Our Chairman, Lorna Tilbian, is a Columnist for Impact, the magazine of the Market Research Society (MRS), the world’s leading research, insight and analytics association.
After industry consolidation, the biggest impact on the media sector’s performance over the past 30 years has been the economic cycle. Being caught at the top of the cycle – with too much debt or financial gearing in an operationally geared business – has led to much of the consolidation and many takeovers in the sector.
In the real world, the cycle very much reflects supply and demand – economic principles that began with the Romans but, in the stock market, it is manifested in fear and greed – human emotions that are far more difficult to predict and control.
Looking back, simplistically, the recovery from the recession of the early ’80s started in 1981 with six years of uninterrupted growth that fuelled the confidence of small companies like WPP and Blue Arrow to make their audacious bids for Wall Street giants like J Walter Thompson and Manpower. An inevitable market correction followed, with the crash of October ’87, which prompted the Fed and the Bank of England to rein back interest rates enabling the market to bounce back by Christmas.
This induced the mad ‘Yuppy years’ of ’87-’89, which paved the way for the long recession of the early ’90s. It was not until after the election of Bill Clinton in the US and our ejection from the ERM in October 1992 – providing a fillip in both countries – that markets, and the media sector, finally rebounded and three years of recession ended.
Advertising is a sensitive barometer of growth and market sentiment because it outpaces rising and falling GDP – just as it outperforms rising markets and underperforms falling markets – driven as it is by corporate profitability and consumer spend. So WPP’s bid for Ogilvy in ’89 marked the peak of the cycle, and its debt/equity swap in ’92, the trough.
The cycle repeated itself from 1992 to ’98 with six years of recovery that culminated in the Far Eastern currency crisis, Russia defaulting, and the collapse of LTCM in 1998. This again prompted the central banks to cut interest rates dramatically, which stoked the dotcom mania of ’98 -’00. This bubble began to deflate gently in March 2000 with Nasdaq peaking, but burst spectacularly in September 2001 with 9/11, heralding three years of recession.
The next recovery started in 2003 with the so-called ‘Baghdad bounce’, following the invasion of Iraq. But this cycle was half the length of the previous two, which could perhaps be explained by globalisation and the internet ‘coming of age’ combining to make the world a faster and smaller place. Three years (instead of six) of debt-fuelled recovery to 2006 were followed by one year (instead of two) of irrational exuberance to 2007, and 18 months (instead of three years) of recession, from the fall of Northern Rock in September 2007 to Barclays Bank passing its stress test in March 2009.
Since the global financial crisis of 2008, the world’s major central banks – the Fed, BoE, ECB and BoJ – have not only cut and held interest rates to near-zero since March 2009, but also printed – in the case of the US and UK – and are printing – Japan and Eurozone – trillions in so-called QE to offset the mountains of debt in the post-Lehman world.
Despite six years of relatively slow recovery, the Fed was poised to raise interest rates in September 2015, but the Chinese stock market crisis – where green investors in Shanghai triggered black boxes in New York – means that interest rates are likely to stay lower for longer. Just as the blunt tool of monetary policy was the response to the great crash of 1987 and the Far Eastern/Russian/Long-Term Capital Management crises of 1998, it will most likely be the response to the current slowdown in the world’s second-largest economy. If so, this will lay the foundations for the last stage of the cycle – the irrational exuberance that will mark the peak with huge (often value-destroying) mergers and acquisitions deals as at the other peaks – WPP/Ogilvy in 1989, Time Warner/ AOL in 2000 and RBS/ABN Amro in 2007.
