There’s been a lot of talk lately about "zombie companies", the living dead of developed capitalism. For those not familiar with the term it actually dates back to the early 1990s and the Japanese savings and loans crisis, but entered into popular business vocabulary with the post-Lehman meltdown of 2008/9. It was used to describe a company which, after covering running costs and fixed costs (wages, rent, admin), only had enough funds left to pay off debt interest (but not the debt itself).
Now it also has a politically charged meaning. In some quarters (including as august a journal as the FT), zombies are considered to have an unfair advantage through things such as government-backed financing breaks, versus their non-zombie competitors who have little chance of utilising such initiatives; and they’ve even been accused of holding back economic recovery. You can see why - according to research from the Institute for Turnaround, the not-for-profit management association, there may be up to 100,000 zombie companies in operation in the UK.
HMV, a company my colleague Andrew wrote about last month, was a kind of zombie company. In its current form, it has no hope of regeneration. A few profitable shops, such as the Oxford Street, London branch (which makes about £1.3m profit a year), might generate enough cash to keep the chain going but it had no chance of growth or development. A slimmed down, refocussed HMV supported by its suppliers (the music and movie industries, which would benefit from a “bricks and mortar” friend) with an appropriate funding structure has a chance, but the beast will have to be completely killed so that it might be reborn.
Nobody likes to see familiar names like HMV, Woolworths, Jessops, Blockbuster or Comet disappear from our high streets but, truth be told, they were all effectively zombies, working on out-dated business models and limping along on borrowed time.
Here at Green Square we have been hearing more and more businesses in the marcomms sector that could be termed zombies or are staggering their way towards becoming one. In some instances this is debt driven, for others its an inability to raise debt and then there are those whose products or offers are dying who are pulling off an arm or a leg from times to time in order to live a little longer.
The creative industry relies on a constant flow of new blood and new ideas to the system. As well as young, hungry people, it also requires start-ups. Start-ups not only generate new ideas and keep talent within the industry, they also help the big groups, the WPPs of this world, grow and develop. That might be by the giants acquiring the minnows, or just being kept on their toes by dint of a bit of healthy competition yapping at their heels.
Considering that the creative industries contribute an enormous amount to the UK economy (anything up to £100bn – or 6% - per annum, depending on which estimate you believe), with the medium-to-big groups doing most of the heavy lifting, this is of crucial importance. Start-ups are often disruptive and can do things established players cannot. Most importantly, they are small and thus not significantly burdened with debt and are still nimble enough to adapt to changing conditions.
Of course many start ups fail, but many do not – look at the success of Adam & Eve, bought by Omnicom last year for £60m. It was only set up in 2007, but it gained itself a stellar reputation and created some brilliant work. In the process the agency livened up the London scene and provided the big boys with much food for thought.
The two biggest deals of 2012 were WPP’s $540m acquisition of AKQA in July and then in December, Publicis buying out LBi for €416m – the latter deal was finalised last week. AKQA was one of most successful start ups the industry has ever seen, having grown from one office in 1995 to a leading global digital agency. LBi was also born in 1995 and has a more complex history but is no less swashbuckling, snapping up its competitors to become a 2,000 strong international digital operation.
Publicis announced this week that it is to combine LBi with its Digitas network to create one of the world’s biggest digital operations, with 5,700 employees in 25 countries.
It’s often said by uniformed observers that the holding groups are stale and over-leveraged. They could easily be, but Messers Sorrell, Levy and Wren know that they must grow and adapt if they are not to wither and become our industry’s living dead, which these moves demonstrate. And they also know that to grow, they must “eat” and snaffle up tasty morsels (as well as some bigger meals!) rich in the vitamins of growth – talent, ideas, capabilities, client lists etc. Publicis’ chief Maurice Levy has been one of the more ambitious of the digital empire builders. Since 2006 he has spent over $2.5bn acquiring digital capability, including Razorfish, Digitas, Rosetta, LBi and a host of smaller players. Last year digital accounted for over 30% of Publicis’ revenue (46% in North America) and Levy expects it to constitute more than 50% by the time this year is up.
Levy and co. know that he future will be largely (if not entirely) digital and this is where they must be – and if they don’t already possess the means to seize the digital future (which is actually already the digital present) then they must acquire it. The number of independent big fish still swimming free in the pond is diminishing, but new start ups will hatch and eventually be snatched up. The land grab goes on, and losers in the marcomms “scramble for Africa” will have a zombified future to contemplate.
Barry Dudley is a partner at Green Square, corporate finance advisors to the media and marketing sector.
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