Francis Maude, non-executive chairman of AIM listed The Mission Marketing Group, announced today that he would be leaving the company at the end of the year. Mission's share price dropped to less than 32p - the lowest point in the last 12 months.
Maude has been chairman since the company was floated on AIM and cited the forthcoming general election - expected next summer - as the reason for his departure. Rather surprisingly no arrangements had been finalised for a replacement to be identified before Maude's departure was announced. Mission will seek a successor during the coming months.
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As predicted in New Media Agencies Financial Intelligence when Microsoft bought aQuantive for an extravagant $6 billion in 2007, it has not taken Bill Gates' corporation too long to conclude that the digital marketing component of the deal - Razorfish - is surplus to its strategic requirements.
Indeed the resultant mix of digital publisher and digital marketing agency was always a potential challenge to the competition authorities in the United States. Such a combination is rare, the best known example of which is Dentsu in traditional media although even there the media owning shareholders divested control some years ago.
It is far more likely that Microsoft wanted to acquire a bigger stake in the search and adserving businesses that also formed part of the aQuantive group. Otherwise why pay such a ludicrously high multiple of over 100 times historic post-tax earnings to acquire it?
Razorfish has a chequered history, having been part owned by Omnicom Group when listed on the US junior stock market NASDAQ. It had accumulated losses of $334 million by 2001 when Omnicom offloaded its residual stake into the controversial home for sick dotcom victims called Seneca Investments. Ownership of Razorfish was then handed on from one company to another until it was acquired by US digital group aQuantive with some other businesses for $160 million in 2004.
This week's reports that Microsoft had retained Morgan Stanley to seek a buyer prepared to pay anything up to $700 million for Razorfish are consistent with the now classic opening move by an investment bank wanting to create an auction for a company it is retained to sell.
Whether hints that Publicis Groupe might like to acquire it will prove to have been well founded remains to be seen. Publicis already has a large stake in digital businesses that include the Digitas technology consultancy and the Modem Media marketing agency. However, Modem might benefit by aligning itself with another creative agency in the sector as it still tends to be regarded as a technology biased operation.
Publicis raised additional capital of about $1 billion last month in the form of convertible borrowings, at least some of which may be earmarked to reduce the extent to which the group's short term liabilities exceed its readily realisable assets - last December that deficiency was roughly $1.2 billion. But it's not uncommon for powerful groups to stretch their suppliers' credit as a source of extra free capital and so Publicis may feel it can use its newly raised convertible debt for more acquisitive purposes.
It seems a risky strategy to add a load of extra debt during recessionary times, but Publicis may argue that its balance sheet is not too overly stretched provided its future profits remain high enough to cover interest costs. And with bargain basement interest rates prevailing at present, chief executive Maurice Levy may be prepared to be bold.
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Wealthy publishing entrepreneur Mike Danson's acquisition of the publicly listed digital media and marketing business TMN Group, into which he has injected various other business he had already acquired, may prove well timed if the target companies benefit from any recovery in the economy, but the current condition of the newly formed group is less than clear. Indeed on a rough calculation, the enlarged group appears to be trading at little more than breakeven at present.
Shareholders in TMN approved the transaction yesterday as well as a change of name to Progressive Digital Media Group. As a result Danson is now the owner of 84.8% of the enlarged group with a stock market value in the region of £45 million following a net cash outlay of considerably less than that over the last two years.
Danson previously made a lot of money from the sale of his Datamonitor business to Informa for approximately £502 million in July 2007. He founded Datamonitor and owned approximately 25% of the shares at the time of sale. So he is rich, an experienced operator and presumably a good judge of business potential in the sector.
The lack of clarity about the financial condition of the newly enlarged group revolves around the fact that Danson had initially acquired companies through two separate investment vehicles and each acquisition was then subjected to a number of rationalising and other exceptional transactions. In the circular sent to TMN shareholders in support of the reverse takeover, no meaningful picture has been provided of maintainable profitability of the enlarged group. The table below shows why it is difficult to construct an estimate that is better than breakeven.
The way in which the Progressive group was created prior to the TMN bid makes interesting reading too.
