WPP Group And Acquisitions & Martin Sorrell (CEO) Case Study With Advertising Agency's Revenues - Accounting Assignment Help,

Assignment Task

WPP Group and Its Acquisitions  

Martin Sorrell, chief executive officer (CEO) of London's WPP Group, supervised his firm's acquisition of New York's JWT Group, the parent company of J. Walter Thompson, in 1987. Goodwill of  $465 million was recognized on the deal and WPP took this amount out of its shareholders' equity account, leaving the company with a negative £64 million net worth at the end of that year. But in 1988,  WPP said that the brand-name value of J. Walter Thompson and JWT's Hill and Knowlton public relations firm was £175 million. At the end of 1988, WPP reported shareholders' equity of positive £61  million. To outsiders, this change in value seemed impossible to explain, but the explanation could be found in a discrepancy between standard accounting procedures in the United States and the United  Kingdom.  

 A year later, in mid-1989, Sorrell bought Ogilvy & Mather (O&M) for $862 million, bringing the controversy to the forefront again. The O&M brand name was also valued at £175 million. Now, even with the controversial accounting policy, WPP's balance sheet carried £600 million in long-term debt and negative stockholders' equity of £330 million. (See Exhibit 1 for WPP 1987, 1988, and 1989 financial  statements.)  

Background  

 WPP Group PLC was an enormous communications empire with revenues of nearly £1 billion in 1989. WPP's six service sectors included strategic marketing, media advertising, public relations,  market research, nonmedia advertising, and specialist communications.  

 Martin Sorrell had built WPP from nothing. From 1977, after earning his MBA from the  Harvard Business School, until 1986, he was the chief financial officer to the leading British advertising agency, Saatchi & Saatchi. But Sorrell's responsibilities there went beyond financial matters. He helped  Maurice and Charles Saatchi build their small shop into an international firm touting the virtues of  "global marketing," which to them meant selling a product the same way in every country.  

 Sorrell explained, "Maurice and Charles Saatchi used global marketing to differentiate  themselves from others."1 Eventually, Sorrell came to believe that global marketing could work for a  few choice brands like Coca-Cola and Marlboro, but in reality, only a small portion of an advertising agency's revenues could realistically come from such products.  

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