Martin Sorrell, chief executive officer of WPP (Photographer: SeongJoon Cho/Bloomberg)

WPP CEO Departure May Herald Empire Breakup, Strategy Shift

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(Bloomberg) -- Martin Sorrell’s abrupt exit from WPP Plc leaves the advertising empire in search of a new chief executive officer for the first time and vulnerable to a break-up, as the sprawling network of agencies faces its biggest challenges since the global financial crisis.

Sorrell’s departure late Saturday from the world’s largest ad company puts WPP’s omissions in grooming a successor to its 73-year-old founder into sharp focus, even with shareholders long flagging the issue. It also raises the prospect of a split, as WPP loses the man holding the empire together.

The shares fell as much as 6.6 percent with WPP’s future strategy now unclear. Sorrell, who turned a 1985 investment in a wire shopping basket manufacturer into today’s behemoth of more than 200,000 employees, was long seen as irreplaceable -- the man pulling the strings to connect its more than 400 agencies who create marketing campaigns for clients such as Coca-Cola Co. and Procter & Gamble Co. Now, the group faces pitches from investment bankers pushing asset sales or a more dramatic dissolution.

“The cataclysmic thing has happened,” Alex DeGroote, a media analyst at Cenkos Securities, said by phone. “People are scared there’s another profit warning coming. They are in a negative tailspin.”

WPP’s data management unit Kantar, whose revenue growth has “consistently underperformed” the group average, is the most obvious candidate for disposal and could raise 3.5 billion pounds ($5 billion) to reduce debt or return cash to shareholders, Liberum analyst Ian Whittaker wrote in a note Monday.

“The chances of significant chunks of the business being sold off have dramatically increased,” Whittaker said. “Sir Martin could arguably be called the glue that bound much of WPP together.”

Companies like Accenture Plc, a debt-free consultant five times WPP’s market value at about $100 billion, have been seen as potential suitors for WPP units, and have recently been buying up ad agencies.

WPP’s board is now focused on finding a long-term solution to replace a stop-gap plan of having two interim operating chiefs and an executive chairman.

The next CEO will be faced with reviewing WPP’s strategy as it battles declining ad spending, competition for digital work from consultants and the threat of web giants cutting out agency middle men.

Fragmented Federation

“Any executive filling Sorrell’s shoes needs to orchestrate assets across the holding company and doing so is a challenge in a fragmented federation of businesses such as those which exist within WPP,” Brian Wieser, a media analyst at Pivotal Research LLC, said in an emailed note.

Sorrell quit WPP less than two weeks after the leak of a probe being conducted by the company into allegations of personal misconduct and misuse of company assets, and just days before the board was set to publish the findings. He has denied the allegations and WPP said Saturday that the investigation was complete, without revealing details.

While a new CEO could more rapidly and radically restructure WPP, management could also become distracted during major reviews announced so far this year for ad contracts, Barclays analysts led by Julien Roch wrote in an emailed note. European media shares usually underperform around management changes, the analysts said.

WPP fell 6.1 percent to 11.16 pounds at 11:51 a.m. in London, giving the company a market value of 14.1 billion pounds.

Elder Statesman

The WPP chief was an elder statesman of the ad industry, earning him a knighthood from Queen Elizabeth II. He was among Britain’s longest-serving CEOs in recent memory, appearing regularly in public to discuss issues from Brexit to Donald Trump’s trade wars to the rise of Facebook Inc. and Google. He courted controversy with his pugnacious manner and inflated pay package, particularly at a time when WPP’s revenue stalled.

In a statement to WPP employees, Sorrell said the current disruption was putting “too much unnecessary pressure on the business” and that in the interest of the company and clients it was “best for me to step aside.”

Sorrell sought to boost morale in his farewell message, arguing that WPP has weathered “difficult storms” in the past.

The company’s decision not to reveal the specific nature of the allegations nor the outcome of the investigation is bad for WPP shareholders, said Guy Jubb, an honorary professor at the University of Edinburgh business school and a frequent critic of WPP’s corporate governance.

‘Cloud of Suspicion’

“WPP leaves a cloud of suspicion when the sunlight of transparency would be a welcome disinfectant,” Jubb said.

For years, the board supported Sorrell’s outsize pay packages amid shareholder complaints because he delivered. He earned about 200 million pounds over the last five years, largely due to a performance-related bonus package.

But there have been signs Sorrell was losing his magic touch. WPP’s financial guidance has repeatedly proved too optimistic, and its shares have lost a third of their value over the past year -- far more than rivals facing the same market challenges. WPP on March 1 lowered its long-term profit outlook, capping a string of disappointments that put Sorrell on the defensive.

Chairman Roberto Quarta has become executive chairman until the appointment of a new CEO. Mark Read, who heads WPP agency Wunderman, and Andrew Scott, WPP’s corporate development director, have become joint chief operating officers. Read and Scott are “highly accomplished” and have the board’s “complete confidence,” Quarta said in a note to employees.

“They will work closely together to lead the business, develop WPP’s strategy and optimize its portfolio,” Quarta said.

Regrettable Circumstances

Sorrell’s hastened exit contrasts with the dignified retirement of fellow advertising grandee Maurice Levy, the 76-year-old who led Publicis Groupe SA for 30 years before becoming chairman of its supervisory board.

“The circumstances surrounding this are regrettable, as is a leadership transition without Sir Martin’s direct involvement,” said David Herro, a partner at Harris Associates, one of WPP’s biggest shareholders. “He will be missed at WPP but eventually he was poised to step down.”

©2018 Bloomberg L.P.

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