Will WPP’s Essence deal help tame Sir Martin Sorrell's great 'frenemy' Google?
 Will WPP’s Essence deal help tame Sir Martin Sorrell's great 'frenemy' Google?
For some time now WPP has been the most acquisitive of all the global holding companies, making numerous smaller acquisitions in dynamic, fast-growing territories, with the odd big deal from time to time.

Last week (4 November) the group announced one of its biggest and most intriguing deals of 2015 – it bought a majority stake in Essence, a London-based shop which claims to be the biggest independent digital media agency in the world.

In its last publicly available financial statements, for the year to last March (2014), Essence reported a gross profit of £35m and a pre-tax loss of about £4m. Gross profit had however grown from just £23m in 2013, so this is a business that could be said to be going places.

The exact size of the stake, and how much was paid for it, was not disclosed, but figures of 20 times EBITDA (earnings before interest, taxes, depreciation and amortisation) have been bandied about. Perhaps such heady multiples are because there is little EBITDA being generated (perhaps none given 2014’s loss). More likely a revenue-based assessment of valuation has been used, with a view that margins can be pulled up over time. However, we do know that Essence will sit in with GroupM, WPP’s media buying arm, which includes such famous names as Mindshare, MEC, Maxus and MediaCom.

Having reflected on things, my partners at Green Square and I have to come to the conclusion that, regardless of how much WPP did or didn’t pay, this could be a very smart deal for Sir Martin Sorrell's group. (It is likely to have been a premium price, because if WPP was interested in this scarcest of things – a reasonably big digital operation – it’s fairly likely that Omnicom, Publicis et al were too and despite the fact that Sorrell dislikes paying over the odds for businesses, Essence may have been deemed too valuable to fall into rivals’ hands. Dentsu is rumoured to have been close to inking a deal with Essence’s founders.)

Essence seems to have an enormous amount going for it, namely upwards of $700m in billings and a client list to die for, including HP, the Financial Times, eBay and Google (of which more in a moment). Secondly, it employs 500 people around the world, some of whom are among the very best in media buying and strategy (apparently the quality of the staff was an important factor in WPP’s decision to buy, as was the agency’s global reach).

Group M boss Rob Norman told US trade press this week that London-based Essence’s success in winning clients in America such as Google, eBay and Expedia was not a surprise because UK talent often proved to be more original and radical in their thinking.

He said: "London’s always been a hotbed of advertising innovation. Sometimes in the US, the size of the accounts is so big that you can get quite easily trapped into incremental thinking when things are so big."

Thirdly, Essence has a deep understanding of data, and how it fits into the marketing mix – and we all know Sir Martin is a big fan of data.

"It is a large part of our interest in this business,” Norman said. “Philosophically, they understand that media, data, creativity and mobility are now part of a single, joined-up space."

He also praised Essence’s expertise in data organisation. "The way the media business is migrating, how you organise data to inventory is becoming more important".

Then there’s Essence’s technology. The company has long specialised in programmatic buying. There’s a quip that’s been circulating in media buying circles for the past few years that Essence uses Google’s advertising products better than Google does. Essence also has a bespoke product (and good custom software is one of the things that gets buyers of agencies very excited these days), a custom planning and campaign management system called Olive that supports most of the global digital media buying for its largest client, Google (them again).

And it’s the Google factor that is perhaps the most important. Back in the noughties, Sir Martin famously described Google as a “frenemy” (since then, he’s added Amazon, Facebook and other tech giants to the frenemy list). As the world’s biggest, fastest-growing media company, Google has the potential to enrich more established agency groups such as WPP; but at the same time, it has the ability to usurp media agencies with its ad technology.

To demonstrate the relationship with Google, the Mountain View company is WPP's biggest media partner – GroupM spent $2.9 billion, or 4 per cent of its media bookings, with the tech giant last year – yet Google also carves off huge chunks of WPP's potential revenue through its ad tech business.

But with this deal WPP is strengthening and balancing its relationship with Google, making it more of a friend and partner, perhaps less of a threat.

As one of Google's digital media agencies (it also works with Omnicom’s OMD on 'traditional media buying'), Essence may be getting first-mover advantage through access to alpha and beta testing of its new tools. Google also has a very good relationship with Essence’s management, and is said to be “very happy” that Essence CEO Christian Juhl is on the GroupM executive committee, according to Norman.

Norman has gone on record saying that Google's view is that if Essence's work gets visibility within GroupM, then that's a good thing. Hopefully that will mean the desire to use Google's products will probably go up in the minds of the big media buyers within GroupM.

And finally, on a related matter, WPP has pledged to keep Essence as an independent brand, despite owning a majority stake.

The Olive system won't just be retro-fitted to GroupM's network, and it will continue to compete for new business independent of the other agencies in the group – although it will collaborate with them on some work.

Norman said: "If we decide to change the Essence culture, we will lose its people. The senior people have lots of chops in the game, so if we make it culturally difficult, they will leave."

But he adds that there's some "reverse psychology" at play: "The more you tell someone 'you can stay independent,' the more curious they will get about the opportunities you can give them."

It's fair to say therefore, in the long term, that the Essence acquisition could be one of the most significant digital deals by WPP since it bought AKQA for £350 million in 2012. But beware the word frenemy...
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