When Sir Martin Sorrell set up S4 Capital it was meant to mark a triumphant last act, a return to the top of ad land and a means of rehabilitating his tarnished reputation, but the worst slump since the advertising recession of the late noughties is threatening to derail his comeback.
Sorrell launched the digital marketing group at lightspeed just a matter of months after his scandal-ridden departure from WPP in 2018, which followed allegations that he paid for a sex worker using funds from the FTSE 100 company he founded and spent decades building into the world’s biggest advertising group.
After an investigation into the allegations, which he has always strenuously denied, he departed as a “good leaver”.
Armed with a steely determination to prove his critics wrong, and a business model based largely on vacuuming up big tech’s marketing budgets, S4 swiftly ballooned to a £5.2bn market capitalisation – more than two-thirds the value of WPP.
Yet the collapse of the ad market, in part fuelled by the more straitened times the tech titans find themselves in amid job and budget cuts, means S4 Capital is now valued at just over 6% of its peak.
Last month, S4 revealed it had made 500 staff redundant by mid-year while laying the groundwork for more to come as the company revised down its forecasts for revenue and profit margins this year for a second time.
The chief executive of ITV, Dame Carolyn McCall, has said the industry is in the “worst advertising recession since the global financial crisis”.
Internally, staff morale at S4 Capital is at a low ebb as client budgets dry up and a sense of panic sets in about job security as the promise of the digital dream shatters.
When Sorrell, 78, set up the company he initially gave himself five years to build a digitally focused advertising empire. The strategy initially paid off, with S4 Capital displaying explosive revenue growth and happy investors fuelling a share price surge to a peak of almost 900p in 2021. At the time, Sorrell gleefully likening his success against the slower growth behemoths of the global ad industry to a “torpedo boat versus an aircraft carrier”.
His self-described “faster, cheaper, better” digital model was underpinned by frenetic deal-making to build scale, with dozens of quick-fire acquisitions backed by S4’s soaring share price.
However, questions started to be raised about the internal machinations of Sorrell’s rapidly assembled new mini-empire when his company’s annual results were twice delayed by its auditors, PwC, a situation he described as “embarrassing and unacceptable”.
“We changed too much too fast. All changes come for a good reason, but it feels like there is an overall feeling of being lost,” said another employee, in anonymous comments shared by Sorrell recently in a weekly email to all staff.
More recently, S4 Capital has suffered from its reliance on the tech clients that had fuelled growth. Technology companies, which have slashed budgets over the past 12 month, represented 44% of S4’s total revenues in the first six months of the year.
The company’s revenues will go into reverse this year while its big rivals such as WPP, Omnicom and IPG in the US and France’s Publicis Groupe expect growth of 1% to 5%.
“[S4 Capital’s] execution is in tatters,” said Julien Roch, an analyst at Barclays, in a recent note to clients.
With S4 Capital’s share price down more than 90% from a 2021 peak, deal-making is at a halt and Sorrell’s focus is now on making the business more efficient and integrated.
At the end of last month, S&P Global downgraded S4 Capital’s credit rating, determining that the ad company’s “organic growth prospects are uncertain beyond 2023”.
“Many of the company’s founders wonder why they sold themselves to S4 and are complaining about the stock price,” says one S4 executive. “It is a bit of a Frankenstein’s monster, being sewn together from various parts, with no internal cohesion. We need to get it together because there is no way we can compete against Accenture Song or WPP if we want to stay on top.”
Sorrell has been a vocal proponent of the benefits of artificial intelligence, arguing that while the ad industry may see widespread job cuts, S4 Capital is better positioned to harness the opportunities.
However, the company’s “faster, better, cheaper” model is underpinned by its content business, which makes creative campaigns for clients including the Facebook and Instagram owner, Meta, Ray-Ban, Reebok and the shoe company Havaianas, that run across digital platforms. The content business saw profits plunge by more than 70% like for like in the first half of 2023, compared with the same six months last year, and has a profit margin of just 2.6%.
It is this part of the business, which one executive said “essentially” ran the whole company, that some observers believe could be most at risk of disruption from AI.
“I think he has backed a horse and I’m not sure it has come in,” said one senior ad agency executive who worked closely with Sorrell at WPP. “The reality it is very tough out there and he is pitching for the ‘pipes’ – low-cost, high-speed content production – and AI is going to replace that sort of work. S4 Capital was built to service that work. But it is going to get easy fast, lots of people can and will be able to do that too. Still, if I back anyone to scrap their way out of a corner, it is Martin.”
Sorrell’s grit, determination and business nous has kept him at the top of the global advertising industry for decades.
For the man for whom retirement is anathema, who once joked that he would leave the industry “only when they shoot me”, returning S4 Capital to its heady heights is a job his detractors would do well not to bet against.
“Our approach is faster, better, more efficient,” says Sorrell, who turns 79 in February. “I still believe that is the best way to go. It is a billion-pound revenue business, we continue to build strong relationships, are well positioned geographically, we have to get it right from an efficiency and margin point of view. I don’t like what has happened in the markets. But it is a long-term game, it is what it is. I still love it.”
