M&C Saatchi needs to spin hard to win back investors


A year ago, the Financial Reporting Council clapped M&C Saatchi, the advertising business, on the back for its exemplary reporting on tax. 

The FRC thought by highlighting some superior accounting practices of small companies such as M&C Saatchi, other tots on the Alternative Investment Market could be encouraged to improve their book-keeping. 

It followed a wave of accounting failures at the likes of Conviviality, the bargain booze retailer, café chain Patisserie Valerie and gas group Yu. The accounts of too many small businesses, on Aim and the main market, were substandard, the beancounter’s regulator opined a year ago. There were too many basic errors, it said.

Now it seems that M&C may be a founder member of Aim’s number-crunching brat pack

Last week, it admitted it may have been overegging profits for as long as five years. This is the business that until this year has handled Tory party advertising during every election campaign since 1979. It was founded in 1995 by Madmen giants of the ad industry, Maurice and Charles Saatchi, after they quit Saatchi & Saatchi. M&C was floated on Aim in 2004 at 125p a share. By January this year, the shares were above 370p.

Last week they fell to 90p, valuing the company at just £136m.

PwC, M&C’s new auditors, has totted up overstatements spotted earlier this year and now reckons the tally is about £11.6m for 2018 and 2019. That is up from £7.8m, which PwC initially reckoned was the total cost of overstated revenues, understated costs and inflated balance sheet assets. It now seems contract wins were booked upfront, expenses booked late and obsolete software was counted at working cost. The irregularities were first noticed by M&C’s former auditors KPMG when auditing the 2018 financial reports in early 2019. It flagged concerns to M&C’s new finance director and the board turned to forensic accountants at PwC to probe further.

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It may take a while yet for PwC to see the whole picture. M&C Saatchi has expanded fast since floating, picking up more than 140 agencies around the world involved in anything from social influencing, sponsorship and PR to digital and mobile marketing.

David Kershaw, chief executive, is fond of describing the company as a “federation of entrepreneurs” with “shared ownership, shared objectives and shared ambitions”. Business-getters were given stakes of a fifth to half of their subsidiaries and rewarded on divisional profits with synthetic equity and dividends. For a while it appeared to work — between 2014 and 2018 revenues more than doubled to £419m.

Now that record looks shaky. The company may have to make adjustments stretching back years. Worryingly, too, M&C warned last week that pre-tax profits in the year to December would be a fifth to a third lower than last year as a result of weaker-than-expected fourth quarter trading and “a higher proportion of non-controlling interests”. In other words, M&C has to pay a whack of earnings to staff who have retained bigger shares in their divisions. It underlines the picture emerging of M&C as a loose collection of fiefdoms, each with their own finance functions and incentivised by share schemes that encouraged them to overplay revenues and underplay expenses. 

Observers with long memories recall that the Saatchi brothers left their former gaff at Saatchi & Saatchi following a spat with investors. Backers then worried that the group’s uncontrolled debt-fuelled expansion had been pursued without any thought of integration. Now they worry that the only difference between the old-style model of adland and M&C is that M&C has no bank debt.

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M&C’s central finance department is now imposing controls, investing in new standardised accounting procedures and policies and increasing the focus on cash management. That comes at a cost. The company says restructuring its UK office will generate savings of perhaps £6m a year from next year, but it will cost some £2.5m this year. Analysts have taken a scythe to forecasts, cutting earnings before tax and other nasties to under £20m. 

If M&C were bigger it might matter less. But it is one of a string of Aim titches that have botched their book-keeping. It does nothing for Aim’s standing. And it may be beyond all of M&C Saatchi’s accumulated experience in spinning to win back investors’ confidence.

kate.burgess@ft.com



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