The Sorrell Stratagem

MARTIN SORRELL PUTS HIS OWN MONEY WHERE HIS MOUTH IS. IT NEARLY COST HIM WPP, BUT NOW THE ADVERTISING GIANT IS WORTH pounds 6.5BN (AND HIS TAKE IS A TIDY pounds 110M)
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The Independent Online
Fast back eight years. Britain is in the depths of recession and with companies across the developed world slashing their advertising and marketing budgets, the advertising industry is in a state of deep despair. At WPP the mood is worse still. Barely a day goes by without a fresh call for Martin Sorrell's head. Built from scratch into one of the world's largest advertising groups through fast-moving takeovers, the group now languishes under a mountain of debt, its shares are flat on their back, and Mr Sorrell, its chief executive, is accused of destruction of shareholder value on a heroic scale.

Now fast forward to the present. WPP is one of the swiftest-growing companies in the FTSE 100, Mr Sorrell, having survived the lynch mob, is more than pounds 100m richer, he's lauded wherever he goes as one of the great advertising and marketing gurus of our age, and the City is so much in love with him that it is preparing to rubber stamp a second gold-plated share incentive and remuneration package for this one-time pariah.

Mr Sorrell has learnt from the experience. From WPP's comfortable, if crowded, headquarters in a quiet mews street in London's Mayfair, Mr Sorrell is these days less exercised by the mega-deal ambition that drove him in the highrolling Eighties, and more with navigating the broad challenges thrown up by the Internet and globalisation.

"Every CEO wants the power of a global company with the heart and soul of an entrepreneurial company," he says with the conviction of someone whose intellectual punch was developed first with an economics degree at Cambridge then with an MBA at the Harvard Business School. "You don't want to be big and slow. But you want to have all the resources at your command and you want to be lively, fast, fit, friendly and flexible. That's what WPP is about."

Away from the slick, designer suits of the advertising world and his rather more conservatively pinstriped backers in the City, Mr Sorrell is more likely to be perceived as the archtypical fat cat than as a relentlessly driven, even visionary leader of one of Britain's top companies. The inevitable cries of fat cattery came in September when he surpassed the final hurdle of an extraordinary five-year stock incentive scheme that netted him pounds 25m for an investment of pounds 2m.

With WPP stock soaring 47 per cent in the past three months, his stake of more than 13m shares, including investment plan performance shares, is now worth pounds 110m. And that could rise even further under a new investment plan for Mr Sorrell and 15 top executives. They have invested pounds 12m, half from Mr Sorrell, that could eventually yield pounds 63m if share price targets are met.

Mr Sorrell has a direct, and not unreasonable, response to the newspaper headline writers. "My much-maligned incentive program has me putting my money where my mouth is." In Mr Sorrell's case, the original pounds 2m would have been lost had WPP stock plummeted, making his scheme unlike traditional executive share options that involve no investment.

"I have a fundamental problem with options," he says. "I agree with what Warren Buffett said years ago. He wouldn't give institutions a cost-free call on his stock, so why would you do that with management?" He also points out that more than 10,000 of WPP's staff of 33,000 have incentive plans which generated $11,000 or more in the past two years for each employee. On top of that, he claims 100-plus employees have become dollar millionaires.

Yet it is probably Mr Sorrell's kangeroo-like rebound from near-bankruptcy in the early Nineties, after a period of debt and share-fuelled expansion, that most rankles City critics. From a low of 26p in 1991, WPP stock has risen 32-fold. And since the five- year performance plan was introduced in 1994, WPP stock has outperformed every FTSE 100 company bar Vodafone Airtouch.

Starting from a one-room office overlooking Lincoln's Inn Field in 1985, Mr Sorrell and early investment banking partner Preston Rabl set out to built a global advertising and marketing communications group from scratch. Each invested pounds 250,000 to take control of what was then a shopping- basket maker, Wire and Plastic Products. Shares in WPP were then used to buy up a sequence of small, direct-marketing and communications firms. As finance director with Saatchi & Saatchi during its 1980s heyday, Mr Sorrell had won respect in the City for being the numbers man who focused on profit margins, and there was plenty of backing for his grand design.

The WPP share price rocketed, giving Mr Sorrell a valuable acquisition currency with which to buy other companies. The process culminated in the late Eighties, when WPP moved onto the ad world's centre stage in Manhattan, shelling out $1.4bn to buy, first, J Walter Thompson (JWT), then Ogilvy & Mather (O&M). To begin with, the formula worked like a dream. This was the highrolling Eighties and when WPP made its $563m cash bid for JWT, the stock market was electrified. At the time WPP had a market capitalisation of just pounds 25m and the hugely ambitious nature of the takeover was just what the times seemed to demand. But that reaction turned to horror less than two years later when Mr Sorrell horribly overpaid for O&M.

On top of the overpayment came the recession of the early Nineties. The company had more than pounds 1bn in debt to service but revenues were shrinking fast. A debt rescheduling in 1990 proved insufficient and in 1991 Mr Sorrell had to agree a humbling debt for equity swap. Over the next two years, Mr Sorrell got added financial breathing room through a rights issue and a share reorganisation, but in truth he was lucky to survive. Only the support of his bankers kept him from the firing squad of angry investors.

He admits the experience changed his approach and led to greater concentration on minimising risk in group finances. "It may be having gone through that fairly brutal period I have become more cautious, who knows?" he says. "If you go through that sort of experience, it's only natural you would be much more cautious."

