#76: Mark Penn on Stagwell’s capital allocation and global growth

[Music] Now I formed Stagwell because I thought the big companies were too slow to adapt to clear digital change. [Music] Welcome to Agency Business, the podcast where we talk about, well, agency business, through the lens of finance, strategy and leadership. Andrei Weiserup, Madison Wall. And I'm Olivia Morley of Fusion Front Media. Every week we talk with agency CEOs and industry experts about where the money is flowing, how models are evolving. What that means to you? [Music] Who are you? Hi, I'm Mark J. Pan. What do you do? Right now I'm chairman and CEO of Stagwelling. Why did you wind up in the agency industry? Well, because I had been in marketing services, really almost all my life in one way or another. And I said, you know what? How do I take my collective knowledge and apply it to something that might change the industry? Make a better. Good approach. Why the services side of it versus say you were at Microsoft for a long time? I mean, obviously that cannot have another period of time inside of the agency world. But you could reinvent yourself in any direction if you came outside of Microsoft. Why create Stagwell, why this direction? Well, you see how many tech companies went out of business? How many marketing companies went out of business? Almost none. Right? And so what I said was, let's do services first. Let's get the clients. Let's develop technology and then let's sell services and technology. Let's go all the way up to global full service down to platform self-service, starting at 10 years ago. Absolutely. Zero. Makes sense, but. Why do you stay? I mean, obviously I agree with you that, you know, there's a resiliency to this. Why do you think it's so hard to persuade so many people in the outside world that agencies are resilient relative to say a software company? In a more specific, concrete thing, I suspect that agencies collectively will elast most of the today's global digital giants. Because of that resiliency, I don't think most people would agree with that. Why do you think there's just perception challenge with agencies in general? I think there's blind prejudice against marketing. I think American investors, in particular, think the companies should exist without marketing, but somehow it's evil as opposed to it being the lifeblood of any really good company. They have to have a brand, they have to have knowledge of that brand, and that really drives, you know, consumer choice and the chance that consumers will take on products. But I think, well, let's talk on the investor side. I mean, I would say right now and for a good number of years, agencies in general have been in the deliverments to say the least with some exceptions and some periodic exceptions. I think, certainly, as a form of security, as I was covering the sector, I loved kind of owning a chunk of the mental space of the agencies because most people were paying attention. And so it was a very low interest category among institutional investors. But it produces an artist and it's around 20% on our ease, and it's shocking how profitable and durable agencies are. So when you talk to institutional investors, you need to look at the map. It's not about the operating side of it. That's great for private equity fund, or for a public equity investor where they need to see capital turn on the actual stock itself. How do you persuade them that's going to? Well, what will it take for the industry to persuade investors that that can change? Well, I think that we're going to get back to persuading it. Look, chip companies, okay? Bit the rage now. You can go back. They had five years in the doldrums. Right? I could look at Microsoft. I was at Microsoft. How many years was the stock 25? Okay, before it was 400. So this is not uncommon that investors go to sleep on various sectors and then eventually wake up. Now, there's no question that agencies advertising and marketing are undergoing significant transformation and have. Where investors go wrong is they think that transformation is going to kill marketing rather than just marketing kind of reemerge from a shell in a new form. Because fundamentally, the process of marketing, bringing brands to market, keeping them to market is not changing. Right? What's actually changing is how people spend their time. Right? I grew up. I was in front of the TV. So they had TV ads. Last bunch of years, everybody's been switching to first they switched the internet. So then we had a bunch of internet ads. And they switched to the phone and Facebook and now everybody just phone and Facebook ads. Don't have some robots. We're going to have some robots ads. Have AI. We're going to have some AI ads. You go to the stadium. We're going to have some stadium ads. Right? Advertising itself has to change. Now I formed Stagwell because I thought the big companies were too slow to adapt to clear digital change. I went to Microsoft. I actually had the idea for Stagwell. When I went to Microsoft, I said, "You know what? If I believe that we should have a more tech oriented marketing company, I'd better go to like Microsoft and make sure I understand technology." And there I rose up to me, head of all the marketing and then chief strategy officer. And Steve Bomber comes to me when Dan says, "You know, after he exit the company, I like working with you. I'll fund that idea." And get you started. Such a headmiss day and other year. And then we started, you know, basically the end of 2015, beginning of 2016. 