What Do Analysts Think About the Publicis Groupe-Sapient Deal?

It's pricey for the holding company but adds value

Advertising analysts see Publicis Groupe's move to acquire digital player Sapient for $3.7 billion as a bold move designed to jump-start growth and even venture into Accenture's world of technology consulting.

The acquisition price, however, is high and values Sapient at 14 times its earnings before interest, taxes, depreciation and amortization. Several analysts wonder if the return on that investment will be as great. Also, such an outlay would limit Publicis Groupe's ability to buy back stock—something that the company signaled a desire to do before unveiling the deal this week.

"The acquisition will dash hopes of greater cash returns, which bulls have pushed for, and there will be some concern [that] this could be a panic buy," noted Liberum analysts Ian Whittaker and Lisa Hau. "Our concerns revolve around fears that Publicis may be falling behind other agency groups in an environment where secular issues are mounting."

Others echoed that concern, particularly in the context of the company's meager third quarter results and failed union with the larger Omnicom Group.

"With the core Publicis business struggling with recent account losses and an aborted merger, it appears that this acquisition of a high quality digital asset is a bold attempt to kick-start growth," wrote Nomura's William Mairs. "However, with the deal unlikely to cover the cost of capital for several years, questions will be raised over management's ability to appropriately allocate capital. Much will now depend on successful integration of the business and if this does drive top line acceleration."

More succinctly, Exane BNP Paribas' Charles Bedouelle said: "We would have preferred to see Publicis solve its operating issues before embarking on a large deal."

That said, many see strategic value in adding another big digital player to a portfolio that includes DigitasLBi and Razorfish. In fact, Publicis Groupe wants Sapient to oversee that digital group as Publicis.Sapient, with current Sapient CEO Alan Herrick at the helm.

In a report titled, "Publicis, the New Accenture?," Natixis analysts Jerome Bodin and Pavel Govciyan said the deal underscored the holding company's "leadership in the field of consulting and integration for digital."

The duo added that "size is important in the field of technology consulting, as it makes the group indispensible for service providers (software vendors in particular) and therefore enables it to sign the most favorable partnerships. Publicis is thus gradually becoming for digital advertising what Accenture is for IT."

A closer look at Sapient

Analysts also provided a detailed picture of Sapient's three units and their revenue. Here are some highlights:

  • Collectively, SapientNitro, Sapient Global Markets and Sapient Government Services will generate an estimated $1.35 billion in revenue this year.
  • SapientNitro supplies about two-thirds of that revenue with the other third coming from global markets (28 percent) and government services (5 percent).
  • Most of Sapient's revenue comes from the U.S. (63 percent), followed by Europe (27 percent), with the remaining 10 percent split among the Asia-Pacific region, South America and other parts of the world.
  • Almost two-thirds of Sapient's 13,000 employees work in India, with the next largest chunk (24 percent) operating in the U.S.
  • The bulk of Sapient's clients are within the consumer, travel and automotive sectors (42 percent), followed by financial services (31 percent), government and healthcare (11 percent) and energy (9 percent).