S4 Capital: Sorrell’s tech fervour has its limits

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Martin Sorrell built his reputation at WPP and now S4 Capital by espousing tech-led business. Monday’s gloomy profit outlook raises questions about his execution of this strategy, including an over-dependence on big technology clients.

The speed with which the advertising company issues profit warnings has knocked investor confidence. Its share price fell by a quarter on Monday. The depressed price means acquiring more growth is no longer an option.

S4C’s comparable first-half ebitda is down from last year’s period by 30 per cent. The outlook is dwindling. In July, net revenues were forecast to climb 2-4 per cent this year. Now the company says July and August were weak. When Sorrell squints into the horizon, revenues slip below zero.

Cost cutting at Big Tech can be held partially responsible. Some companies, such as Amazon and Meta, have reduced senior staff. Ad agencies complain that job cuts mean key contacts are disappearing. S4 is particularly vulnerable. Technology companies represented 44 per cent of revenues in the first half. Compare that with 12 per cent at Publicis of France, or 15 per cent at Interpublic in the US, as Citi points out.

At the same time, S4 can no longer rely on buying up revenue growth via smaller agencies as it did a few years ago. The roll-up model enabled fast development just as tech sector ad spend was booming. But with S4 shares down by half in the last year this juicy source of expansion has long since dried up. Instead, S4’s newest owner-managers, holders of 40 per cent of shares, must squeeze team costs.

Sorrell has no plans to change his strategy. Dependence on technology clients notwithstanding, he rightly sees digital ads as the future. This subsector should grow to an $871bn business by 2027, up nearly 60 per cent from last year according to eMarketer data. But S4 will have to address growth. Perhaps a merger with another midsized agency, such as Havas, may offer new possibilities.

Shrink-to-grow strategies have their limits. S4 Capital has tested those boundaries for far too long.