The news this week that KKR made an offer to acquire a majority stake in corporate and financial communications giant FGS Global highlights an issue that has been evident for some time: that the ownership of PR agencies by large and increasingly unfocused holding companies is more likely to diminish the value of those holdings than it is to deliver the oft-promised synergies.

The math of the KKR offer is simple: according to the Financial Times, the bid values FGS—the firm formed by the merger of Finsbury, Glover Park, Hering Schuppener and more recently Sard Verbinnen—at more than the $1.43bn implied by its purchase of a 29% stake last year. Given that WPP’s current market capitalization is just under $10 billion, that means a PR firm with fee income of $455 million last year is worth somewhere close to 20% of its majority owner (2023 revenue: close to $19 billion) as a whole.

As the FT’s analysis of the offer says, the numbers “underscore how WPP suffers from a conglomerate discount, whereby its £8bn London stock market valuation is worth less than the sum of its many operating businesses.”

It is worth noting that the FGS/WPP situation is unusual in a couple of ways: first, as the image accompanying the FT analysis shows, WPP has considerably underperformed the other giant holding companies over the past two or three years. And second, FGS is a unique asset, a global group with a stellar reputation focused on the high-value areas of corporate and financial communications and public affairs.

The softness of WPP’s stock price and the strength of FGS margins notwithstanding, KKR;s offer leads the FT to speculate that the holding company’s other public relations assets—the recently-consolidated Burson and Ogilvy PR—"might yield £2.2 billion at a KKR-pitched ebit multiple,” and according to Citi, for a 5% improvement in the company’s stock.

Put simply: WPP’s public relations assets are likely worth more if divested than they are as part of a giant conglomerate of marketing services and other related agencies.

The FT also suggests that WPP’s public relations operations are “of debatable importance to its marketing offering,” which is an interesting observation. That might be more true of Burson, which continues to be better known for its own corporate reputation and crisis management capabilities than for its consumer work, while Ogilvy, much more focused on the consumer space, benefits significantly from the name it shares with the legendary ad agency.

There is, of course, nothing new about the idea that public relations firms have not exactly flourished under holding company ownership.

In 2014, when we began to produce our global ranking of PR firms again after a hiatus, the three major PR holding companies (WPP. Omnicom, IPG) had combined PR revenues of $4.191 billion; in our most recent global ranking, 2023 revenues for the same three companies were $4.334 billion—anemic growth of about 3.4% over the best part of a decade.

Over the same period, the top 250 firms as a whole went from $10.4 billion to $17.3 billion, growth of better than 66%. And in answer to the suggestion that it’s easier for smaller firms to grow, Edelman—the one global full-service firm that has maintained its independence over that span—grew from $812 million to $1.04 billion (28% growth).

In other words, independent PR firms (including, these days, those owned or supported by private equity) grow between 10 and 20 times faster than those owned by WPP and its peer group. The “independence premium,” at least as far as the top line is concerned, is massive. Calculating the bottom-line premium is more challenging, but anecdotal evidence suggests there is one.

Under the circumstances, the holding companies—who must by now realize that the “synergies” they hoped for when they initially acquired these firms are unlikely ever to materialize—should be willing to listen to offers for underperforming assets, even if it means admitting that some of their earlier assumptions were erroneous?

In the past, the question has been where those offers might come from.

PRovoke Media’s Arun Sudhaman probed this issue in 2019, when he asked “Are more publicly-held PR agencies likely to buy back their independence?” He pointed to a number of (relatively smaller) firms that have bought themselves back—Freuds, which escaped the clutches of both Havas and Omnicom; MWW, once part of IPG; and APCO, which bought itself back from Grey Advertising—and asked why larger agencies had not done the same.

The straightforward answer he suggested: “To date at least, few agency principals have had the wherewithal to come up with the hundreds of millions required to buy their firm back into private ownership.”

But the fact that KKR is willing to pay a healthy price for FSG is just one indication of how things have changed over the past five years, during which private equity firms have begun to take a serious interest in the public relations sector.

New Mountain Capital has helped Real Chemistry establish itself as a top 10 global agency; Falfurrias is supporting Penta Group as it rolls up public affairs and financial communications firms; SEC Newgate has the backing of Investcorp; Waterland has worked with Team Farner on acquisitions in Europe. So evidently KKR is not the only entity with both investment capital and an interest in the PR business.

Might this interest extend to some of the larger public relations brands that are currently owned by giant holding companies?

The first thing to note is that most of the firms to benefit from private equity funding share with FGS a focus on those segments of PR that excite the C-suite and the board of directors: corporate and crisis communications, the capital markets, and public policy. Real Chemistry is perhaps an exception, but it clearly presents a unique opportunity due to its healthcare expertise and a unique portfolio of digital and data-driven assets.

So all of these firms operate in sectors where margins are traditionally higher than they are in consumer PR. But the rise of influencer marketing, expanded digital and data capabilities, the recent performance of PR agencies in Cannes, and the potential for artificial intelligence to upend traditional billing models—all of these suggest that there is significant potential to be unlocked on the consumer side of the business too.

There is, however, a second issue, perhaps even more important. The firms that have benefited from an infusion of private equity were all either founder-led or highly entrepreneurial at the time of PE investment. Does the fact that the larger agencies are now mostly 30 or 40 years removed from any entrepreneurial origins make them less likely to flourish independent of their current parents, and therefore less appealing?

I’d argue that if 500 of the top people at Burson, or Weber Shandwick, or FleishmanHillard had equity in the firm (as 500 of the 1,300 people at FGS currently do) and if those people stood to benefit from a potential public offering (as FGS almost certainly will at some point in the next few years) it seems likely that they might rapidly develop the kind of entrepreneurial spirit that could unlock their true potential.

There is a clear market incentive for holding companies to unload some non-core assets. There are publicly held PR agencies underperforming the market as a whole. There are investors who see value in our sector. All of that means there has never been a better time for some creative disruption.

Image produced with Copilot.