WPP after Martin Sorrell

More than any other holding company, WPP is linked to its "founder" (the company technically existed in a separate, irrelevant form previously - as we wrote about in our history of WPP). With the recent surprise announcement that Martin Sorrell would be leaving the company, the future of both WPP and agency holding companies generally are worth considering. Agency holding companies substantially owe their existence to Sorrell, and WPP was the first true financial acquisition vehicle of other agencies, with its former CEO leading the charge at every step of the journey. 

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WPP grew to be the world's largest agency holding company. Size was a goal and it was achieved through Sorrell's high-touch management in many parts of the business. He was intimately involved in assembling the company as it stands, including creating the certain units that were developed in-house and acquiring and integrating the rest. Sorrell served as a liaison across a highly complex set of businesses and helped it achieve a relatively high level of coordination. In fact, a certain amount of the enterprise value of WPP could be considered to flow directly from the synergies that disparate businesses were able to achieve because of his careful orchestration (the stock price dropped 6% upon his departure). Yet he was also a dominant force and likely placed certain constraints on how different business units operated. In a post-Sorrell world, it is likely that the far-flung assets of WPP will act as a looser federation - with more coopetition among its own units. 

Currently the company is being run by co-COOs. The first is Mark Read, the CEO of Wunderman (a digital-first agency that is part of Young & Rubicam) and former CEO of WPP Digital. Read was a member of the WPP board of directors for several years. He both understands the complexities of WPP's global business and is intimately familiar with digital, where the company needs to be focusing. Read had been mentioned outside of recent events as a potential successor to Sorrell. Andrew Scott is the other co-COO and was the former COO for WPP in Europe and head of WPP M&A. Scott has grown has stature within WPP internally and is respected for high quality financial operations that respect the human components of the work. Both will report to the chairman of the WPP board, Roberto Quarta, until a new CEO is in place. Read is leading the client work while Scott will focus on operational and financial performance. There is an official search under way, but it wouldn't be unreasonable for it to conclude with Read on top and Scott as his number 2. 

Some in the media have speculated that the company may divest material portions of the business or even cease to operate in its current form as a massive holding company. From a timing perspective, no material changes would be likely happen until a permanent CEO is nominated by the board. That said, among the most likely changes would be the sale of Kantar, the digital research group - with Nielsen being a likely buyer. An alternate direction for the company might be a stronger investment in business operations, as some of its competitors have done. Publicis, for example, is moving forward with its integration of Sapient - a broader digital consulting company that it purchased for $3.7B, while Omnicom runs the Sellbytel Group, an outsourcing business that represents roughly 10% of its employees. 

Media observers have also predicted more extreme outcomes, including the equity research company Natixis noting that "WPP now looks even more likely to be broken up or taken over." Omnicom has been mentioned as a potential acquirer of at least some WPP assets. Others have noted that Sorrell was the main force holding the company together, and now that he has left, shareholders may have more control to divest at least some assets. Analysts have valued the health and digital divisions alone at more than the current overall value, should they be spun off. There have also been guesses that the company might sell the PR group, though these are less supported.

The world of agency holding companies is facing a number of headwinds. Most noteworthy among these are: 1) trends towards zero-based budgeting, in which brands justify every dollar of marketing spend, often meaning slower marketing growth, in turn impacting agency takes that are often tied to overall marketing spend, 2) the overall margin compression (in many ways, a continuing result from the K2 rebates report a few years ago), 3) competition with consulting companies, 4) increased dominance of the duopoly and their movements brand-direct, 5) publisher content studios competing with creative agencies, and 6) in-housing of media buying. 

Holding companies arose to leverage economies of scale and to handle and separate potentially conflicting clients. Further synergies through the vertical integration of creative and media buying drive additional value. Yet the overall structure of holding companies arguably has not adapted to reflect the realities of a quickly changing industry. It is possible that WPP may emerge a leaner agency with a stronger focus on growth areas and less interest in size for size's sake - especially as digital has diminished some of the buying power of agencies. This, in turn, may begin to change the agency holding company business entirely.