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14 March 2018 : Pica #024

The wolves and the vultures.

Predator investors target advertising agencies.

Hedge funds bet big against major advertising companies but maybe the worst is past.

Predators, like wolves, look for weakness in their prey to make an easy kill, while scavengers, like vultures, wait for death before they can eat. The predators of the modern financial world, hedge funds, have their eyes on the big advertising holding companies. There are currently more than $3bn in short sales of shares against Publicis, Interpublic and Omnicom. Short sales of WPP for a value of $1bn have already realised large gains with the stock falling 10% since the beginning of the year. The limping beast of the pack, in the eyes of the predators, is Omnicom with $2.2bn bet against it, equivalent to 13 percent of its total shares.

This paints a grim picture that doesn’t, in my opinion, reflect reality. The advertising industry has changed immensely over the last two decades. It has been fundamentally disrupted in every aspect and is also facing profound changes in the way society views consumption. How well the big agency networks have adapted to all these changes is debatable but it is undeniable that they have adapted and they have done so rapidly. This is a great achievement and one that indicates resilience. I have a feeling that we have touched the bottom and from now on things will improve.

The golden moment of the digital disruptors has passed. Facebook, Google, etc are struggling to reassure advertisers on various issues. The rate of ad-tech ‘innovation’ and proliferation has slowed and we are in a phase where standards are starting to be applied, this will lead to consolidation and rationalisation. Competition from big consulting groups has forced the agency networks to improve their offering and efficiency. Last but not least there seems to be an inversion of attitude towards agencies by clients.

Ally Financial announced this week that it will provide all agencies involved in the final round of its US creative, digital and media account review with a five-figure stipend. Andrea Brimmer, Ally's chief marketing and PR officer said; "We want to establish from the get-go that we believe that agencies are partners and they have a seat at the table and the closer we get to one another, the better the work will be”. This is an isolated case but therein lies the key to survival - clients are starting to realise that relentlessly squeezing agencies has become counterproductive. The bottom has been touched.

Ad agencies are still in a unique position to support clients in every aspect of brand management. There is value in the role. Agencies have the resilience, inventiveness and agility to keep adapting and resurge. Even among the wolves, there are those who believe this. David Herro, chief investment officer at Harris Associates, holds shares of WPP and Publicis in excess of $2bn and he has said that he does not believe the current share prices reflect their true values. I agree with Mr. Herro, the wolves may make a killing but the vultures will go hungry.

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