Sir Martin Sorrell isn’t known to suffer fools gladly. And within minutes of sitting down I’ve managed to irritate him – and with reason; I’ve missed the point.
In referring to S4 Capital’s (LON:SFOR) recent spate of transactions as ‘acquisitions’, it seems I’ve completely misunderstood the ethos of the digital advertising and marketing company he chairs.
These transactions are mergers, he tells me more than once. “We are looking for people to buy-in, not sell-out. This is our philosophy,” he explains.
Much has been made of the fact he beat his former employer, WPP, to the punch with the €300mln swoop for the Netherlands-based digital production company Media Monks last year.
Bold first transaction
It was a bold first transaction and one that made doubled-decked headlines across the business pages here in the UK.
Possibly ignored in the hubbub was the template for that deal and subsequent additions to S4’s line-up.
It’s a simple, two-pronged blue-print. The founders and owners of these businesses were paid half the consideration in cash and remainder in S4 equity, which reflects Sorrell’s ‘buy-in’ philosophy with agency owners taking a stake in the larger business.
With Sorrell himself ploughing £40mln of his own money into the firm, it means everyone at S4 has skin in the game.
And, in a break with tradition for the media advertising and marketing industry, there have been no earn-out agreements, alleviating the worry of a mass exodus once the deferred payments have been distributed.
A break with the past
Rather than replicate WPP, the £11bn advertising giant he created with a holding company model, Sorrell is rolling up smaller agencies and merging them into one of two arms: an operation producing content, and a unit handling the programmatic placing of online ads.
And unlike the business Sorrell ran for more than three decades, S4 is “purely digital”.
If the traditional advertising and marketing model is in secular decline, digital is on the up, growing 20% year on year in the US in the first six months of the year.
Faster, better, cheaper
S4’s aim is to be “faster, better and cheaper” than the competition.
According to Sorrell, this means being more agile than the opposition.
It also requires having a better understanding than its peers of the big fish in the digital ecosystem such as Google, Facebook and Amazon, while also being leaner, smarter and slicker than the established firms.
Sorrell bristles at the suggestion he was a late convert to the new, digital-only world of S4, saying there was no damascene conversion.
“Even when I was at WPP, the advantages of being purely digital were there to see,” Sorrell said.
At 74, there is no sign of the drive and desire diminishing as he has helped mould a company that in 18 months has grown to employ 1,850 people in 23 countries.
Sorrell talked to Proactive shortly after unveiling the merger of Media Monks with Firewood Marketing, Silicon Valley’s largest digital marketing agency, which counts Google as its biggest client.
In an era where tech and data firms are routinely valued at 10-times revenues, S4 is paying just over two-times expected sales.
Firewood, Media Monks and the programmatic business MightyHive (the three pillars of S4) were all brought into the fold on roughly the same terms – realistic one-to-two-times revenue, or five-to-10-times EBITDA.
You can see why investors have been happy to fund these deals; because Sorrell and his team have been buying in a lot of growth.
S4’s organic revenues were up 42% in the first-half and have accelerated since. “We will do 50% for the full year,” Sorrell says.
Being more agile than the competition and knowing the digital landscape better than the opposition has put S4 in the box seat when it comes to unearthing some real gems.
“We look for top-line growth; we look for margin; we talk to people and listen to what people have to say. We talk to them about where might be the best places to buy,” said the S4 chairman.
He’s coy about the identity of the next ‘merger’ candidate, but you sense Sorrell has a lot on the back burner.
If the traditional hotspots for marketing and advertising tended to be Madison Avenue, New York and London’s West End, then S4 reflects the shifting axis of power with its largest “nodes” in Amsterdam and northern California.
It’s still a fairly diversified business that should be little affected by the issue of the UK’s exit from the EU, which has split the nation and threatens to harm home-grown businesses.
In a sweet spot?
“We are well-placed for Brexit, whatever form it comes in,” says Sorrell.
“We are in the ideal spot.”
More like a very sweet spot from the perspective of the so-called “legacy” marketing advertising giants such as WPP, Publicis and Ominicom, which are struggling with the structural rather than political carnage created by a dying model.
“For the moment, and I think for the foreseeable future, we have a very interesting digital ecosystem,” says Sorrell.