergers (and the immediate reaction of shareholders), he suggests that a healthier new business plan is a sign that WPP’s plan will eventually pay off, adding: “If that proves to work, and people do find the model is simpler and they pull off some client wins… there’s evidence that the logic behind that is coming to bear.“ Adds Read: “We look at 2024 with optimism. We’ve got great plans around AI. We have a very strong new business pipeline. We’re doing great work for our clients, who are many of the world’s leading organizations. I think there’s tremendous opportunity ahead of us at WPP that we’re determined to capture.” Read more

The Sorrell-helmed holding company’s latest trading update contains little cause for optimism. What does it tell us about the health of the sector at large? Client caution in the face of adverse economic weather will likely persist over the next 12 months, according to Sir Martin Sorrell, executive chairman of Media.Monks parent firm S4 Capital. The agency boss said “we are not expecting 2024 to show macro-economic improvement” in a trading update concerning the company’s commercial performance in the fourth quarter of 2023. Though the company said results were in line with expectations, the update counters some of the optimism expressed by UK ad industry figures, including the IPA’s director general, Paul Bainsfair. “After four years of very strong growth, 2023 was a difficult year impacted by volatile macro conditions and, consequently, cautious spending from clients, particularly those in the technology sector and from smaller project-based assignments,” Sorrell said in a statement. The company said it expects like-for-like annual net revenue to fall 4% and for its operating profit margin to hover around 10-11%. The margin rose on the back of “significant cost reductions” which included hundreds of layoffs earlier last year. Whether or not S4’s Q4 performance will be mirrored by its sector peers is an open question. The fourth quarter of the year is typically lucrative for agencies as clients spend the cash left in their budgets. A recent trading update issued by Mission Group, a smaller British agency network listed on the AIM exchange, bore this out – after issuing a profit warning because of “challenging” commercial performance earlier in 2023, its trading “significantly improved” in the final quarter. The lift available to agencies may only be a small mercy, however. 2023 saw advertisers slash marketing budgets, leaving little scope for commercial growth for agency businesses. “For a significant majority, Q4 was tough,” says Barry Dudley, a partner at advisory firm Green Square. “Q4 was a combination of the cost of living, interest rates, the works. Clients just sat on their hands. But conversations seem to be opening up.” Last week’s IPA Bellwether, a quarterly survey of advertiser confidence, suggested that brand advertisers would look to increase spending on marketing activity over the next few weeks. “This quarter’s upbeat Bellwether findings show that companies are heeding the evidence that continuing to advertise through the tough times can help maintain brand loyalty and protect the long-term health of their brands,” said Bainsfair. “Optimism for this year is high, but there’s nervousness for elections and wars,” adds Dudley. But S4’s client profile – the company prefers to work with tech clients and large multinational advertisers it terms “whoppers” – means that increased spending by British household names is unlikely to provide much benefit. ‘A maelstrom of uncertainty’: My CES chat with Sorrell became an agency survival guide S4’s revenues were hit when technology clients began cutting marketing spend last year. And its ‘tall’ market offering, which eschews additional sectors included in bigger holding company portfolios such as PR or healthcare, means that the company has proven vulnerable to the whims of the US tech industry. “They don’t have that balance of other services at S4,” says Dudley. Sorrell suggested 2024 would not bring a radical change in circumstances for the firm. “While it is early in the year, we are not expecting 2024 to show macro-economic improvement, and client caution on marketing spend will likely persist, although not at last year’s level given interest rates are likely to fall over time,” he said. Given those conditions, Media.Monks’ content pillar, which broadly covers creative and production, had the most scope for growth, he added. “Initial indications are for an improvement in performance in the Content practice, reflecting cost reductions, broadly similar performance in Data & Digital Media to last year and a more challenging outlook for Technology Services. In these unpredictable times, we are focused on positioning the Company for medium-term growth, improving profitability and returning funds to shareowners.” The latter point is an important one for S4 Capital. Its growth strategy in previous years centered on a seductive M&A approach that offered cash-and-share deals to founders. The strategy paid off, and it was able to add companies such as MightyHive, XX Artists and TheoremOne. Now, S4’s share price is considered to be underweight. If it’s to return to its strategic growth plan and fulfil Sorrell’s medium and long-term ambitions it will need to keep shareholders onside and hope its price rises once more. Read more