The sagas of WPP Group and Saatchi & Saatchi, which had been moving in lockstep since Martin Sorrell embarked both London-based institutions on a policy of buy high, h" />
The sagas of WPP Group and Saatchi & Saatchi, which had been moving in lockstep since Martin Sorrell embarked both London-based institutions on a policy of buy high, h" /> Pound foolish, shilling wise <b>By Richard Morga</b><br clear="none"/><br clear="none"/>The sagas of WPP Group and Saatchi & Saatchi, which had been moving in lockstep since Martin Sorrell embarked both London-based institutions on a policy of buy high, h
The sagas of WPP Group and Saatchi & Saatchi, which had been moving in lockstep since Martin Sorrell embarked both London-based institutions on a policy of buy high, h" />

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Pound foolish, shilling wise By Richard Morga

The sagas of WPP Group and Saatchi & Saatchi, which had been moving in lockstep since Martin Sorrell embarked both London-based institutions on a policy of buy high, h

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Accounting for Saatchi’s posted loss was a $858-million write-down of goodwill. As his swan song, Saatchi’s outgoing chief, the Frenchman whom Wall Street calls “Dreyfthe-Hyph,” considered writing off all of Saatchi’s $1.2 billion in accumulated goodwill–an accounting construct that has nothing to do with the actual health of a company.
Over at WPP, meanwhile, ceo Sorrell, rather than write off the past, re-enacted it. He announced another rights offering, one big enough to test the optimism of even his strongest supporters. For every five shares already owned, WPP shareholders will soon be allowed to buy four more. Of course, if they elect not to exercise this right, then’ WPP holdings will be diluted by nearly half.
Since this is the mechanism that bankrolled Sorrell in the first place, which in turn caused WPP’s share price to fall further than most meteorites, the announcement of yet another rights offering gave cause for pause. But, as one analyst says, Sorrell isn’t up to his old tricks so much as down to his last one. “In for a penny, in for a pound–that’s got to be what they’re thinking.”
What they’re not thinking is options, for, at this point, Sorrell & Co. haven’t many. The company must pay back $150 million in debt by July ’94, and, despite surprisingly strong operating profits (up 40% to $95 million), operations alone won’t make it.
“The bankers have obviously refused to give them more credit,” continues the analyst, who asked for anonymity, “which means they must either sell off specific assets or sell more securities.” The former is not only unthinkable (it has taken Sorrell two years and counting just to divest of Scali, McCabe, Sloves), but impractical. Who, in this environment, would buy?
Here, too, the sagas diverge. The Saatchis, by bringing in Dreyfus in ’89, rid the company of political encumbrances. The Frenchman, accountible to no person and beholden to no plan, could slash and burn with abandon. Or, as Alan Gottesman, the PaineWebber analyst, puts it: “He was free to determine who and what to get rid of. Once that was done, all that was left was execution, which he did with relative dispatch.”
It helped, of course, that Saatchi’s now infamous shopping spree, which pre-dated Dreyfus, left the company chockablock with enterprises of only the slightest connections. Consultancies had been acquired, objets d’art collected. (On explaining a nonrecurring item for which the company reported a $2.6 million gain, Dreyfus remained completely deadpan last week when he said, “Charles continues to do a good job of selling art for us.”) Then, too, who can forget the brothers’ stunning foray into merchant banking?
“Overly eclectic” is how Gottesman describes the resulting agglomeration. “By comparison,” he says, “Sorrell’s strategy was always much more coherent . . . . You can’t point to any one operating unit and say it doesn’t make strategic sense. That doesn’t mean, however, they all make economic sense.”
Sorrell’s major sin, to be sure, has been to pay too much for his acquisitions. His obsession with agencies, which be* gan during his tenure as Saatchi’s cfo, was compelling enough to send him out on his own. And it was convincing enough to draw investors, and bankers, to his cause.
Even if the bankers have since abandoned Sorrell, Jim Dougharty, an agency analyst at Dean Witter, contends it’s premature to make the definitive WPP/Saatchi comparison: “As humiliating as it has been, as embarrassing as it must be to go to bankers all the time, Sorrell has stayed the course. He has never hidden behind a front man.”
There’s even a chance, remote as it now seems, for Sorrell to emerge as a hero again. Indeed, the normally dour Dougherty puts the odds of this happening as better than even. ‘You’d be amazed,” he says, “how just a couple of percentage points on revenues can affect the bottom line and change expectations.”
Until that reputation-resurrecting uptick, however, the practical lesson of last decade’s acquistion frenzy would seem to come from Saatchi’s slash-and-burn Frenchman. “We in Europe and in Japan,” Dreyfus said just before making his industry exit, “should never forget that, when Americans start selling their businesses to nonAmericans, there’s a very good chance they’re selling for top dollar.”
Copyright Adweek L.P. (1993)