19th February 2025
After a thumping $1.38bn goodwill write-off, the Japanese holding company presented a frank three-year plan to rebuild its international business. Green Square partner Barry Dudley assesses its chances of success and what it means for Dentsu’s teams around the world.
Much like IPG, Dentsu had a tough 2024 in terms of its general trading – organic net revenue fell 0.1%, having fallen 4.9% in 2023. Its operating margin was ahead of expectations, but at 14.8% I would call that pretty ordinary.
Hiroshi Igarashi, president and global CEO, Dentsu, said: “The Group FY2024 results were in line with our November guidance with broadly flat organic revenues, and operating margins higher than expectations. We saw sequential quarterly improvement throughout the year, with strong performance in Japan. There were also some notable global new wins in the International business [everything outside Japan].”
So, an OK picture. But Igarashi went on to say: “However, we have reported a significant goodwill impairment in the fourth quarter, reflecting a more conservative outlook in EMEA and the Americas. We believe that recognition of these uncertainties will contribute to a sounder balance sheet and a stronger platform upon which to implement the Mid-Term Management Plan announced today.”
That goodwill impairment was a lumpy JPY 210.1bn relating to EMEA and the Americas – that’s an eye-watering $1.38bn. There were two headline reasons given: “…a higher discount rate than previously used based on recent market interest rates [going up], secondly conservative reflection of various risks in international businesses.”
What sits behind all this? When a business is acquired, very simplistically, the difference between the net assets on its balance sheet and the actual price paid by the acquirer sits on the acquirer’s balance sheet as an intangible asset called goodwill. As most service-based businesses have few “hard assets” (buildings, machinery, IT and the like), the goodwill number is commonly a very big proportion of what is paid by the acquirer. From time to time, the acquirer must review this asset’s carrying value on the balance sheet – is it still worth what they paid for it and is the value still there? If the business is making losses and its future looks tricky then things get harder to justify and some or all of the value may have to be written off. Similarly, if the name of the asset acquired is disappearing, perhaps it is being merged into another business and taking that business’s name – again, is the value still there? I suspect there is a bit of both going on here.
As you’d expect, there is a plan. An “MTMP” no less. Igarashi explained: “In our new Mid-Term Management Plan (MTMP), which will run through the years of FY2025 and FY2027, we plan to achieve organic growth of 4% and 16-17% in operating margin in FY2027. We will conduct a thorough review of our core business strengths, be more selective and focused on what we do, and adopt a differentiated strategy to meet our diversifying client needs.
“While we will continue to invest in data and technology and our people and culture, we will also invest into areas where we can increase our media capabilities in our key markets. At the same time, we will reevaluate our underperforming businesses and rebuild our business structure. Our ultimate goal is to regain competitiveness and return to a growth trajectory.”
I have commented before on the frankness that Dentsu management often use: “Our ultimate goal is to regain competitiveness.” Crikey! Its results were summarized as Japan “performed very well” and the international business was “challenged overall and we are taking this quite seriously.” Got it.
And the solution to the seriousness: In 2025, year one of the MTMP, Dentsu will be “focusing on improving profitability through re-evaluating underperforming businesses and rebuilding our business foundation.”
During the earnings call there was another piece of frankness from Igarashi when he said that Dentsu didn’t deliver the last MTMP which ended in 2024, which was built on M&A. The new MTMP to 2027 is all about organic growth, with M&A to be “carried out selectively in line with business performance recovery and under strengthened, disciplined management.”
The theme continued with a slide saying: “Our position has become increasingly challenging in the face of intensifying competition”, which went on to conclude that Dentsu’s position is “Inferior in terms of network and resource scaling” with “insufficient technology investment.”
Then came the inevitable cost reduction plans and the promise of “thoroughly eliminating inefficiencies.” The aim is to reach an operating cost reduction of up to JPY50bn (US$329m) in 2027. The first thing that was mentioned here was to “simplify operations by integrating the Tokyo and London headquarter functions” and then by “redefining the role of regional offices,” in addition to “implementing cost control measures in the markets.” Watch out senior regional management.
And what of that pesky AI thing? It was mentioned once in the press release and that was referencing what others are doing in AI. Mentioned the same way in the investor presentation and then just once more within the cost savings: “Extensively automate with AI and systems.”
I have a personal affinity to Dentsu which I won’t bore you with. There are many things that make it unique, but I’d say it has a pretty tough time ahead of it – hunkering down and being efficient will only get you so far…