10 years ago to create Stagwell as a combination of creative, digital, and take some of those things that I thought were wrong with the other holding companies. Like how do you create a collective or collaborative environment so that people can leverage all of the various activities that they do? I thought that was sorely lacking in the other companies. Well, I mean, I guess I would argue that most of them had many of these assets, maybe just different weightings. So let me pivot that a little bit to say, how do you think about what your asset exposure should be in terms of function, in terms of geography? And I do want to hear it on A.G.K. and international smash, but maybe even to stick within a domestic context, how do you think about the asset exposure by sub-curl of the industry? Well, I would say right now the other companies have become mostly media companies. They've abandoned a lot of the other services we have not. We believe in premium creative that there's a huge space for that and that that's not going to disappear. In fact, in a world where everybody has incredible tools, how do you differentiate? You're going to have to pay a premium to differentiate and we're finding that we're making huge inroads, which has had sort of almost ten new wins across the industry. And those wins are showing that we're able to come out and compete against those. Now, the first principle is how many companies can do a global marketing campaign? Only four. Okay, I have one or two competitors that are regional, a European competitor and Asian, so in this primarily Asian, and I have three other companies that can do a global marketing campaign. Every pitch starts out with at least four people. Well, I mean, you find, I guess if I push back on that a bit, I don't tend to think about a stag well in the, I just be having the comparable depth of global capabilities. But you're saying that you are, you believe you're competitive when it comes to every day, we enhance our capabilities. Okay, so I look at the other companies and they're shrinking. They're trying to get rid of assets. They are, right? We're growing. But isn't it what I already looked like two years ago is not what we look like today. But I wonder if we look at the where I'm 51 countries. That's fair. We've presence in the markets, but when I think about the largest global markers want to have a global AOR, which may not necessarily by the way I think be the best, most desirable business, because that becomes the most commoditized, there's the least able to take advantage of whether an anomaly or 72 in sunny does anyways. They want scale, they want commoditization, maybe not even differentiation. I perceive that many of our brands actually are trying to be differentiated. See brands is the way that the whole coast brands are not. And then yes, but collectively now they can create teams that have global coverage because ultimately the biggest clients need global coverage. So we're covering them in two ways. One through marketing services across, you know, if you were to go back, we were in 20 countries and we're in 30 countries. Then the last two years, I opened up the both the mid east and over in Asia with 10 new markets so the companies can place global marketing campaigns with us. Because that's critical because what we have to do is keep growing the size of clients. How do you decide how much exposure you want to say and how many feet on the ground say in Australia and Indonesia and Romania, etc. I mean, how do you form a view about like the other whole coast, I think going back maybe a decade ago, I think wisely identified let's prioritize the top 15, 20 countries and then we'll create partnerships for the rest of it. And let's offload that capital, get some cash in, fund other things inside the core markets and not worry about the mine ones. How are you thinking about how much capital you should be putting work into individual countries and well, yeah, just love to hear you thinking in Tied 80. Well, we're 80% US. So we're 80 20 and the key thing is to be able to handle global clients for global assignments. And then let me just go back to its global full service down to platform self service. So at the same time we're developing the technology for people from the world. who either want to do it themselves, or have global marketing organizations that are too big and that now need software that we have like the machine. So we keep trying to grow, right? So I had said as a goal of 6040, between U.S and the rest of the world, but even though every time I expand global, the U.S. keeps growing more. So that sends me a message that maybe I don't have to go 6040, but I do need to be able to cover all those areas because there are certain pockets of growth in other areas. I don't have to dominate those markets. What I need to be able to do is provide credible and good coverage so that when they go to a global committee to award a global contract, the first number of handles as I like these people. And the first