WPP: What Happens Next -- Pivotal Research

When we pause to assess what will happen next to WPP for starters we are guessing that members of the Board understand the industry well enough to know that the broadlydefined marketing industry is not experiencing a secular decline at this time that WPP is only slightly underperforming other traditional agency holding companies and that WPP should be seen as a going concern This means that the Board is likely to focus on growth and expansion opportunities within the company39s industry when it appoints a new CEO Reinforcing this view we can imagine that the business units which are most desirable to acquirers relatively separable and with high growth potential are the least desirable ones to sell especially competitors Further a broad sales process could bring a chill to business activity across the network as clients begin to question where their business will be housed in the new future and as prospective employees avoid the holding companySize is not by itself necessarily a problem For anyone other than Sir Martin Sorrell WPP may be too big a confederation of businesses to be micromanaged the way it was in the past However it is not necessarily too big a company to be managed if organized and managed differently This could mean fewer direct reports and less direct involvement in different parts of the business by the company39s executive team While less coordination across the company may result individual business unit leaders who undergo less ongoing scrutiny from the center may become less constrained and less risk averse freer to find the new revenue streams the company expects it will need to support future growth Key to this occurring is the degree to which different WPP business units have capable executives running them we think they do by and largeWith regard to timing we think it is unlikely that any major change occurs in the company39s asset base until a new CEO is appointed Our guess is that the Board recognizes an external search for a new CEO adds cultural risks and potentially takes a significant amount of time before a new individual could be installed and brings their own team in This suggests that the next CEO may more likely be an insider or alternately an outsider available to start quickly who gets paired with a strong internal 2 executiveOnce an individual is in place at the top we would expect a review of the company39s business to occur and a process that leads to an articulation of the company39s strategic direction and the ways in which WPP will pursue growth within the marketing industry That direction could include or exclude some major business units or other assets but could also identify areas which warrant significant ongoing investment It39s not unreasonable to think that Kantar might be sold in part or in whole either to private equity or possible to another market research company who it does not compete with because Kantar is relatively separable and because investors have never been fond of it Of course it39s also possible that new ideas arise around how to realize synergies between the research division and other parts of WPP We think it is more realistic to assume that various assets within the company39s venture portfolio which do not provide tangible business benefits for the rest of the company could be divested At the same time WPP will want to demonstrate its commitment to growth and so we would not be surprised to see enhanced MampampA activity especially in fastergrowing areas of the broadlydefined industry such as marketing technology and related servicesWe maintain our 1330p YE2018 price target on WPP stock as well as our Buy ratingVALUATION We value WPP39s business with a DCF framework incorporating a 74 nearterm discount rate a 128 longterm discount rate and a 6 longterm growth rateRISKS Agency risks relate to blowback from the transparency issue squeezing fees from clients competition from adjacent industries reduced competition between marketers and demand for advertising servicesFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE WPP 42018pdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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WPP: What Happens Next -- Pivotal Research

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Brian Wieser

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WPP: What Happens Next -- Pivotal Research

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