An interview with Sir Martin Sorrell: Building a marketing services giant by acquisition
Interview by: Journal of Strategy Management
WPP was established in 1986 by Chief Executive Martin Sorrell. He made his name as finance director of the advertising giant Saatchi & Saatchi Plc, joining the firm in 1977 and playing a key role in its growth through acquisitions. In 1985 he left Saatchi & Saatchi to establish his own marketing services company.
Martin Sorrell bought a stake in Wire and Plastic Products Plc in 1985, a holding company for a group of wire and plastic manufacturing firms whose main business was the production of wire shopping baskets and domestic wire products. The company had gone public in 1971. Martin Sorrell became the CEO in 1986 and changed the name of the company to WPP Group Plc.
With the support of other directors, in 1986, WPP made a number of acquisitions focusing on developing below-the-line (BTL) capability. WPP's profits rose sharply, despite its borrowings, from £1.7 million pre-tax in 1986 to £40.3 million in 1988. Sorrell's reputation as a skilled acquirer grew as well, and WPP continued to make other acquisitions. In 1988, WPP was listed on NASDAQ exchange in New York. A bigger coup came in 1989, when WPP acquired the Ogilvy Group. Following this acquisition WPP overtook Saatchi & Saatchi, the biggest advertising group of the time, in worldwide billings.
WPP continues to make acquisitions. In recent years the most notable acquisitions were 24/7 Real Media in 2007 for $649 million and TNS – a protracted acquisition in 2008 for £1.2bn. TNS is being integrated within the Kantar Group to create the second largest market research group in the world. WPP has set aside £100 million in 2010 and 2011 for further purchases.
The number of acquisitions made by WPP and its stakes from 1986 to date is 315, and WPP has taken stake in a further 176 companies.
WPP overtook its long-time rival Omnicom for the first time in 2008 to become the world's largest marketing services group, as well as the most profitable marketing services company. WPP consists of a number of brands covering advertising, media, information and consultancy, healthcare, public relations, design and branding, direct and relationship marketing, and specialist communications. They operate individually as a distinctive brand in their own right and this is one of WPP's strengths.
Sir Martin Sorrell is one of the best known chief executives of a FTSE 100 company. He has created from scratch the largest marketing services firm in the world by sales and profit. He is greatly admired and respected for his achievements.
Sir Martin also has a long-standing and deep interest in management education. Here, we are privileged to interview Sir Martin Sorrell and discover in greater depth the strategies he has deployed to create such a successful company.
JSMA: How do you define strategy?
Strategy directs the key future investment decisions. It offers an umbrella for managing an organization's future. Our strategy is comprised of three strands; new markets, new media and consumer insights. The WPP's strategy is explorative we search and invest in new growth opportunities.
JSMA: You have built WPP to a business of over £9bn market capitalization through a series of acquisitions and investment in other companies. Academic research indicates that between 60-85 per cent of all Mergers and Acquisitions fail to create value. Why has WPP succeeded when so many have failed?
When you start with a wire basket manufacturer and you want to build a multinational services company, there is very little that you can do other than grow by acquisition. We have been successful but of course make mistakes all the time. We made a number of big acquisitions, which have worked pretty well, for example:
- JWT Group in 1987;
- Ogilvy Group in 1989;
- Young & Rubicam Group in 2000;
- Grey Global Group in 2005;
- Real Media in 2007; and
- TNS in 2008.
All of those were in the public market and usually public company acquisitions are more expensive than private acquisitions. For these and others we had a well thought through strategy – we started off focusing on “below the line” activities that were both unfashionable and fragmented and therefore affordable. We identified this approach before the industry and the markets as a whole agreed with that diagnosis.
In 1987 we acquired JWT, which had in addition to an advertising agency, a PR company and a research company. That represented a change in strategic direction for WPP as until then we were seen as a “below the line” company. Below the line is everything except traditional advertising in television, newspapers and magazines. We have a clear strategy and we acquire companies that meet the needs of our strategy.
JSMA: What would be the main criteria that would tempt you to make an acquisition; market share or profitability?
The main criterion is a fit with the strategy of new markets, new media and consumer insights. Also value – paying over the odds is always a mistake.
JSMA: Do you involve people who run a relevant business from the outset in the acquisition process?
Sometimes, it is horses for courses. If the company is going to be fully integrated into an existing operation then you need to involve the people who run that particular business. But it is not sensible to involve the line management as a matter of course because egotistical and territorial issues surface and deals can be frustrated by issues such as who is going to run the combined company. This is a sensitive issue when acquiring private companies. The structural considerations are more important than who gets involved in the discussions.
In some acquisitions one may want to change the management. For example, we may decide to strengthen an area of activity while the people running the business may feel that they are strong enough in that area – of course many businesses think that they are pretty good at what they do! The problem is that people very rarely hire people that are better than themselves.
JSMA: Do you have a process for acquisitions?
Our process is straightforward and what one might expect – we examine the market, talk to a range of sources such as clients, analysts, shareholders, investment bankers and brokers. The key is to develop relationships with people in the potential target company. It is a bit like winning new business. The worst acquisition is where the vendor expresses an interest in selling.
JSMA: How do you resist the temptation of paying “over the odds”?