handle is Europe. We have several thousand people in London. We have really a great operation in Blue Fan, with great operations across the U.S. We have a great hub in Singapore, out in Asia, again with all of the other operations across the region. We're going to keep expanding and we really have now five or six hundred people from zero over in the mid-east. So we're really covering, I think, the key areas of growth. So there are opportunities to invest further, right? And I presume, coming from wrong, that it could be client-led, visual-led, pocket-led, opportunistic, whatever. So you identify that there is an opportunity to expand and invest. Why do you do buybacks? And I asked that more to philosophical level. And I would say this to any companies, not just you. I, as a forester, I would always look at companies that did buybacks and say, "That's a lack of imagination about where you could put capital in word. There surely must be somewhere else you could do it. Is it, are you telling us that this is the best-used capital?" And I know the math behind why it works. But so rhetorically, aren't there better use of capital than putting money into and doesn't have more for the way else? I don't love buybacks, actually. I love actually what you said, which is really invested. And we have a lot of continuous investment opportunities. But sometimes the sector is so undervalued that we've been able to buy our stock for less than we've been buying another company. Right? And that's the case. We buy. Well, I thought like, with ADK in particular, I mean, I think, forget it, we calculated the net cost was like negligible. I mean, it was like pretty remarkable, cheap. And I would have to think because of this investor sentiment being so negative on the space, there's so much available at such great value. So that's why I wonder why not put more money in. At the same time, you have, on our estimate, we calculated there's 17 public and you listed agency groups we're tracking. And among them, you're the highest allocator of capital into you allocate more into capital expenditures in any other agency group of scale that we're with. Yes. Well, I think what shifted in the last year or so is we've went from acquisition capital investment to capital investment in our software. And I think that's a huge shift in the last year because we had always designed this company when I came out of Microsoft to be tech first. And AI came along and this was a huge opportunity for us. I'm sitting here with great tech teams, five out of the six top clients, by the way, our tech companies. Right. That is our sweet spot. And we said, we have to develop in the frontline AI application products and areas. And so we shifted capital into cap X, which when I came to the companies, all they did was spend on real estate. The cap X line was like huge installations. I cut all that out. We have great products, the machine, the deal with Palantir for the targeting system, the media machine that we just sent out. We have Harris Quest, which is an incredible suite of products in the research industry. We have incredible suite of projects and communications and influencer marketing. And we're building also, in addition, I think, to finishing the products, the sales organization and the sales motions that you really need to do that. And then we've shifted our digital transformation with a big partnership with Adobe to help implement their software across across customers. I think you're seeing double digit growth in our digital transformation. And you're not seeing that anywhere else. Well, I mean, although I would suggest that there are pockets of double digit growth for every other agency group, it doesn't produce necessarily overall growth. We estimate that you make it slightly negative on the last quarter or get on a like for like net revenue, organic growth basis, explode, black side of the country. Oh, whoa, whoa, ex political. Oh, let me just take your right arm off and say, oh, you were fine. Accept if I didn't count your right arm. That's fair. But actually, back to the communication with investors, wouldn't it make more sense to separate how you report the advocacy business versus the right way you used to do that? I mean, stop doing that because of people like you would say, well, let's not count that political business. It's just a fast growing, highly profitable business. There's no reason we should count that. So that we're in a count of business that we know isn't going to grow as fast, not count the business that we know is going to double or triple over the years. And what could it say? Is that make it be I would have done with that game. I'd love to hear your feedback on this one because I have perceived that it obscures the underlying business, the underlying trends to be able to model on a corelier annual basis from their new investor communications perspective. It's always been a very talented. Oh, I had, there's good and bad things I think with the MDC legacy, which I always appreciate as an incredibly entrepreneurial business, but it was so complicated. The model I would always tell them, I can't cover you. I've done best to much time to understand this. We are super clear. There we've got the segments. All the advocacy is in a single segment. You