For example, last November SPG Media Group was bought for about £11 million in cash by Progressive Capital, a £100 company actually owned at the time by another member of the Danson family - Peter - presumably as bare trustee for Mike Danson. The deal was funded by loans from Mike Danson. Then Progressive Media Group (Holdings) acquired Progressive Capital in return for 100 shares issued to Mike Danson, seemingly inconsistent with the fact that Peter was still shown as the sole shareholder in the company's annual return as recently as April this year. Doubtless this inconsistency will have been sorted out prior to finalising the TMN deal.
Earlier acquisitions were made by another Danson owned company Progressive Media Group - again funded by Danson loans.
Some property assets were subsequently stripped out of acquired companies into yet another Danson company Estel Property Investments that is not within the newly restructured group although it is contracted to provide services to the group.
At Progressive Media Group a batch of publishing assets was bought for £1.4 million from a subsidiary called Progressive Media Markets after which that subsidiary was sold for £10.8 million to an unnamed purchaser. Curiously Mike Danson became a director of Progressive Media Markets on the very day that it was sold by the group (succeeding his relative Peter Danson on that board) and the sale proceeds were used to repay the loan that Mike Danson had previously made to the Progressive Media Group. In other words, it seems quite likely that Mike Danson was in effect paying £10.8 million to one of his companies in return for some publishing assets so as to enable that company to repay a loan of a similar amount that he had made to it previously.
As the Danson family appears to have been the dominant shareholder in all companies involved in these transactions and the resultant parent company is listed on AIM, prospective outside investors might be disappointed not only by the lack of clarity about underlying profitability but also by the fact that Danson owns some companies personally that will have continuing relationships with the enlarged group.
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AIM listed Digital Marketing Group, where former McCann executive Ben Langdon is chief executive, has hired its third group finance director in two years.
Newcomer Keith Sadler, aged 50, was previously group finance director and latterly chief executive of the publicly listed events and publishing business SPG Media Group. He left that company when it was acquired by Progressive Capital late last year (see TMN's re-emergence on AIM as Progressive Digital Media Group lacks clarity).
Sadler will take over from his predecessor Greg Minns at the end of this month. Minns was appointed only six months ago. Aged 43 he joined Digital Marketing Group in January from software services company Vividas Group where he had held a variety of finance posts. Prior to that, he had been employed in a string of interim finance positions.
Minns took over the group position at Digital Marketing Group from Sarah Guest who had held the post for 18 months - the longest period in the group's very short corporate life. Her predecessor was Robert Millington.
Let's hope Sadler can stay in post for a little longer than his predecessors.
Creston's operating profit for the year to 31 March 2009 remained virtually unchanged from the previous year at £12.3 million after margin erosion undermined a 4.1% growth in revenue. However, on the face of it, the overall financial picture presented by the group was a healthy one.
Part of the margin erosion was due to increased charges for amortisation of intangible assets like goodwill. But, even before that increase, the profit margin showed a small slippage from 15.9% to an admittedly still healthy 15.2%. None of this should come as a surprise in the current economic climate.
The better news was that post tax profits benefitted from lower finance costs and lower tax charges, leaving shareholders with retained profits for the year of £6.6 million against £4.8 million in the previous year.
Net borrowings at 31 March remained virtually unchanged from last year at £18.6 million, contributing to a healthy debt/equity ratio of 0.21:1.
However, net short-term liabilities grew substantially from £12 million last year to £26 million at 31 March, reflecting acquisition earnout and related commitments due within one year. The company expects to be able to meet the cash component of those obligations out of a mixture of its existing bank facilities and normal operating cash flows. Presumably this assumes the business will continue to prosper during the recession and doesn't suffer a serious loss of business following the General Motors restructuring, for example. Nevertheless the group might benefit from being rather less dependent on relatively short-term borrowings.
Along with its financial results Creston announced a more streamlined management structure whereby the original consultative partners' board has been replaced by an executive board at which each of the divisional heads has a seat alongside chief operating officer Barrie Brien and to which they will be accountable for their divisional performance.