The intervening decade has won handsome rewards for the WPP shareholders who stuck with him through the dark days. Abandoning big acquisitions, Mr Sorrell has year after year wrung out ever- greater profit margins, while expanding at low cost into fast-growing emerging markets. "I think we've got all the resources we need, geographically and functionally, to develop our range of businesses," he says. "We certainly find in America that acquisition valuations are quite strong. We find (acquisitions) easier outside America."

Aside from global ad agency networks such as JWT and O&M, WPP includes more than 60 communications, marketing and information consultancy businesses, operating in 92 countries. Now worth pounds 6.2bn, WPP still reflects Mr Sorrell's original vision to offer clients a fully integrated service ranging from advertising creation and buying to direct-marketing and strategic consultancy for fast-growth business sectors such as health care and technology. The group also encompasses public relations with Hill and Knowlton, economic forecasting through The Henley Centre, as well as branding and corporate identity through consulting arms.

In recent years, WPP has fallen to number three in size terms, behind the US giants of Interpublic Group and Omnicom Group, but Mr Sorrell is far from perturbed. "The size of our business is not a problem," he says. "I don't feel any great pressure." Nor, perhaps, should he, given that WPP is now virtually debt-free, consistently beats growth targets, and is spending surplus cash flow on share buybacks.

Despite this more conservative approach, one long-time adviser notes that Mr Sorrell still commands attention from his Madison Avenue rivals. "They have a combination of respect and fear," says Rupert Faure-Walker, an investment banker with HSBC who has advised Mr Sorrell since the early years. "He's gained market share, and raised margins."

That goes against the grain of the traditional public conception of advertising, perhaps best encapsulated in the image of flamboyant creativity nurtured by Mr Sorrell's former bosses, Maurice and Charles Saatchi. "The problem with our business is that people don't take us seriously," Mr Sorrell says ruefully. "They think advertising is a bit of an offshoot from show business." Getting rid of that perception has been one of Mr Sorrell's overriding objectives.

As advertising growth has slowed, owing to price inflation in traditional media, notably network television, Mr Sorrell has embraced higher-growth communications services such as consultancy, public relations and specialist communications. Non-advertising services, growing at above 10 per cent annually, will soon account for more than half of group business. Mr Sorrell also envisages a future WPP whose revenues will be split roughly equally amongst Europe, the US and emerging markets rather than the current 40:40:20 per cent split.

Now Mr Sorrell is consumed by the challenge of the Internet. Despite the handicap of being London- and New York-based, he was quicker than most to understand how big an impact the Net would make. WPP already leads the industry in new media, having invested in Wired Ventures four years ago, following with minority stakes in a host of other new media businesses. Units such as Mindshare and Miller Brown Interactive are expected to generate more than $100m in pure Internet revenue this year.

Even so, Mr Sorrell is worried about the destabilising effect on his business of the online revolution. "Lack of proximity to Silicon Valley is an issue," he says grimly. "You even see it in the US. East coast people don't get it as well as west coast people."

In response, Mr Sorrell has developed a two-pronged strategy. WPP business units are encouraged to embrace the technology as rapidly as possible. In addition, WPP has made direct investments in companies such as Broadvision, which Mr Sorrell believe have potential. WPP has also spent several million dollars investing in venture funds with clients.

Mr Sorrell still frets. "It's a gold rush and it's very destabilising," he says, pointing out that web-based businesses remove the traditional distinction between wholesale and retail, serving to "disintermediate" established businesses with a lower-cost business model.

Worse still, he laments, venture capitalists steal a company's best people with fat, incentivised remuneration packages. "I think it is spreading quite rapidly," he says. He expects the new employment system will soon hit Britain.

The Internet's radical challenges are here to stay, Mr Sorrell believes. "You can't dismiss it as a financial bubble. What's fundamentally changing is the way we do business, the way we communicate, the way we live our lives."

In some respects, there is nothing new in the present revolution. Mr Sorrell says; "David Ogilvy not only pioneered the modern ad agency, but also ventured into other forms of managed marketing communications such as direct mail. In a way, he was the grandfather of the Internet because he understood one-to-one personalised commun- ication was important. He understood the basic strategic shape of what was happening."

If Mr Sorrell seems clear on what the Internet means for WPP, he remains well-removed from the state of paranoid alert advised by technology gurus such as Andy Grove, chairman of Intel. "It never pays to think of these things as either/ors," he says. "It pays to think of them as supplemental, complementary, sometimes competitive. The key is get people thinking about it."

And thinking about his people, WPP's global workforce, occupies most of Mr Sorrell's waking hours, he says. "Our attitude to the business of WPP is different from unitary branded competitors like Omnicom. You have to be multi-branded to deal with issues of conflict, and also because tribal values in our business are very important. People like to belong to clubs."

"I think large companies in our industry have difficulties - we are really 60 or 70 tribes and if you stimulate those tribes, that's to your benefit. Trying to co-ordinate them is more difficult. But I'd rather have strong tribes more difficult to pull together, than one big amorphous, elephantine company which is slow and dull-witted."

Mr Sorrell's model for the perfect business culture is drawn from the ranks of other "people" businesses such as investment banks and consultancies.

"McKinsey, Goldman Sachs, JP Morgan - the business models they have are phenomenally sophisticated. The basic business model they use, that rewards are distributed on the basis of co-operative behaviour, is a model we have to follow. Everybody in our group, whether they are with Ogilvy, JWT or Hill and Knowlton, should be calling on all our resources to address any problem or client opportunity they have.

"We have the greatest retail knowledge of any company in our industry. We have more knowledge of advertising, public relations and retail design than anyone else. We should never lose a pitch for a retail piece of business."

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