The combination of MDC Partners and Stagwell Group, announced late Monday, will create a global challenger to the “bloated and outdated” holding company networks that have dominated the industry for so long despite their inability to adapt.
That’s the plan proposed by Mark Penn, the former top Clinton aide and Microsoft chief strategy officer who will serve as chairman and CEO of the combined network, which aims to hit $3 billion in revenue by 2025.
“There hasn't been something new of this size in the marketing industry for as long as I can remember,” Penn told Campaign US.
The new network will deliver on this goal in four ways: through creativity and communications from agencies including 72andSunny, Forsman & Bodenfors and Anomaly; precision data and media buying capabilities; consumer insights from companies like the Harris Poll; and digital transformation offered by agencies including YML and Code and Theory.
The idea is to have these companies work more closely together, with technology at the core, to deliver benefits that “far exceed the individual qualities of each company,” Penn said on an investor call on Tuesday morning.
Penn, who became CEO of MDC Partners in 2019 after Stagwell invested $100 million in the company, has spent the last two years getting the historically independent-minded network to collaborate internally. He pointed out cooperation between 72andSunny and Instrument and Anomaly and YML, specifically, and to a new integrated solutions group at MDC that helps bring agencies together on specific accounts.
“We do actually financially incentivize the companies to work together and refer business to each other,” he told Campaign US.
But Stagwell, which will own 79% of the combined company’s common equity when the transaction closes, is the clear driver of evolution. The combined network aims to “more than triple” the amount of “high-growth, digital offerings” from MDC.
Penn is unconcerned about getting the two networks to cooperate because it’s a process they’ve been on over the last two years, he said. “This doesn't come out of left field.”
The new network will manage $4.4 billion in media spend annually, “primarily online,” Penn said, and employ 8,600 people in 23 countries.
A global offering
Combined services between MDC and Stagwell, which could add 5% organic revenue growth annually to deliver $200 million of pro forma cash generation in 2021, are a big focus.
But the possibility of merging agencies within the group is not on the table.
“I don't think we are looking at that kind of consolidation,” Penn said, referring to the recent merger at WPP between Grey and AKQA. “We're not too big, having to slim down. We're smaller, having to scale up, and that creates opportunities.”
One such opportunity is M&A and investments. While Penn didn’t go into detail about acquisition targets, he noted that he wants to complete the group’s global footprint in regions like Latin America and the Middle East, and invest in emerging technologies such as AI.
The network will also build technology, with plans to grow digital marketing services 10% to 15% to make up 32% of the combined business. Over the past couple of years, the group released products such as PRophet, an AI platform for the PR market, influencer marketing platform Koalifyed, and market research platform Compass.
MDC and Stagwell can develop products quickly and effectively because it has 600 engineers in-house who are not “divorced from understanding marketing,” Penn said. The company aims to generate $70 million in new revenue streams from tech products developed in-house by 2025.
With this new scale, the network will look to compete in larger, global pitches against the traditional holding companies.
“We're able to invest in the core strategic areas and not have the bloat of the holding companies that are hung over from 50 and 60 years ago that they're trying to deal with,” Penn said.
Penn has no plans to unveil a new name for the group or sunset the MDC or Stagwell brands. Individual agency cultures will remain distinct, but “it's important that they all have an overlay of collaboration,” Penn said.
“Once they understand collaboration is additive but not a threat, that unlocks the power,” he added.
Those who have been following MDC’s financial woes for the past five years know that the tie-up with Stagwell is about more than just operational synergies.
MDC has been struggling financially since a 2015 accounting scandal involving former CEO Miles Nadal pushed the company’s market cap from $1.5 billion at its peak to less than $90 million this year.
MDC’s stock popped 14% to $2.60 upon news of the merger this morning, which will decrease its net debt leverage ratio from 4.2X to 3.4X, and achieve roughly $30 million in savings from operational efficiencies.
“On almost all major financial metrics, this strengthens the balance sheet,” Penn said. “We will be a stronger, better, more vibrant player in the marketplace.”