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AIM listed market research group Optimisa has written off a substantial part of what it paid to acquire EQ Group and nxt:MOVE Corporation and is working to satisfy bank lending covenants by the end of this month. The write-offs contributed to a loss of £4.5 million in Optimisa's delayed accounts for 2008, published today. The accounts had been expected to be published by the end of May (see Optimisa accounts delayed further).
As already announced, the group is also seeking approval to be delisted from AIM at its forthcoming annual meeting.
Optimisa has written off £4.3 million of the £7.7 million cost of acquiring the financially stretched EQ Group in 2007 (that cost included fees and a £0.9 million overdraft taken over on top of the purchase price of £6.4 million). It has also written off all the goodwill arising from the acquisition of nxt:MOVE in the United States, accounting for a further £0.8 million.
Talks are now proceeding with the aim of selling nxt:MOVE before 30 June in order to comply with banking covenants. The group's embryonic Asian business has already been sold to its management for a nominal sum. These disposals are intended to stop the current cash drain which was exacerbated by a particularly sharp fall in revenues from those territories in the first quarter of this year.
Auditors PricewaterhouseCoopers highlighted the vulnerability of the group in their report, pointing out that there is increased risk of over predicting profitability in the current economic climate. "The matters set out in note 1.1 to the financial statements indicate the existence of material uncertainties which may cast significant doubt over the ability of the group to continue as a going concern", the audit report explained. Optimisa's directors say they have "reasonable expectation that the group can operate within its existing financial arrangements" and therefore considered it appropriate to have used the going concern basis for preparing the accounts.
Now here's a conundrum, or two conundrums actually.
AKQA's UK accounts, just published, show a big drop in post-tax profits from £1.5 million in 2007 to £281,227 in 2008, but this is attributed to some non-recurring salary costs arising from the acquisition of a controlling interest in the group by private equity house General Atlantic Partners in 2007. Why profits went down in 2008 as a result of exceptional salary costs relating to 2007 is a little difficult to understand.
Even more perplexing is the difficulty the management has experienced in identifying how much of group directors' remuneration relates to services provided to the UK company. So it hasn't allocated anything at all. Apparently the remuneration of the UK company's directors who are also executives of the parent company AKQA Holdings Inc is borne by AKQA Holdings Inc and AKQA says "it is not practicable to allocate this remuneration between their services as directors of AKQA Inc and their services as directors of AKQA Limited"
Not practicable? How can that be? How could these executives have built a technology-based enterprise of world renown without also having the ability to estimate how their remuneration should be allocated between two companies? Chief executive Tom Bedacarré holds a BA degree from Stanford University and an MBA from the Kellogg School of Management. Chairman Ajaz Ahmed has an honorary doctorate from Oxford Brookes University and is bright enough to have mentored students at Said Business School.
Come along now chaps, you can do better than this.
Yesterday's announcement that the cash-rich US listed digital technology consultancy Sapient Corporation is to buy the Nitro advertising agency raised more questions than it answered.
Is it a grand expansion into creativity? Will it cost $50 million as publicised? What is Sapient hoping to get for its money?
First, the deal has not yet been done. According to Sapient, it expects to complete it in July although this is subject to satisfying certain conditions and approvals. So the financial terms may have been agreed in principle, but they are certainly not public yet.
As to what Sapient is buying, it believes that Nitro will help it exploit the convergence of internet and traditional broadcast media. However, the Nitro business itself is a bit of a Chinese puzzle - what the dictionary describes as "intricate...consisting of many interlocking pieces".
Nitro is run by an Australian Chris Clarke who gives his address as Greenwich, Connecticut. One of the interlocking pieces of his empire is Nitro in London which Clarke owns through an offshore company called Nitro Group (BVI) that is based in the British Virgin Islands. Other related agencies are based in Hong Kong, Australia, China and the United States.
Nitro established a presence in London when it bought the business of Soul Advertising in 2005 for £220,000. At the time Soul had net liabilities of £131,263 and was struggling to expand. Soul had been set up by some former Bartle Bogle Hegarty executives who left Nitro after deal.