can still do your model, which I did, right? So you can still do your model, but darn it, stop with this cutting that out and focusing only on the growth you're going to tell me, I'm not going to grow as fast in creator. Okay, I know that. But I've got huge political, I've got huge digital transformation services. I'm infusing my media with the latest in technology. And so stop counting the lowest growth area as my core value and start looking at these incredible areas that are going to grow. I'd rather see those businesses laid out on a two year of a two year basis. I mean, that's kind of the way I try to think it out when I'm trying to understand. Again, the two year of a two year takeer is kind of the right way to think about it on my humble beat. But I'll give you my right arm and we can carry on back to the cap XTs. I just want to hit on this last point and maybe before we wrap up a bit. So again, I think that the cap X, what 4% or so of revenue going into cap X, I think you said this year it'll hold up at a similar level this year. It'll probably go down next year. Why? Because this is a thing I don't know if you guys are doing uniquely well. And I'm very critical of other agency groups for keeping sets low levels. After 2%, 2% is mostly real estate to your point and laptops. I can make a very clean connection between investing the business and it doesn't grow, especially in the period of change. Or if you don't invest in a business, it will not grow. If you do invest, it might. It's like this should be rocket size. So why cut it? Why not keep it out in the LV level and take care? Well, it really depends upon where I feel the products that we're investing in are. And if I think it takes another year, I'll keep investing in it. We have to achieve, you know, the look we're at about 100 to 120 million dollars to the marketing cloud. We set a goal of 25 million of the new enterprise products. And I got to be in 27. I really have to get like 75 million of the enterprise products and keep the cloud growing. So I'm growing a couple hundred million dollar division of really SaaS software. I'm growing double digital transformation services. And I'm growing double digit political. I need you to focus on, wow, okay, that's not like omnicom, right? I mean, every day we're coming into new clients and when we come into new clients, they get to meet not just the agency that wins it, but Staggle itself. They take a little bit of the other services. And that's the opportunity for the long term growth of this company, which has come from zero. So almost three billion in revenue. Okay. Well, Mark Pint, thank you so much for the time here. Agency business. Thank you. Thanks. If you're listening to this, all do you care about how agencies make money and where they're having? There's more in our agency business newsletter, episode recaps in deeper context and exclusive takes on the week's biggest agency business news. You can sign up at agencybusiness.substac.com. It's free and comes out every Monday. So news of the week, this week we've had a busy news week, but it's been full of canned stuff. There were a couple pieces of news that popped out to me that were interesting from a business perspective, namely the departure of Darryl Lee from omnicom. So Darryl has been a major player in the omnicom ecosystem for some time now. This to me was kind of a surprise. Brian, did you have a chance to look at the news? I did just see it. In fact, I could have sworn I someone said they just saw Darryl and can. I'm still in France right now. I got to say I wasn't surprised. I didn't understand the role of someone there where you had Tyler, Terrible in place. There's just I heard rumblings of another on the communit that was media brands where there's going to be more change and more leadership changes. It's interesting that there's still stuff happening. And it didn't all there were things that maybe didn't make sense in the when the initial leadership team was announced. Like again, Darryl's fantastic, but they just named a CO2 McCann. So given the cost constraints, why would you have a second person of burlacabar characterization comparable stature? Well, and it's interesting to me, like I'm just looking at this from, you know, it's another proof point that even though consolidation and the initial wave of change has occurred, like we're still seeing things shake out here. And some of that might be very intentional, meaning they took care of the changes they knew they wanted to make, they being only calm and that were most impactful right away. And others, they thought maybe there's a reason hang on or maybe there's a situation that could work out. So you don't want to execute on change if you need the ability to back off or adjust or whatever that solution is for the individual executive. But it does highlight the yes. As you said, there's, they mean they're not there. Sure. Yeah. Next piece of news that I thought was sort of interesting. Depth has announced its own AI tech stack, ostensibly to compete with the likes of WPP open and all of the others at all of the major holding companies. I reported when I was at ad week on what I think was the first iteration of this several years ago. It was specific to the media side of the house. If