S4 Capital's chief growth officer, Scott Spirit, is no stranger to acquisitions, having been involved in merger and acquisition strategy during his time with WPP. Spirit (pictured) spent more than 14 years with WPP before joining Eureka AI for about a year as MD – business development. He reunited with former WPP founder and CEO and S4 executive chairman Martin Sorrell in July last year when he joined the agency as chief growth officer.
On the latest episode of Marketing's "Connected" podcast series, Spirit gives listeners the low-down on what it’s like to work with Sorrell once again. In an excerpt from the podcast episode titled "Survival Instincts: Working with Sorell (again) and S4’s spirit of acquisition", Spirit also shares takeaways from the acquisitions he has experienced and tips for independent agencies that are looking to be acquired. You may listen to the full episode here.
Marketing: Among the list of firms that S4 has acquired over the past two years include MediaMonks, White Balance, Prop Media Paramount Pictures, and Circus Marketing. What were some of your takeaways during this acquisition journey, as well as challenges you faced?
Spirit: In terms of key takeaways, I think the main one for me, which is maybe a bit different from our prior experiences, is the emotional and sort of qualitative side of that journey. Appealing to those entrepreneurs and getting them to buy into our strategy at S4 and our deal structure, which is really different and come on that journey with us. We have this kind of empty holding company mentality, I guess.
The companies that have joined us all really share that belief. I think they want to build a new approach. I didn't want to sell out or exit the companies in the traditional model. Our deal structure is half cash, half stocks. You really have to believe in S4 and believe in your ability to build on that if you're going to take half of S4’s capital stock as compensation for the deal. So that’s quite a different conversation. It’s definitely more kind of a philosophical conversation than more kind of technical evaluation conversation that form a part of any other deal.
I wouldn’t say that’s been a challenge. It’s definitely been something new. Probably something refreshing actually and I have enjoyed it. But it's definitely different.
Marketing: The acquisition journey is not clear-cut and the truth is, sometimes the smaller guys don't know what they are getting into or they don't know who the right guys are to partner with. Everyone talks about culture and fit, but that is only part of the iceberg. What advice do you have for independent agencies when it comes to valuation and knowing how to price your business?
Spirit: I would disagree actually. I would say that valuation is probably the tip of the iceberg and that culture and fit is the big 90% or whatever of the iceberg that’s floating underneath. I think we have a bit of a different model. If you are going to sell your agency, the sensible approach would be to talk to several of them. They have a pretty similar model to valuation. Consulting companies use the same model as well.
There are obviously variables on it, but I don’t think you are going to get wildly different evaluations. We all look at the same metrics and have the same view on how value should be calculated. So obviously there will be differences in mechanism, there will be slight differences in dollar amounts, but I don’t think it will be wildly different. I think for a successful acquisition, you talk about the little guys. I guess you’re talking about the person selling their company (we are still being quite literal here), it’s obviously bigger than the deals we do.
I think it really depends on your motivation. You have to go into a conversation around M&A with your eyes open and understanding what your motivations are.
There are no wrong motivations. If you want to sell out, make loads of money and buy an island somewhere that's fine. That's not a bad motivation at all. But if you're going to do that, then you need to structure the deal to achieve that. That is an exit model. I think, you know, that's not the kind of deal we're looking for at S4.
It's not necessarily bad, but we're looking for people or entrepreneurs who perhaps have built their agency to a certain level, have lots of ambition, usually quite young and have big careers ahead of them and want to build it further, but they would like to be part of something bigger to achieve that. That's why I think the way we look at it, you’re not exiting or selling out your company. You're buying into the S4 proposition. You’re buying into the strategy that we have and you’re literally buying in by taking stock instead of cash dollars. You can’t buy an island with S4 stock that’s locked up, that you’re not allowed to sell for several years.
I think that's a very big difference in what we doing. Again, it's not a judgment. I think there's nothing wrong with having that exit strategy. The traditional model we used at WPP was very much of a financially driven model. I think it's a fair model. It’s still the model the holding companies use and the consulting companies use. It really drives everything around financial metrics and mutual success. If the deal doesn't deliver for the seller and the entrepreneur financially, then it certainly doesn’t deliver for the acquirer either.
Our models are a bit different. They are really around believing and buying into what we are trying to build and then continuing to build that in the future. The incentive becomes the success of this all, rather than the success of your individual agency.
Marketing: S4 has done well during the first quarter of this year, posting a 19% like-for-like increase in gross profit and this is despite the impact of COVID-19. That said, in general, cost-cutting initiatives are underway across the industry. What do you make of all these initiatives and the headcount cuts that major ad companies and networks are taking?
Spirit: I mean, I think it is very sad. It is a tough time. I mean even if we gave our results and we were very happy with them. You know, we are obviously providing services in a very much a growth area, you would expect our results to be better. But if you look it up on a month-by-month basis, I can’t remember the exact figures, but I think we did 30 something per cent in January, 20 something in February, and 6% in March. So, you know it's not like we were unaffected by COVID. We just managed to keep growing through it and hopefully will continue to do that. But it's not like it's not a difficult time for us and for our clients.
I think for the larger ad companies, there wasn't much growth before COVID. I mean if you look at last year, I think on the common IPG had a couple of percent growth and Publicis and Dentsu and WPP went backwards. I think the overall growth in the industry was pretty much 0%.
Economically last year was a good year right. GDP was up, the economy did well. So, it’s obvious, when you get a hit like COVID which is not something that you have ever experienced before. In an industry like ours, which is an industry where I think the reaction of clients when they need to save money really quickly, one of the things they do is cut budgets.
You see some of the spend figures declining, I think ITV’s spend went down 40 or 50% in 1 month in UK. You’re hearing similar kind of projections from other media companies in April particularly. Even Google and Facebook and others have significant declines in March and April.
So, I don’t think it's unusual that everyone's having to resort to pretty extreme cost-cutting measures. I think it’s sad, it’s difficult and it's horrible for people that are impacted. I think to be fair, there are other things you cut before you start cutting people and we've done our own cost measures. The senior execs at S4, we all cut our salaries 50% instantly, got rid of some of our cash bonuses. We got rid of some our leases, or short-term WeWork style leases in many places. We got rid of them because everyone’s working from home. Obviously, there’s no travel, there’s no expenses. So, there are plenty of things you can do before you start impacting people.
But the reality is, people are 60% plus of the cost base of an agency. While we continue to grow through this and being lucky, if you’re in an agency that’s heavily geared towards traditional media and TV budgets, so they are on 40%. Then you know, reality is probably that there is going to be impact on jobs. It’s tough. I’ve lost my job in my career before and it's a horrible, horrible experience.
I just hope that when companies do it, they try to do it fairly with empathy and try and help people.
I have seen some horror stories of some group firings on Zoom and stuff like that just makes it all the worse. I think you have to remember that in a time like this, it's not just our industry. There are 30 million newly unemployed people in America, its many industries that are being hit and it’s very unfortunate.
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