Nitro continued to acquire other businesses in the UK. In July 2005 it paid £250,000 as a first instalment for the acquisition of The River Communications Group (later renamed A Plus Studio). In the following January it acquired 51% of Mook, bringing the total outlay on these two companies to nearly £1 million. But, by the end of 2006, most of that outlay had been written off and Nitro had run up losses of £565,000 on its London operations as a whole.
By the end of 2007, the London business was being funded by a bank loan of £817,000 plus additional loans totalling about £800,000 that had been provided in 2005 by a related Nitro company based in Hong Kong. However, early in 2008 the London agency restructured its capital to enable some of its bank borrowings to be repaid. That restructuring appears to have involved replacing some intra-group debt by permanent share capital and offering those new shares as security for a new loan.
Of course, the London arm of Nitro is only part - and perhaps a very small part - of the story. According to Sapient, the business was founded in Shanghai and has a global presence. Without examining the remaining pieces that are reported to have merited the $50 million purchase price, this particular Chinese puzzle will remain unsolved.
As foreshadowed in its announcement towards the end of last year (see Huntsworth share reorganisation: substance or image?), global public relations group Huntsworth has been buying up its own shares regularly in the past few weeks, often in 50,000 tranches costing about £25,000 each - so much so that it now owns approaching one million of its own shares.
In addition the company's employee benefit trust has recently bought another 3.5 million shares, bringing the trust's holding up to more than 4% of Huntsworth's issued capital.
While these purchases are consistent with the company's stated intentions, it remains difficult to understand why the group should spend over £2 million in this way.
One of the main reasons given by the company for seeking permission to buy in more shares last December was to soak up any shares jettisoned by tracker funds after Huntsworth was dropped from the companies comprising the FTSE All-Share Index. But it is hard to believe that these recent share transactions are still arising from the tracker fund fallout.
Another reason Huntsworth gave for wishing to buy in shares was to enhance reported earnings per share (by reducing the number of shares in issue that are divided into the reported profits). This would normally have a knock-on positive influence on the share price if the bought in shares are cancelled. Even if the shares are not cancelled, but instead are "warehoused" by an employee benefit trust or in treasury and used later to satisfy the exercise of outstanding options, they will reduce the extent of future dilution and thereby enhance what is known as the "fully diluted" earnings per share. On the other hand, theoretically those warehoused shares could be sold back to the wider public without any benefit to earnings per share at all.
Maybe the company simply wants to hold the shares to satisfy the five million or so options that are currently eligible to be exercised, irrespective of any benefit to earnings per share achieved by doing so. But how many employees would wish to exercise their options at the weighted average price of 77.9p applicable to options exercisable at the start of this year when the current share price still remains well below that figure? On the face of it, very few.
However, there is a twist: the lowest exercise price applicable to some of the options exercisable today would be 56p which, by a remarkable coincidence, is exactly the market price today. If Huntsworth can buy in shares at this price or less, it will be able to use them to satisfy the 56p options at no cost and without diluting other shareholders.
If, after buying in shares, the price climbs above 56p, this will increase the prospect of employees being able to make a profit from exercising their options and gain a better reward for their loyalty. For example, chief executive Lord Chadlington has about two million share options that would be worth exercising once the price gets above 58p.
Of course another explanation might be that Huntsworth is trying to keep its share price as high as possible while it contemplates making a bid for another company. Only a few weeks ago it was in talks with Next Fifteen Communications Group and, although Next Fifteen announced that all talks were over, Huntsworth was uncharacteristically quiet about its own intentions in the matter.
Accounts of AIM listed research group Optimisa have still not been published despite a board indication that they would be sent to shareholders by the end of May. Optimisa's shares fell a further 17% to 19.50p by the close of trading last week.
The delay follows a boardroom upheaval last month when the company announced the impending departure of its former chief executive Simon Dannatt and the resignation of director and company secretary Jonathan Waters. Chairman and former investment banker Ron Littleboy immediately assumed the role of chief executive as well as retaining the chairmanship position.
At the same time the company announced its intention to seek shareholders' approval to have its shares de-listed from AIM. That approval has not yet been sought, perhaps because the accounts for 2008 are not yet available.
