OUTLOOK: Is Saatchi bigger than the sum of its individuals?

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The Independent Online
The time to buy shares, according to the old Rothschild adage, is when there is blood in the streets. It takes a deal of investment nerve to do it, but catching equities as they bounce off the bottom - and when the herd is going the other way - ca n be extremely lucrative. Those who have braved their way into the bloodbath that is the market for Saatchi & Saatchi shares in the past few days have proved the old adage once again.

It is no great surprise that those leading the charge in this case are the macho fund managers at PDFM, the old Phillips & Drew fund management business, now part of Union Bank of Switzerland. PDFM prides itself on its aggressive fund management style. It paid off in Enterprise Oil's abortive bid for Lasmo last year, when PDFM sat on a big chunk of the target company' shares and swept up most of the cash on offer in Enterprise's controversial dawn raid.

PDFM has certainly made a tidy profit on the 4 per cent of Saatchi and Saatchi it bought last week. Saatchi's shares traded at 93p at one point last Thursday as the full extent of staff and client defections emerged. Yesterday they closed at 117.5p, a rise of more than a quarter.

We don't know when PDFM first started building up its position in Saatchi, so it may still be nursing an overall loss. The shares are still well below the price they were before the ousting of Maurice. But, in a climate where nobody is really sure what is going on at the company, there is obvious upside potential to be had from betting that the company will outlast the presence of its founders.

PDFM's little coup is not yet in the same league as the rewards that Peter Gummer scooped up for supporting Shandwick when it was languishing at 2p in 1992 - the shares are now 20 times that - but added to PDFM's deft handling of Enterprise's bid for Lasmo, the bounce in Saatchi shares shows the money-making scope in corporate disasters.

The volatility of Saatchi's shares over the past month underscores an important point, however, in investing in people stocks such as Saatchi. The shares have bounced around so much because no one really knows - and nobody probably can know - how much ofthe company's business is going to walk out of the front door this week.

British Airways and Mirror Group Newspapers probably account for less than 2 per cent of Saatchi's revenues, but Mars could take that up to 5 per cent and who knows which other companies might join Dixons in reconsidering their position. That said, the bulk of its revenues still come from the United States and the agencies that Saatchi bought in its disastrous acquisition spree in the late 1980s. How many - if any - of the agency's transatlantic clients give two hoots for the Saatchi name or for the London creative geniuses who have flounced out in the past week remains to be seen.

That makes forecasting profits pure guesswork. As one analyst admitted yesterday, his estimate that 1995's profits would be roughly the same as his 1994 forecast of £32m did not involve a great deal of science.

When investing in companies with no assets and a surfeit of egos, it is important to guage whether the company is bigger than the sum of its individuals. J Walter Thompson probably is; Saatchi, for all Maurice's success in peddling the idea of branding to his clients, has yet to demonstrate the same trick.

On most measures Saatchi is indeed good value at its current level. Its revenues, for example, are almost twice as high as WPP's in relation to the size of the business, which indicates its potential for profits growth. It is not expensive on a traditional earnings multiple.

But any people who are contemplating following PDFM's lead should go straight to their stockbroker and ask him for a set of share price charts showing the performance of Aegis, Fitch, Shandwick, WPP and Saatchi over the past 10 years - all dominated by individuals, and all of them in their time complete disaster areas.

If they had invested £5,000 split evenly between the five companies at their peak, they would now have the grand total of £465. Businesses that do not need access to the capital markets should not be public companies, and those who invest in them should do so with their eyes open