April 24, 2018

One of the most common topics to emerge over the past week in relation to the transition underway at WPP is the prospect of a break-up of the company or a major divestiture program. For the most part, we don't think this speculation makes much sense, and if anything, WPP probably emerges from this process as a net buyer rather than a net seller. We continue to value the company at 1330p on a YE2018 basis and rate the stock Buy.

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 broadly-defined marketing industry is not experiencing a secular decline at this time, that WPP is only slightly under-performing 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 company's 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 company.

Size 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 micro-managed 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 company's executive team. While less co-ordination 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 large).

With regard to timing, we think it is unlikely that any major change occurs in the company's 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 executive

Once an individual is in place at the top, we would expect a review of the company's business to occur and a process that leads to an articulation of the company's 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. It's 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, it's 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 company's 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 M&A activity, especially in faster-growing areas of the broadly-defined industry, such as marketing technology and related services.

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