Why China still represents the big one for marketing investors
When we come to look back on 2013, I think it’ll go down as a busy year for M&A activity in the marketing communications sector. Despite – or perhaps because of – the still wobbly economy, businesses seem to be snapping up, or merging with other businesses with astonishing regularity; scarcely a week goes by without news of yet another significant deal being done.
China still attractive to investors like WPP
This week has been no exception. The big breaking news on Tuesday morning was the acquisition, by WPP’s digital marketing agency VML, of IM2.0, a Chinese digital advertising and media agency.
The deal, which was of course for the usual “undisclosed sum”, is subject to regulatory approval. Once the deal gets approval (which seems likely, according to informed observers) it will join VML, which is in itself part of WPP’s Y&R worldwide network of agencies. The newly-merged entity, which will be run by IM2.0’s management team, will be known as VML IM2.0, with immediate effect.
For the uninitiated, VML is in fact one of WPP’s most ambitious brands – earlier this year (19 July) my colleague Barry Dudley wrote in The Drum about VML’s acquisition of top South African digital agency Native, while it also opened outposts in Poland and Tokyo, both in June 2013.
IM2.0 is an interesting, and fast-growing, business. The agency – one of the top 10 digital shops in China – employs some 230 people in its Beijing and Shanghai offices. Domestic clients include China Merchant Bank and Haier, the fast-growing electronics group that makes everything from fridges to TVs.
Its unaudited revenues were 72 million Chinese Yuan (£7.37 million) in 2012. This is not an enormous amount of money but I suspect what piqued WPP’s interest was not just its domestic clients, but also the work it does for big global brands.
As well as its digital duties for domestic brands, IM2.0 provides clients such as Adidas, Dell and Mondelez (formerly the international snack and confectionery business of Kraft Foods, and which owns the Cadbury brand) with services such as online strategy, creative design, website development and maintenance, online campaigns, mobile application development, media optimisation and data analytics. It has always treated its clients as long-term strategic business partners rather than just 'clients'. This is interesting because this kind of attitude to business, and the work that goes with it, offers good margins and strays into consultancy.
And it’s important because – as my Green Square colleague Tony Walford has been arguing for some time – a threat to the 'traditional ad agency model' comes from management consultants like McKinsey.
In a globalised, permanently-switched-on digital environment, the big clients that the multinational agency networks that make up the spines of the big holding companies WPP, Publicis, IPG and Omnicom rely upon are looking for more than a billboard and a memorable TV spot; they’re after insights and long-term strategy. Sir Martin Sorrell, Maurice Levy, John Wren and the other grandes fromages of the ad world know this, and realise that the like of McKinsey, Accenture, Capgemini and KPMG would not only love to grab a slice of that client action, they’re actually quite well placed to do so.
This is a subject that deserves its own blog post (and we’ll be returning to it in the near future), but it’s worth mentioning here as it may give a clue to Sir Martin’s strategic thinking.
The foremost reason for buying IM2.0 is of course quite clear. In a statement released as the news broke, WPP said this acquisition marks a further step towards its “declared goal of developing its networks in fast-growth and important markets and sectors".
The group recently increased its target for the proportion of revenues from fast-growth markets and digital/new media to at least (previously up to) 40-45 per cent, over the next five years.
WPP companies (and its associates) have combined revenues of $1.4bn (£875.8 million) and employ 14,000 people in Greater China. In fact, after the US and UK, China is now WPP’s third-biggest market, and is likely to be second within the next couple of years.
By most estimates, WPP will spend about $640m (about £400m) in new acquisitions this year. Of the 40-odd acquisitions made thus far in 2013, five have been in China (and they’ve all been digital or consultancy-style outfits), and around 30 of the total acquisitions have been in emerging markets – everywhere from China and Thailand through to Argentina and South Africa.
This confidence in emerging markets presents an interesting contrast to some City analysts, who have in recent weeks called into question Unilever and Diageo’s strategies in emerging markets in Africa, India, Asia-Pacific and South America. But most of Sir Martin’s acquisitions have been in the digital and 'new media' spaces (last year, digital accounted for one-third, or $5bn, of all WPP’s revenues) as opposed to 'traditional' agencies.
And of course, whatever the analysts make of (say) Unilever’s adventures abroad, the City responded positively to the IM2.0 deal: WPP shares rose 2.3 per cent to 1,270p on the day, while so far this year the group’s stock has risen an impressive 43 per cent so far this year.
I can see why investors liked the IM2.0 deal. VML, and its 'parent' Y&R, have some massive brands on their books – the Premier League, Colgate-Palmolive, Virgin Atlantic, Danone, Kellogg’s and Microsoft among them – who would love to get their products in front of China’s still-burgeoning middle classes and the expertise (IM2.0 was named Chinese Agency of The Year 2013 by the Mobile Marketing Association) of the acquired team means that there is more likelihood of this happening.
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.