I'm remembering correctly, going back to my demo, some of that is in the ad week article that's still up. But this is the next level. And what I think is really interesting is I'm looking through it is like it does look like the interface is very user friendly. And I'm seeing more and more of that in some of these like new iterations of these media and AI platforms. Like they've got more integrated creative. They've got better UI. So the depth is just the latest. Yeah. And I think it highlights, or at least I think it highlights a theme or trend that we've tried to highlight around a capital expenditures inside of a business will support long term growth. And then those capital expenditures are in turn supported by a private equity investment largely or capital that's been made available through P and depth is one of those firms. You know, it's interesting. It doesn't take much to move the needle as we've we matter. Some all over it about and I think talks about this podcast. The typical agency only puts 2% of its revenue into CapEx and that includes real estate. Stag Wells, we heard earlier in the pod is absolutely standing out with spending a substantially higher share. It would be interesting to see if the depths of the world or other seemingly growthy, well positioned middle size private agency groups are actually doing similarly. If so, that's really positive for them. And frankly, it's a much bigger source of growth for any agency group let alone the, you know, section that calls itself independent. Yeah. Well, it's fascinating to think about the flexibility that some of these companies, whether private or private equity owned, have to invest in some of these capital expenditures right relative to the larger holding companies, which I guess are under more scrutiny by the market. Would you say that's correct? Yeah. No, I agree. And well, I think it's largely a choice, meaning I think that it's a circular one. If the public companies choose not to invest more in their future, because they believe that investors will be afraid, it's not like they're particularly excited right now anyways. So I never bought that idea to start with, but it is absolutely what explains a lot of the decision making, frankly, among most public companies that they fear the consequences of some, you know, stock driven downturn. Well put. All right. So last piece of news that stood out to me, WPP enterprise solutions has entered into a multi year contract with AWS. This is just interesting to me because WPP has been rebounding as a business, at least on the media side. And I have questions about this enterprise solutions side of the business. Is it competing with the likes of Accenture or a sapient? Like what, you know, this is a multi year contract that seems interesting to me. It's probably the case, my guess is that it's an announcement of a renewal of terms with maybe some bells and whistles in some form altering, not necessarily expanding the preexisting relationship. But it is interesting that the WPP would do press around this and amplify the Amazon relationship when the Google relationship is also a thing they they care about. I mean, I believe in it correct me from my think they still hold some of the Amazon global media business, but means they lost it either way. I think you do. I think yeah, some markets. It's more significant that they're talking about that they're doing it. Got it. Well, anything else, Brandon, you want to hit on? No, you know, just back from Cannes and the narratives I've seen, what I have seen in the press around everyone kind of walking off the plank and saying, yeah, we don't need to die because of AI. I think it's true. Like the point of view we've been arguing forever, which is that AI will not kill agencies that human plus AI beats AI alone. There was a real lack of negativity if I could meaning it wasn't like positive, but I think that when I would talk to an agency CEO's and I did talk to many of them there, I think that the, you know, in a frank conversation kind of sense, I think that there's well less negativity, which is for a emergency world of positive. And when you say negativity, like I remember last year, this time we were talking about, you know, are people talking about the economy or they worried about the economy? Is that a thing this year? Is that what you mean by negativity? No one's even thinking about the economy. I just mean about the secular factors impacting agencies. I think that the will fall optimism around the durability of growth and the economy is something everyone accepts. But I think the bigger issue is just whether or not, you know, that for agencies specifically, there was an extra layer doom and gloom because of fears of being just intermediate or otherwise going away. That makes sense. All right. All right. Well, thanks very much for tuning in this week to agency business. Thanks everyone. Agency business is a production of Madison and Wall and Fusion Front Media. You can follow us on LinkedIn or subscribe to our newsletter for weekly episode notes. I don't know if it's on the week's biggest agency business news. And if you're enjoying the podcast, leave us a review on your listening platform of choice. It helps more people find a show. Thanks for listening. [Music]