Dannatt became chief executive after Optimisa acquired KAE:market intelligence and its management team in April 2005. He had been managing partner of KAE and Waters had also been a member of the KAE board. Under Dannatt's management and Littleboy's chairmanship Optimisa pursued an acquisitive growth policy culminating in the acquisition of financially stretched EQ Group in 2007 for £6.4 million in cash.
Last year Optimisa announced it had cut its revenue projections for 2008 by 15% and expected no profit contribution in the first half of 2008 from EQ Group. Chairman Littleboy also acknowledged that the integration of EQ Group companies had disrupted business development, but blamed the economic downturn for much of the profit decline. The company's shares slumped immediately by almost 50%.
In response to yesterday's blog (see Mission's share price slides another 10%), The Mission Marketing Group this morning explained that shareholding particulars published on its website were incorrect.
The 9.4% shareholding attributed to Mission's subsidiary Bray Leino was an error based on a feed from Hemscott, according to Mission's CFO Tim Alderson. Mission also updated particulars of shares held by former Bray Leino shareholders. David Morgan now owns 6.85% of Mission and Nick Bacon owns 2.7%, giving them 9.55% of the equity between them.
The share price of The Mission Marketing Group continued to slide this morning, losing another 10% of its value in early trading. The shares are now valued at 29.50p, a fall of 39% since a partial recovery valued them at 48.5p on 17 April.
The shares peaked at 143.50p in October 2007 and have been in decline almost continuously ever since, despite a £1 million share placing arranged by Seymour Pierce to strengthen the group's balance sheet on 15 May and more recent share purchases by Lloyds Banking Group.
Mission is a well spread regional business that should have been able to trade through recession relatively unscathed, but its acquisition programme has left its balance sheet rather weak. At its annual meeting on 2 June chairman Francis Maude sought to reassure shareholders by reporting that the company had successfully rescheduled certain liabilities "in order to ensure appropriate working capital is available for the group going forward" (see also Mission funding negotiations completed at a high price). He added: "We continue to monitor closely the economic environment and are taking a cautious approach to managing our central and agency cost base. Current trading is in line with the board's expectations and the group remains well positioned in the markets in which it operates."
With its market capitalisation now down to £13 million, it is interesting to speculate on whether Mission's management might come under pressure from shareholders - not least from those who acquired their shares as part consideration for the sale of their companies.
For example, at the time of writing Bray Leino's founding director David Morgan was reported to still own at least 4.4% of Mission's shares according to the company's website. It was not clear whether that holding included the additional 969,934 shares received on 22 May after Mission renegotiated the terms of its earnout payments. Intriguingly, Bray Leino itself was also reported to hold a 9.4% stake. Following an approach from Fintellect, Mission subsequently updated the above particulars, indicating that Morgan and fellow former Bray Leino shareholder Nick Bacon now own 9.55% of Mission between them (see Mission shareholdings updated - two Bray Leino vendors own 9.5%).
Morgan has already sold the Bray Leino business three times in its history and bought it back again twice. Doubtless he will be as eager as ever to get a good return on his most recent sale to Mission and, if that seems unlikely, it remains to be seen whether he would contemplate trying to repurchase the Bray Leino subsidiary yet again. Or would he seek a more powerful role in determining the future direction of Mission itself? Any such initiative would seem fairly improbable as Morgan is not as young as he was and may prefer to stay on the sidelines.
WPP seems so far to have avoided the consequences of the US car-makers' bankruptcies - or is keeping very quiet about it - but of the three other major global marketing groups affected the Interpublic Group seems to have been fairly well prepared.
The group escaped exposure to the Chrysler collapse, but is owed $20 million by General Motors. That amount is much smaller than the $58 million owed to Omnicom agencies by Chrysler or the massive $127 million owed by GM to Publicis agencies.
However, exposure to these bankruptcies is not limited to unpaid bills. Doubts will also arise over unbilled work in progress or - as in the case of Omnicom's relationship with Chrysler - potential costs of closing dependent offices if the client business moves to another agency as a result of the turmoil.
Interpublic itself announced on 5 June that its maximum exposure to GM companies in the US was estimated to be $50 million - a lot more than the $20 million in unpaid bills disclosed in the bankruptcy petition - and the excess appears to relate mainly to unbilled work in progress.
