Saatchi & Saatchi Plc

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Saatchi & Saatchi Plc

80 Charlotte Street
London W1A 1AQ
England

Public Company
Incorporated: 1970
Employees: 7,500
Billings: $8.2 billion worldwide
Sales: $3 billion
Market Value: $1.06 billion
Stock Index: London New York

Throughout the 1980’s the advertising industry has been experiencing a fundamental change in its structure. This change has been caused primarily by a trend towards larger and larger advertising conglomerates which serve as holding companies for subsidiary agencies. The entire complexion of advertising is being altered; the industry is presently entering the era of the “mega-merger” and the “super agency.” At the forefront of this trend is the Saatchi & Saatchi Company and the two brothers who operate it, Charles and Maurice Saatchi. In the short span of 16 years they have taken their operation from a small office in London’s Soho district and have built it into the world’s largest advertising company with offices all over the globe (the Saatchis have not even visited many of the agencies they presently own). In May of 1986 the Saatchis completed a ten-year agency buying binge with the purchase of the highly profitable Ted Bates firm. This acquisition gave Saatchi & Saatchi combined total billings of over $7.2 billion, enabling it to move past Omnicom (itself the product of a merger between BBDO, Needham Harper, and Doyle Dane Bernbach) in the race for top position in the advertising business. The price tag for purchasing Bates and attaining industry pre-eminence? $450 million.

The Saatchi-Bates agreement is interesting not only because it represents the largest acquisition in advertising history but also because it almost did not happen. Negotiations broke down numerous times and the Saatchi brothers feared they would lose Bates the same way they lost a bid to purchase Doyle Dane Bernbach before it became part of Omnicom. To secure the deal the Saatchis agreed to extraordinary payment terms: $400 million cash up-front, and another $50 million over the next two years. No one but the Saatchis would have had the financial resources to fulfill such a contract.

Most industry analysts agree that once the competing client or “conflict of interest” problem is taken care of, the Saatchi-Bates merger will be beneficial for both firms. Saatchi & Saatchi, which promises its shareholders an annual per share increase of 20%, needs wholesale growth in order to maintain its present rate of expansion; and the acquisition of Bates allows for just this kind of growth. Bates wanted to make 21 acquisitions of its own but had the resources to make only two such purchases. Says Bates chief executive officer Robert Jacoby, “Privately held, Bates would be 10th next year and 15th the year after. It was inhibiting us.” With the Saatchis behind him, Jacoby is now pursuing all 21 potential acquisitions.

The Saatchi brothers have gained a reputation as men with the single-minded intention of creating the largest advertising institution in the world. When they have an opportunity to purchase an agency to further fortify this global network, they usually take it. Since 1982 they have added such important firms as Compton Communications, McCaffrey & McCall, Backer-Speilvogel, Dancer Fitzgerald Sample, and the Hay Group (a Philadelphia-based consulting agency) to their holdings. Furthermore, they have not been reticent in expressing their goals and intentions. In 1983, for example, they took out a full page ad in the New York Times announcing that they were moving into both Wall Street and the American advertising market.

Charles and Maurice Saatchi are first-generation Britishers of Iraqi-Jewish extraction, their father having emigrated to England to become the owner of a moderately successful textile business. Both brothers are reclusive and enigmatic. They rarely grant interviews or agree to have their photographs taken, they do not frequent advertising social circles, and seldom meet with clients. Though they actively draw attention to their agency, they try to direct it away from themselves.

Charles, who is in his early 40’s, is competitive, aggressive, and often brilliant. He began his advertising career at 18 when he went to work for a small London ad firm as an office boy. In two years he became the star copywriter and then left for the United States to study the American style of magazine advertising. Upon his return to England he was hired by Benton & Bowles. From there he moved over to London’s most innovative advertising firm, Collett Dickenson Pearce. He stayed at CDP long enough to make a reputation for himself and then left to start his own creative consultancy. In 1970 he joined his brother Maurice and friend Tim Bell to form Saatchi & Saatchi advertising.

Smooth and calm, Maurice is the perfect complement to his brother. While Charles and creative director Jeremy Sinclair handle the creative side of the business, Maurice takes care of the financial side. Maurice is urbane and modest. After receiving a sociology degree from the London School of Economics, he was employed briefly as a developer of new magazines. Later, when he and Charles first entered the advertising business, he used his experience with magazines to help promote the fledgling agency. In addition to his collection of other advertising firms, Charles has created one of the largest collections of contemporary art in the world and has recently established a private museum in London. Maurice, for his part, has rooms full of model trains.

The Saatchi & Saatchi Company’s story is a “rags-to-riches” tale that was accomplished in only 16 years, a virtual overnight success in the advertising business. From their small office in Soho, Maurice would call prospective clients on the phone without invitation, and Charles would leak news of the agency’s newly won accounts to the trade journals so as to build a reputation for the firm. In addition, the Saatchis had a skill for hiring talented people and creating innovative ads. One of their most famous campaigns was for the British government’s Health Education Council which was trying to increase public awareness of birth control. The Saatchis produced an ad that featured a pregnant man with a curiously anxious expression on his face. The text asked: “Would you be more careful if it were you who got pregnant?’

The most important opportunity for Charles and Maurice, however, came in 1976 when they merged with the old and well established Compton agency of London. By merging with Compton the Saatchis acquired the accounts of a number of “blue chip” clients, chief among them being Procter & Gamble.

