In the last 40 or so years, the ad agency transformed from an industry of relatively small and independent companies to being largely concentrated in 4 (or 6, by some measures) agency holding companies. Here we discuss how WPP came to be.
WPP, the company formerly known as Wire and Plastics Products, is by most measures the largest ad agency in the world. The company WPP was formed in 1971 to make wire shopping baskets. It was eventually publicly listed and was making its baskets when Martin Sorrell came knocking. WPP was acquired because it had a "mature but not senile" (his quote) management, and which had a simple manufacturing process that regularly made money. This is because Sorrell wanted to use the company's public shares as a shell for his marketing company, and because he wanted to be able to issue debt against the company and have the company's profits service the debt (the basis for modern private equity). He took a 30% stake in 1985 along with his partner Preston Rabl. In 1986, it was renamed WPP Group, and in 1987, Sorrell became the CEO.
Sorrell specifically wanted to create a global marketing services company. He was previously the finance director of Saatchi and Saatchi, then the largest agency in its own right. At Saatchi, he was very influential and became considered "the third brother" (a reference to the two founding Saatchi brothers) (separate side note, Saatchi was eventually purchased by Publicis, a rival of WPP). After taking over WPP, Sorrell quickly found JWT (J. Walter Thompson). At the time, JWT was 125 years old and was a large (for the time), successful agency holding company. The reason JWT was purchased was almost entirely due to accounting. They owned a large building in Tokyo and depreciated it at 2.5% annually. At the time of the acquisition, the property was valued at nothing because of the accounting rules around depreciation, but was actually worth about $200M if you were to sell it. The offer for JWT that was accepted was $525M, meaning 40% of the price was in the delta between the accounting and real values of the real estate that it held.
JWT in hand, WPP followed its template of issuing debt on its operating business. This generally has the impact of allowing a company to grow but making it more susceptible to downturns (the company may not be able to pay its debt payments in this case). In 1989, it acquired Ogilvy & Mather for ~$850M. This acquisition was almost entirely debt - 50% was pure debt and 50% was "convertible preferred." As foreshadowed, in the early '90's, there was an economic downturn and the entire company had to be restructured because it couldn't make its debt payments. This generally has the effect of equity holders losing out and Sorrell's ownership stake was significantly reduced. That said, not long after that, IBM consolidated all its business with Ogilvy in 1994 and WPP resumed its successes.
In 1997, WPP launched a new internally-grown business - Mindshare. This focused exclusively on media planning, buying and research - at first focusing only on Europe and Asia. Mindshare expanded to the US in 1999 and has since become quite successful - one of the few organically developed (not acquired) elements of WPP. On the flip side, the company made over 30 acquisitions in 1998 alone. In 2000, it acquired Young and Rubicam for $5.7B - then the largest deal in the history of ad agencies to date. This deal brought the then 4th (JWT), 10th (Oglivy), and 11th (Y&R) largest agencies under one roof. It made WPP the largest agency holding company, a title which it held for one year when IPG overtook it. Not to be outdone, WPP continued acquiring and eventually reclaimed its title. This includes Grey in 2005 (which owned Mediacom). Indeed, being the largest agency is a genuine goal of WPP. Sorrell has stated “Maurice Saatchi used to say if you’re the best, you’ll be the biggest, which I have some sympathy for. There are other people who say ‘I don’t want to be the biggest, I want to be the best.’ That’s because they’re not the biggest.”
WPP created GroupM in 2003 to oversee its media agencies. GroupM now includes Mindshare, Mediacom (originally part of Grey, spun into GroupM in 2006), MEC (renamed in 2010 from mediaedge:cia, with CIA joining WPP in 2002 as part of WPP's acquisition of Tempus, a merger it actively tried and failed to get out of, despite outbidding Havas, because Tempus shares tanked before the deal completed), Maxus (originally used as a conflict agency, though not as much now), Xaxis (discussed below), Plista (now their native advertising group), and more. GroupM handles 32% of the world's media billings, making it by far the largest such group in the world.
The company has two programmatic buying arms, that function as its agency trade desks: Xaxis and GroupM Connect. Xaxis has its roots in 24/7 Media, an early internet ad tech platform that merged with Real Media and was eventually purchased by WPP. 24/7 operated largely as an ad network, whereas Xaxis was an organically developed, data-based marketing platform. They were merged in 2011 and have since focused on leveraging data with the non-transparent ad network model. GroupM Connect includes the programmatic buying unit (PBU) which operates on a transparent margin, as opposed to Xaxis. Agencies and brands can largely take their pick between the Xaxis model (if it works, regardless of margin, use it) and the PBU model (fixed margin, less proprietary tech). WPP has also made a series of technology investments, including Buddy Media (a Facebook page management platform), JumpTap (an early mobile ad network), and AppNexus (an rtb-focused ad technology platform).
The story of WPP cannot be separated from that of Sir Martin Sorrell. Despite owning 30% to start, he now owns less than 1.5% of the company (in part because of the restructuring, discussed above). He's doing quite well for himself though - both because the company is worth quite a lot, and because his compensation is substantial. In 2015, Martin Sorrell's pay package was $99M. When asked about the size of his compensation, he noted "[t]he problem is that we have been successful. If that is bad news, okay it's bad news, but we can easily deal with that by not being successful," (it should be noted that his compensation was based on share price, which had done quite well, so this was a bit flip but technically accurate). Sorrell is into his '70's, and while succession planning is underway, the company exists substantially because of Sorrell, who is an incredibly active manager to this day. Indeed, some are concerned that upon his no longer being able to run the company, it may not be able to exist in its current form.