No-one knows yet what proportion of these debts or other exposures will be recovered, but Interpublic took two proactive steps in anticipation of the GM bankruptcy. First it obtained the agreement of its bankers to exclude its GM exposure when assessing whether it was complying with its borrowing covenants (see IPG negotiates protective deal with bankers in case GM collapses). And secondly, Interpublic hired a top GM marketing executive to maximise the prospect of maintaining close relationships with operating units during and beyond bankruptcy.
At the other extreme, Publicis seems to have done rather less by way of protective measures before GM became bankrupt. Admittedly, the exposure of its Starcom Mediavest network to media owners may be greatly reduced where it can show that it had not been paid by GM for the media it has booked (the concept of sequential liability). Indeed Publicis was quick to put out a statement that it expected its maximum exposure to be $78 million.
But $78 million is still rather more than Interpublic's estimated $50 million maximum. Omnicom hasn't quantified its maximum exposure as such but told analysts that in an absolutely worst case scenario it would not expect to lose more than $35 million. Of course, these estimates may still be subject to change. As Interpublic put it: "GM's subsidiaries outside the US have not commenced bankruptcy or similar proceedings, and if they did so the company's potential exposure could increase."
Perhaps the current position reflects something of the personalities of the global chief executives. Omnicom's John Wren and Interpublic's Michael Roth were both trained in accountancy and inevitably have a stronger bias towards financial matters, whereas at Publicis Maurice Levy comes across as slightly more of a successful showman and optimist - the Phineas Taylor Barnum of the marketing industry.
See also update Publicis ecapes worst impact of GM bankruptcy.
Tangent Communications, the AIM listed group that specialises in digital technology and direct marketing, has paid a heavy price for having acquired a company that provides digital print services to estate agents towards the end of the last property boom in March 2007.
Revenues earned by the unfortunately timed Ravensworth Digital Services acquisition fell by £2.3 million on a like-for-like comparison with the previous year, precipitating an 80% fall in group post-tax profits to £304,000 in the year that ended on 28 February 2009.
Fortunately the group's debt-free balance sheet and positive net current assets provided a useful safety blanket and the group has rationalised its resources with the aim of cutting annual costs by £200,000. Last year's profit bore a charge of £400,000 relating to this reorganisation.
Since the year end Tangent has acquired the creative digital agency Lateral Net and the UK licence to use the software platform that previously had been Ravensworth's main competitor. Lateral's most recently filed accounts for the year to 31 March 2007 suggest it may have been losing money prior to acquisition as retained profits declined by £290,000 in that year. So it is unlikely that it would have been a costly acquisition.
"The new financial year has got off to a good start with both acquisitions integrating well and the current overall performance is above budget", said joint chief executive Nicholas Green.
WPP Group shareholders learned today that its pre-tax profit for the first four months of 2009 has been caught in a pincer movement between revenue shortfalls and cost increases.
In particular the timing of the Taylor Nelson Sofres acquisition is proving to be less than beneficial as the group struggles to contain borrowing costs while revenues from the group's insight division that includes Taylor Nelson have been "most affected" by the recession (see Some pearls from WPP's annual report).
Profit before tax for the first four months of 2009 was "significantly down on the previous year", chairman Philip Lader told the company's annual meeting.
However, Lader said the group's headline operating margin was "above budget" for the period. This comes as a surprise because only a month ago WPP said it would be difficult to maintain operating margins at the level achieved in 2008 (see WPP becomes global leader but predicts lower margins as recession bites). One possible interpretation is that the budgeted margin for the first four months of this year was lower than that achieved in 2008. In that case little glory should be attached to beating it.
Net debt at the end of April exceeded £3.5 billion while shareholders' funds stood at little more than £6 billion - giving a relatively comfortable debt/equity ratio of 0.6:1.
Interestingly, the stock market value of WPP fell today by £322 million to a figure below the £6 billion of shareholders' funds employed in the business. So the stock market value of the whole is now lower than the aggregate book value of the parts. That's not a very comfortable position to be in.
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BOB WILLOTT
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