This can be difficult as a range of issues arise from getting too involved in the process to the various egos involved. If it is in the public spotlight you tend to be dragged into things – so you have to resist that temptation. Private company acquisitions are easier except where one gets involved in an auction. And the danger is that the momentum drags you away from your objective criteria.
Hamish Maxell, one of our best chairmen, used to say that a hostile takeover is better than a friendly one. This runs contrary to the conventional view that friendly is better than hostile. His argument was that if you were involved in a hostile takeover, you tend to be much more disciplined in terms of price and do not become involved in deals with various people.
JSMA: What are the drivers of hostile takeovers?
Hostile takeovers can be made for reasons of efficiency, incompetence or inadequacy – but not all hostile takeovers are made for these reasons. Our acquisition of JWT was seen as a hostile takeover but it was not. In my view there is no such thing as a hostile takeover – many takeovers are not hostile to the shareholders or employees – they may be hostile to the CEO.
JSMA: Do you, as a matter of course, replace the management of companies you acquire?
Not as a matter of course and change is limited rather than whole scale. In JWT we changed the top person; in Ogilvy we had two changes of management (the top person and his successor apparent). In YNR we made some changes as we did in Tempus. But most times we keep the existing management, so change is a rarity rather than rule.
JSMA: In creative businesses people are very important and in an acquisition, one of the key issues is retaining key people. How do you retain the key people?
We have a transparent private equity based model, which we derived in the early 1990s where targets are set and up to a percentage of the profit before bonuses and taxes is used as an incentive.
"The Chief Executive is the driver of agility and can make it happen. The reason that we have been successful is that we have quick decision making. If the CEO is not involved, it will be slower."
We also developed leap executive plans in the early 1990s which were somewhat controversial at the time, where we asked our key people to invest in the company (people talk about entrepreneurial opportunities and they confuse entrepreneurialism with autonomy). Autonomy is target setting and freedom to achieve that target whereas entrepreneurialism means taking risks with their own money. This is where employees commit stock that they own or buy stock and, dependant on performance, get a multiple of that stock as a performance bonus.
JSMA: What capabilities have you instilled in WPP to ensure that it can “turn on a sixpence”
The Chief Executive is the driver of agility and can make it happen. The reason that we have been successful is that we have quick decision making. If the CEO is not involved, it will be slower. Here are some parallels with a crisis situation where the organization has an inability to respond quickly to difficult situations. It is rarely a good idea to have operational managers involved in a deal as they will raise “social” problems and the social problem may not be the target, it might even be themselves.
During our acquisition negotiations we usually meet at the end of the week to review what happened during the week with our advisors. Advisors need to be clear on what needs to be done – and need instant responses to do so.
JSMA: Do you think that a joint CEO situation can work in a merger or acquisition?
There is no such thing as a merger – they are all acquisitions. A structure that proclaims to support a merger with a joint CEO or joint chairman cannot succeed in the medium to long term.
JSMA: Do you think that the experience of the Chief Executive in mergers and acquisitions is an important driver of success?
Experience obviously helps as the more experience that you have the fewer mistakes you are likely to make. Ownership is an importance driver – whereas I don't have any patience with options as it is giving managers a call on your stock for ten years. A Chief Executive may not have to do anything if the markets are rising and be rewarded in shares. This is simply outrageous.
What is important is commitment – this can also be emotional commitment as well as financial.
JSMA: Do you have a set process for due diligence?
We have an internal due diligence group that carry out exhaustive due diligence on all acquisitions. This is important given that there are many accounts that may be unqualified by their accountants. We reconstruct Profit and Loss account historically, we reconstitute the numbers to determine the organic growth rates, if the information we have is not strong enough. We also look at all plans, budgets etc, we also go to all the potential sources of information that we are aware of such as clients, competitors, analysts and so forth.
JSMA: What are the core competencies of WPP?
Our core competencies revolve around new markets, new media and consumer insights. We have a very strong geographic footprint with the strongest position in Russia, China, India and Brazil. We also have the strongest position in Africa. It is also important to have a presence in the USA which has an economy three times the size of China. If one was starting from the beginning, I would suggest that a strong presence is needed in the USA, Europe and in particular Germany, Asia, Latin America, the Middle East and Central Europe.
JSMA: Clearly acquisitions have played a key role in WPP phenomenal growth. How about organic growth?
We have also grown organically through innovation and winning market share because of our ability to bring together diverse resources to meet challenging client requirements. We monitor our organic growth and on average we have grown organically 5.7 per cent between 1986 and 2009.
JSMA: Do you systematically scan the environment?
Yes, we listen to what clients are doing and keep our ears open. I spend about a third of my time with clients, a third internally and a third externally. It is important to be on “receive” and not “transmit” during client interaction. We have formal strategy sessions every year where we get our top 100 people together and systematically (partly systems, partly proactive and partly reactive) review what is going on, who is being successful, who is being unsuccessful and so forth.
This is a shortened version of “Building from scratch a marketing services giant by acquisition: Case study and interview with Sir Martin Sorrell, Chief Executive of WPP”, which originally appeared in Journal of Strategy and Management, Volume 4 Number 3, 2011.
The authors are Abby Ghobadian and Nicholas O'Regan.