More importantly, Compton was listed on the London Stock Exchange, thus giving the Saatchis a source for generating the large revenues needed for expansion. Selling public shares in an advertising agency, however, is not an easy task. Most industry analysts and investors consider advertising companies poor risks and Compton more so than others. Its share price was a disappointing four times earnings. Maurice had to work hard to persuade the London investment community that Saatchi-Compton was a stable business capable of turning a profit regardless of economic cycles. Investors were impressed with Saatchi’s steady growth and soon started buying agency stock. Eventually the price-to-earnings multiples of Saatchi stock rose above that of the overall market average.

The capital produced by selling public shares of stock enabled Saatchi & Saatchi to expand and purchase more agencies. For the Saatchis, there is more to the advertising business than just advertising. Advertising itself makes up only one of the three “pillars” of the Saatchi institution, the other two consisting of communications and consulting. To increase its financial resources for expansion, Saatchi & Saatchi offered public over-the-counter stock in the United States for the first time in 1983. And, in fact, it was the company’s ability to raise capital in the stock market that made it such an attractive merger partner in the eyes of Ted Bates.

However, not all of the Saatchi mystique is the product of financial or business prowess. The agency has won numerous awards for creativity in advertising and tends to attract the most innovative people. One reason is that the Saatchis pay their creative types very well, better in fact than any other British agency. According to John Salmon of Collett Dickenson Pearce, “They’ve changed the salary structure of the creative market in London.”

Saatchi & Saatchi is perhaps most famous for its political advertisements. The Saatchis produced a campaign for Margaret Thatcher in her successful bid to become Prime Minister of Britain in 1979 (they also helped with her 1983 re-election race.) One ad aimed at the incumbent Labour Party showed a long line of workers waiting in a “dole queue” and said simply, in a brilliant pun, “Labour isn’t working.” The agency was so deft at this kind of political advertising that it reportedly “changed the face of British politics.” Mrs. Thatcher’s campaign for prime minister proved to be a vehicle of self-promotion for Saatchi & Saatchi. By the end of 1979 it was the number one agency in Britain; two years later it was the largest agency in Europe.

The ads the agency creates usually feature provocative or arresting visual images and an economy of text. Saatchi creative director Jeremy Sinclair feels that a direct and simple message is the best kind of advertisement. This attitude helped Saatchi & Saatchi win the British Airways account over from Foote, Cone & Belding a few years ago. British Airways has now become the agency’s flagship account.

Yet the main lesson the Saatchis have taught the advertising industry is that advertising is a business first and an art second. Furthermore, they have proven many times over that they will not remain complacent. They actively and aggressively seize any good opportunity for added growth, whether it involves retail growth in the way of new clients or wholesale growth in the way of new agencies. Saatchi & Saatchi feel no need to conform to the established connections and rules of the industry. For instance, the British advertising trade association forbids the stealing of clients from competitors, claiming that this kind of unsolicited “poaching” is unethical. The Saatchis believe so firmly in poaching that they have a special account team that does nothing but try to take clients away from competing firms. As for the advertising trade association, the Saatchis simply did not join.

When one listens to Maurice Saatchi explain the reasons for the agency’s preoccupation with continuous expansion, the word “position” figures prominently. “We have a strong belief in building position,” he says. And he thinks the Ted Bates agreement will secure its place among the three or four most profitable advertising companies for at least 20 years. Yet, for two men who are so dedicated to controlling as much of the global advertising market as they can, the Saatchis tend not to get involved with either their clients or their subsidiary firms. The rule of thumb is to purchase good agencies and then leave them alone. In fact, neither of the Saatchi brothers is on the governing board of any of their subsidiaries.

In spite of their extremely rapid and well-publicized rise to the top of the advertising industry, the Saatchis themselves see nothing unusual in their success. In their words, they are just “riding the tide of industry history.” Advertising, they explain, will soon be conducted by a number of large compartmentalized holding companies which service the accounts of fewer but larger multinational clients.

If Charles and Maurice Saatchi are correct, clients will need to become accustomed to sharing a particular advertising company with competitors. (For instance, Mobil Oil and Shell Oil may in time have the same advertising agency.) And the agencies themselves will need to learn how to remain creative while the size and complexity of their operation increases. The Saatchis have further proven that greater attention must be given to financial matters if an ad firm hopes to survive. Much of what has made their agency such a successful enterprise has been its healthy approach to the stock exchanges in London, Paris and New York. Other advertising companies will have to reassess their relationship with Wall Street and the City of London if they are not to be left behind.

Critics of the Saatchis, however, are not sure their approach to advertising is good for the industry or for the Saatchis themselves. They feel Saatchi & Saatchi has perhaps stretched itself too far. Trying to do so much in such a short time often means agreeing to expensive deals. Between 1987 and 1992 Saatchi & Saatchi will have to make earnings-related payments on its recent acquisitions of up to $162 million. More frequently, though, the Saatchis are criticized less for their accomplishments and more for the way they have achieved them. The British advertising community is especially quick to point out that the Saatchis publicize only their victories while glossing over their losses. Others say Saatchi has lost its creative edge.

Yet the Saatchis usually find ways of answering their critics. Saatchi & Saatchi is a very profitable agency with an impressive clientele. It handles 40 of the world’s 200 largest multinational corporations. Furthermore, its shareholders are happy. According to Morgan Stanley, Saatchi & Saatchi’s emphasis on cost controls and budgeting has allowed it to outdistance other publicly-owned agencies in profit growth.

Principal Subsidiaries

Saatchi & Saatchi Compton Worldwide; Backer & Spielvogel; KHBB (U.K.); William Esty; Ted Bates Worldwide; McCaffrey and McCall; DFS Dorland Worldwide; Saatchi & Saatchi Compton Group.