Was Saatchi & Saatchi One of the Great Entrepreneurial Firms?

In 1989 Saatch & Saatchi acquired Gartner Inc. (which Gartner employees and Bain bought back three years later). We did some background checks on Saatchi, which was by far the largest advertising firm in the world, but we had no idea of the firm’s true but relatively unknown story. Years later I found a draft of a paper by John Connolly and Gene Busnar, which I believe was never published. For me it was fascinating because it describes the history of this firm which we later had to deal with and I’m reprinting it for your possible enjoyment. I inserted a few comments myself, in [brackets]:

“After Maurice and Charles Saatchi unsuccessfully attempted to buy a bank in 1987, their stock plummeted and the smart money knew it was time to bail out.

Journalists like to talk about the rise and fall of Saatchi & Saatchi. But there was no rise, it was a pyramid scheme from the start, engineered by a couple of brilliant rug merchants who cloaked themselves in the garb of world-class executives.

Even after their pyramid had crumbled, the brothers’ own grandiose lifestyles did not suffer. But this sleight of hand had always been part of the Saatchi mystique.

By 1974, Saatchi & Saatchi had built a reputation as London’s “creative agency” — a small shop that turned out clever work. At that point, they were Britain’s 13th largest advertising agency. Not bad for a company that had only opened its doors in 1970, but small stuff for two brothers entertaining visions of conquering the entire advertising industry.

From the moment they set up shop, Maurice began writing letters to agencies – many of which were substantially larger than his own – asking if they might want to be acquired by Saatchi & Saatchi. Most of the executives contacted by Maurice laughed off these buyout overtures as delusions of grandeur, but Maurice knew exactly what he was doing.

Nobody was laughing in 1975 when the Saatchis engineered a reverse takeover of Compton Partners – a stodgy, publicly traded London advertising company owned by New York’s Compton Advertising. Compton had hoped to acquire Saatchi & Saatchi and install the brothers as the energetic, inventive management team the older company needed to revive itself. “Better yet,” said the brothers, “in exchange for our talents let us acquire you.”

When the dust settled, Charles and Maurice had taken over a company twice as big as their own. Their unlikely catch included a majority share of the merged company’s equity, a jackpot of blue-chip accounts like Procter & Gamble, and Compton’s stock exchange listing. The newly combined company ranked fourth in the UK!

When Compton’s senior managers saw the headline “Saatchi swallows up the Compton Group,” in the British advertising paper Campaign , many got out as quickly as possible.

The brothers couldn’t care less if feathers had been ruffled. They had succeeded in establishing the pattern for future Saatchi acquisitions. Here’s how one former senior executive describes the process that would be repeated many times over the ensuing decade:

‘Charles and Maurice would tell the prospective sellers anything they wanted to hear, and invent an ideal version of what life would be like after the deal was signed. After that, they’d just do whatever the hell they wanted.’

Maurice and Charles sought to use the advertising trade press as their personal publicists, and they made a good deal of headway during the early years. Still, no amount of positive spin could have matched the boost the Saatchis received when, in 1979, they were retained to create the advertising campaign for Margaret Thatcher and her Conservative party in the general election. Interestingly, this was the year that Gartner Group was founded.

So, if the brothers were going to be the largest advertising agency in the world, they would have to go public. To do that, they would need the support of The City, London’s version of Wall Street, in order to obtain the necessary financing.

Maurice Saatchi and his financial officer Martin Sorrell devised a management system that monitored the company’s financial condition daily and imposed rigid budgets on its ever-expanding roster of acquisitions.

This system made a strong impression on the City’s financiers. They provided the capital that made Saatchi & Saatchi London’s top glamour stock and enabled the agency to launch the biggest acquisitions binge the world of advertising has ever seen.

In addition to their global visions, Maurice and Charles believed they were too big to be contained by the advertising business. Searching for new worlds to conquer, the brothers decided that service firms were as ripe for acquisition as advertising companies. Thus, they decided it was essential that they become a full-service communications agency and in 1984, the Saatchis began implementing their one-stop concept, offering clients not only advertising, but public relations, research, even legal and financial services.

In 1985, the Saatchis were buying companies, most of them American, at the rate of one a month. In 1986, the Saatchis capped off their unprecedented corporate buying spree by paying $100 million for the New York based Backer & Spielvogel, the largest sum ever paid for an ad agency. Weeks later, they smashed that record by paying nearly $500 million for Ted Bates Worldwide, the third largest agency in the United States.

With the Bates acquisition, the brothers had realized their dream. Saatchi & Saatchi was now the largest advertising conglomerate in the world, operating on five continents and servicing more than 50 of the world’s 100 largest companies. But the cracks in the Saatchi pyramid were now becoming obvious.

Many analysts mistakenly consider the Bates acquisition to be the beginning of the end. It should have been clear, however, that Saatchi & Saatchi was heading for disaster much earlier in 1984, when the brothers started acquiring consultancies in areas they knew nothing about.

But in the wake of the Bates deal, some of Saatchi & Saatchi’s biggest clients started to defect. After Procter & Gamble, Colgate-Palmolive and Warner Lambert removed more than $300 million in business, the brothers were backed into a corner. Something dramatic would have to be done, lest the stock market catch on that the engine fueling Saatchi & Saatchi’s breathtaking growth in profits was a pyramid of acquisitions built on escalating debt.

Things started going downhill quickly. Saatchi & Saatchi’s stock price tumbled by almost 20% between September and October 1987. There was also a series of key personnel defections, for example, Martin Sorrell, the company’s financial genius.

Saatchi retained Booz Allen to strategize how to regain growth, resulting in the conviction that the consulting business was ripe for consolidation and that Saatchi could be the first to exploit this huge opportunity, which would be enhanced by many advantageous synergies. And after all, Saatchi had experience when it came to acquisition binges! So Saatchi then succeeded in acquiring eleven firms in disparate areas of consulting [Gartner Group being the last in June 1988 and the first in the information technology space! I was skeptical about Saatchi’s stated objective of becoming the world’s leading consultancy because it would be an uphill fight with organizations like Arthur Andersen and others around.  I felt that Gartner would be good for Saatchi but was not convinced that the converse would be true. But the board with its VCs saw a handsome liquidity event, and while I was ready to retire to my vacation home in Aspen CO, I nevertheless agreed to stay on as chief executive for just under three years to the end of our 3/92 fiscal year].

It was now clear to Saatchi insiders that there had never been much real “internal” growth at Saatchi and little would be forthcoming. Charles and Maurice increasingly removed themselves from day-to-day operations and in October 1989, Maurice announced that he and Charles were giving up their roles as joint chief executives in favor of French turnaround expert Robert Louis-Dreyfus.

Louis-Dreyfus immediately had to fight to keep investors from bailing out and to ward off predatory takeover artists. He instituted an austerity program that included massive employee layoffs and in mid 1990, initiated his fire sale of the consultancies”.

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