Publicis-Sapient buyout analysis: The deal no one saw coming is about reach, not scale
Wow – nobody saw that one coming. It’s not every Monday morning one wakes up to discover that one of the biggest deals in the history of advertising has just been agreed, and kept so secret. The first most of us knew about this was a piece on the Wall Street Journal’s site yesterday evening (Sunday 2 November).
Publicis' Maurice Levy
What am I talking about? As everyone should now know, Maurice Levy’s Paris-headquartered Publicis Groupe has agreed to buy (or merge with, depending on you point of view) US-based Sapient for $3.7bn – in cash.
According to reports, the boards of both parties have agreed “unanimously” to the merger/takeover, so it looks a done deal. Once the paperwork is signed, Sapient will be delisted from the NASDAQ and subsumed into the Publicis Groupe (although Sapient co-chairman and CEO Alan J Herrick will become CEO of a new entity, Publicis.Sapient, which will also include Publicis’ existing digital businesses).
That $3.7bn is a huge sum, and represents a massive premium. Reported profits for Sapient last year were only $86m on turnover of £1.36bn, although Bloomberg’s market analysis was more flattering, indicating a normalised EBITDA of $160m. But whichever way you look at it, it’s a huge premium – in fact, it’s a doubly huge premium, because Sapient’s market value just before the deal was announced was $2.46bn. So Levy is in effect paying one-and-a-quarter billion dollars more than the market thinks it’s worth and almost three times turnover.
Sapient is a very good company; it’s been in the digital space since prehistory (1990!), employs some of the best suits and creatives in the business and has great clients like Audi, Coca-Cola, M&S and Target on its books. But is it worth a premium of about 44 per cent on the shares? And why has Maurice paid so much, and what does it all mean?
First of all, to turn to the second question, it means that there will be no revisiting of the failed Publicis/Omnicom merger (if it was unlikely before, it’s impossible now).
When the “Publicom” deal collapsed back in May, many of the merger’s critics (who were numerous, and very vocal) said that it was all about ego and legacy-building and nothing to do with adding value for shareholders. Over the past six months, as the dust has cleared and there’s been time for calm reflection, it’s becoming clear that there were actually some legitimate reasons for considering the merger, even if it was too unwieldy and there were too many cultural differences to overcome.
The two good reasons for the deal were, from Omnicom’s position, to increase its capability in digital and, from Publicis’ side, to increase its presence in the US, where it has never been particularly strong. Despite the rise of China and other territories, the US is still the biggest and most important advertising market of all.
In acquiring Sapient, Publicis now has an enormous bridgehead to build its business in the US and, more importantly, it can do it digitally, which is really what matters. Publicis’ acquisitions in digital over the past two or three years have been very canny, if a tad expensive – LBi, $450m; Rokkan, $575m; Rosetta, $575m; Razorfish, $530m; Digitas $1.3bn; plus Chinese social media agency Nettalk for an undisclosed sum, but likely to have been in eight figures.
Now, it could be argued that Publicis has already got very good digital capability Stateside with the likes of RGA and Rosetta, and that this deal is just more of the same. There’s something in that, but I think Levy is thinking more long term – and I’m not just talking about his desire to leave a legacy when he steps down in the next two or three years.
What he’s really thinking about is parking his tanks on the digital lawn. I’m willing to be corrected, but I believe that Sapient’s digital unit, SapientNitro, is the largest shop remaining outside one of the big international groups. As prizes go, it was just about the most glittering one still up for grabs; this morning Levy called it “the crown jewel in the quest for digital business”.
And it will fit in very nicely with its existing digital businesses, Razorfish RG, Rosetta and Digitas LBi, creating a real digital behemoth that will have Omnicom, WPP and IPG fretting and, perhaps, looking around for properties of their own. However, I’ve no doubt that Sir Martin Sorrell will say that he is sticking by his strategy of making organic acquisitions in new spaces and in new territories, as he did when the Publicis-Omnicom merger was announced last year
What’s really interesting about this deal for me though is the thinking it represents. In a world and an industry increasingly disrupted by technology, it’s long been assumed that everyone had to attain scale to survive – hence the rash of M&A and consolidation activity we’ve seen over the past decade. The Publicis-Omnicom merger was, to a degree, all about scale: being the biggest agency with more of the best people with the biggest blue-chip clients. But building an entity of that size was always going to be fraught with political and cultural dissonance, client conflicts, regulatory hurdles and infighting.
So, while scale is an important factor in Publicis’ thinking here (consolidation should save it about $50m a year in costs), I think reach is more important. In business, scale and reach are two different things. In marcomms, it’s about putting your clients where their customers are and, at the moment, when said customers are going to be most receptive and responsive to messages. It’s all about helping your clients get to, and grow in, new markets.
So, while Publicis.Sapient will be the world’s largest digital agency ($8bn in revenues, 75,000 people worldwide), it will also have the widest reach – in all the world’s important markets, strong in all digital channels and disciplines including mobile – together with a client book full of companies both strong in digital marketing and requiring a helping hand. It can help clients move into new areas: Pubicis’ digital agencies could prove particularly attractive for, say, Chinese brands wanting to break into America and Europe, and help them cut or consolidate costs.
When scale and reach are combined, you have power. And as the likes of Google and Facebook try to lure clients away from agencies in order to deal with them directly and grab a larger slice of the marcomms pie, Publicis is now in a better position than arguably anyone else to stand up to the aforementioned tech giants.
Sapient has always been strong on strategy, and this could in the long term be Publicis’ ace in terms of building new business and boosting its revenue streams. As I’ve argued before, in a digital world creative is in danger of being seen as a commodity, while strategic thinking is highly valued by clients looking to cope with the digital revolution.
Some time ago, Levy told investors and the media that he wanted 50 per cent of Publicis’ revenues to come from digital by about 2018. In its third-quarter results announcement last month, Levy announced the figure was 41.6 per cent. After snapping up Sapient, some observers reckon that this target could be met as soon as next year – three years ahead of schedule.
This means that while Publicis is not the largest global agency group (WPP still holds that trophy) it is best-placed to survive in an increasingly digital and increasingly mobile world.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector