Picking up on my last post about Sir Martin Sorrell's future-gazing into the tea-leaves ... I note that he now says that the economic teacup looks pretty empty for all of us. Really? That couldn't just be a ruse to persuade value-building entrepreneurs to sell him equity on the cheap, could it? asks Rose Lewis.
A cynic might say that the negative "worst is yet to come" message issued by issued by WPP's GroupM this week is all a bit scoundrelous, given that WPP's share price is up over 30% in the last 3 months. Of course I couldn't comment on that but I do have a view on what is really happening.
It is certainly true that media space sellers, TV channels and newspapers have certainly seen a decline in advertising. That's been the case for the last 7 years but it's now more pronounced. When the economy hurts and budgets are tight, it's the expensive media outlays that suffer, especially ones that do not provide a proven return that can be measured robustly.
There is evidence of cuts in other forms of marketing expenditure, if you look for it, but in reality, much has gone up too. So let us dispel some myth from truth.
Check out this chart:
The stock market performance of marketing services companies in the last 6 months has been excellent. Good marketing firms are doing well. Those that are in debt are finding it harder to raise cash, but if there is a good business case both the investors and banks are not turning their backs on them.
Money is coming back to the market, albeit it at a slower pace and with more due diligence, but it is coming back. Those that bought other companies with debt are struggling to continue to buy, but they are also looking at alternative methods of buying using their equity and partnering with private capital to raise the cash needed to make good acquisitions.
What about the future? Well, here is where some supposition has to come in to play. Everyone is finding it harder to get a signature on a contract and they are taking longer to close, but deals are still being done. Money is starting to come back in to the markets, and equity values are keeping up in the listed companies of quality.
A lot of the "smart money" stayed on the sidelines in the past few months and has missed out on the 30% + rises in share prices. Maybe that wasn't so smart, in retrospect. In fact, those fund managers are looking a bit silly now, having under performed the market on the share price recovery and they are are starting to buy in on an opportunistic basis.
There's still a lot of money on the sidelines but, over the next few months, it's going to find it very tough to stay out as the markets recover. So that should keep the rally going.
Will we see old levels? Not for quite some time.
Will we see some confidence come back in to the market led by the stabilisation of house prices and equity markets? Well, I think the answer is yes.
Will that lead to more business for the marketing service sector? Again, with a delay, the answer is yes.
My conclusion ... don't sell out on the cheap is my advice. Hang around and sell on the upswing, when the big groups start coming back in volume looking for acquisitions and the money starts to flow freely again in our part of the economy. By all means take tea with Sir Martin Sorrell and friends if the invitation arrives ... but see if you can take a raincheck on any offer that comes out of it for a while.
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