As WPP prepares to merge two of its iconic advertising agencies, the company’s CEO says there has “never has been a better time to bring creativity and technology together.”
Last week, London-based WPP said it would merge Grey and AKQA into a single company called AKQA Group. With 6,000 people in 50 countries, it will create a “new network model,” according to the company. And earlier today, WPP announced yet another agency consolidation by folding Geometry into VMLY&R to create a new “creative commerce company.”
“We have always said we want to have fewer, stronger brands,” WPP CEO Mark Read says about combining Grey and AKQA, adding that “it is important for every company to have a growth trajectory.”
The merger is a part of WPP’s multiyear effort to streamline its agencies within the conglomerate. In 2018, it merged J Walter Thompson and Wunderman to create Wunderman Thompson, and also combined Y&R with VML to form VMLY&R. All have taken place since Read took over as CEO in 2018, after spending several years as CEO of Wunderman and a decade as director of strategy and board member at WPP before that.
“We have been looking at ways to better serve our clients, to integrate our offer and to future-proof [our] company,” Read says. “I think, you know, in the middle of this pandemic, when we’re all thinking about the role of technology—marketing and communications and commerce—never has there been a better time to bring creativity and technology together.”
The goal is to combine AKQA’s reputation for digital innovation with Grey’s creative storytelling. However, it won’t be happening all at once. Rather, Grey Worldwide CEO Michael Houston says it’ll happen “expeditiously, but at a pace that makes sense for our clients.” He added that the way people connect with companies is changing at that the combined company will enable clients to “have much more experience to lead connections.”
“We’re not doing it trepidatiously,” Houston says. “We would want to move things along. But we also want to make sure that we are careful on the process.”
In some ways, the ongoing Covid-19 pandemic might make the merger easier—at least geographically. According to AKQA founder Ajaz Ahmed, employees working remotely encourages collaboration without physical barriers.
“What clients are looking for is an organization that can counterbalance the responsiveness of agility, for pioneering startup with the creative excellence and reach of a global enterprise,” Ahmed says. “And that’s really what this merger is—an unparalleled opportunity for us to build a modern, creatively led company that builds on both our heritages in terms of glory, experience and digital transformation, and create sustained value for our clients and our people and the communities that we serve.”
Like other agency holding companies, WPP has had a hard year as companies have cut back dramatically on advertising during the Covid-19 crisis. However, it seems to be somewhat recovering. Last month, the company reported earnings of $3.84 billion, beating analysts’ estimates.
“We are in the worst recession since the great winter of 1709,” Read says. “And actually, the performance of the holding companies has been much better than anyone expected, including ourselves, I’d say. Our business has been much more resilient than any commentator would have expected, and our revenue has been much more resilient than advertising spend. I think that that speaks to the transformation that’s taken place in WPP’s business and the transformation that will take place in AKQA’s business and Grey’s business, and that this will accelerate.”
Ali Mogharabi, a senior equity analyst at Morningstar Research Services, says the merger is a “good decision” and agrees it’ll help improve efficiencies and digital capabilities without losing creativity. And while the previous mergers were focused on digital transformation, Grey and AKQA both already have digital capability and creativity.
“From an efficiency standpoint, it’s a given, in my opinion,” he says. “But besides that, in terms of how it might help attract clients, I think it’s very positive. You know you’ve got Grey with such a recognizable brand name merging with AKQA, that basically tells you that yes, digital is going to continue to be prioritized, but creativity won’t go away.”
While competitor holding companies have focused on growing via acquisitions, Mogharabi says WPP has focused on organic and internal growth. He explains that the company is “well situated” for recovery, and points out that the company hasn’t lost any big clients this year, instead adding some new ones such as Alibaba, LG, Uber and the NBA—momentum that should help with organic growth in 2021 for the first time in a while if the economy continues to recover. (Morningstar has a valuation of £13 on WPP’s stock, which on Monday was trading at £7.60 per share on the London Stock Exchange.)
“Digital advertising is going to keep growing, there’s no question about that,” he says. “But we think video will be the main format growth driver for digital advertising and that has increased demand for differentiated content and creativity. That’s where the agencies are going to come in and differentiate themselves from consulting firms or anyone else.”
Digital advertising spending is indeed poised to increase again next year with growth of 21.1%—following nearly flat growth of 1.7% in 2020—according to an October report from eMarketer. That’s more in line with growth trends in 2017, 2018 and 2019, which each had increases between 19.2% and 25.3%.
The amount marketers spend on agency services seems to remain consistent, according to Gartner analyst Chris Ross. And while companies bring more advertising functions in-house with teams functioning more like agencies, Ross says agency holding companies have been realizing they might be too fragmented.
“They haven’t done a good job of rationalizing all the brands in their portfolio, and making sure they’re focused on specific audiences and understanding fully how much capability they have in certain functional areas,” Ross says of advertising holding companies. “So I think on the agency side, they’re going through a different exercise where there’s a rationalization happening there in terms of functional capability and making sure they aren’t overinvested in some capabilities or under-invested in others at the portfolio level.”
When asked whether the merger would have happened if Covid-19 hadn’t happened, Read says it’s something the companies had talked about in the past. From his perspective, the company has had “more innovation in six months than we’ve seen in the previous ten years.”
“So I’d say the pandemic has emboldened us to make more ambitious moves,” Read says. “And this is definitely an ambitious move, but I also believe it’s the right thing to do. And fortune favors the brave.”