A roller coaster of hype: Can the new regime exorcise the ‘bullshit’ past of The Marketing Group?

When the European president of UK private equity firm Unity Group addressed Swedish investors last September, his mood was a jovial, upbeat and optimistic one.

Three months earlier, Unity-backed The Marketing Group, a fledgling network of four agencies – three Singaporean and one British – had listed on Sweden’s First North stock exchange, a secondary NASDAQ market in Stockholm.

“It’s been a crazy journey since then,” Toby Street cheerfully told Swedish shareholder association, Aktieaspararna. “A lot of people have had some fun….but we are not just a pretty share price.”

Street was referring to TMG’s “meteoric growth” which had seen its stock soar from €1 at listing to a remarkable €9 on the market’s close on August 1. It briefly gave TMG a market capitalisation of €257m.

Its number of subsidiaries had also rapidly expanded, from the initial four to 17, six of them in Singapore.

Despite the breakneck speed of growth, Street confidently told his audience that TMG had no plans to slow its acquisition strategy.

“We have been questioned….as to whether we can keep up this pace and the answer of course is that we wouldn’t have made the statements that we have….unless we could deliver,” Street insisted. “A company that delivers on its promise is probably a fairly rare thing in the world but we plan to ensure that this is our norm.”

Yet even as he spoke, TMG’s star was fading. In the six weeks since the stock hit the €9 high, it had stopped being quite such fun, the journey no longer crazy but a worrying one-way trip south that would continue for months.

Acknowledging the stumbling, though at that stage still healthy share price – it had slipped to €5.20 on the day of his presentation – Street conceded there had been “a period of people taking profits” while others “were a little bit fearful [and asking] is this a bit of a flash in the pan.”

Fear not, Street stressed, “we are here for the long run”.

Five months later, Street had been proven spectacularly wrong on pretty much all counts.

Far from being around long term, he and fellow Unity Group board members of TMG had been replaced, investor and market trust had evaporated, the share price had collapsed to below €0.40c, TMG’s financial performance was in the doldrums and the much-heralded acquisition strategy had not so much slowed as ground to a shuddering halt.

The beginnings

The Marketing Group listed on the little-known First North market in June 2016 with the four “founding” agencies it had acquired: Black Marketing, Creative Insurgence and One9ninety, all based in Singapore, and Nice and Polite in the UK.

All had been acquired via a share swap, with the business owners issued shares in the new holding company, the majority of which – as with all subsequent acquisitions – were locked in for 12 months.

Black Marketing founder Chris Reed who on LinkedIn describes himself as the only NASDAQ-listed CEO with a mohawk, and suggests he can transform personal brands to “rock star status”, was the largest shareholder, owning 18.65% of TMG’s 14.4m shares.

Unity owned 6.92% having sold 1.25m shares of its shares in the IPO, with the owner of Creative Insurgence, Aaghir Yadav, holding just over 11%.

For Reed, Yadav and others, the streets of Singapore must have seemed paved with gold as the value of their shares went through the roof.

At its height, Reed’s fortune was worth €24m (S$38m). Today, having disposed of more than a million shares as part of a divorce settlement and with the share price hovering at €0.70, his 1.4m shares are worth just €984,000 (S$1.57m).

All the founding agencies had been sold a vision of entrepreneurial collective greatness by Unity Group founder and chairman Jeremy Harbour, a sharp, self-styled entrepreneurial “mergers and acquisitions expert” who, in his own words, had occasionally adopted “jiggery-pokery” to get deals across the line.

He personally held 3.78% of the company while another of his entities, Five5Five, held 3.82%.

After leaving school at 15, Harbour, a Brit, began his career in the traditional manner of entrepreneurs by investing what he described as “blood, sweat and years” into various enterprises.

But his approach switched dramatically after offers to buy his then company were based on “jam tomorrow” rather than upfront cash payments.

“I figured I could do the same thing,” he explained in a YouTube interview with his Unity Group business partner Callum Laing, a 4.34% shareholder in TMG. “So after kissing a lot of frogs I bought a 13-year-old telco company but managed to buy it without using any capital upfront.

“It took quite a bit of jiggery-pokery but I got the deal done and we grew by a year’s worth of revenue in an afternoon.

“I had a bit of an epiphany. You don’t have to run a marathon, you just run the last 10 yards and you still get the prize.”

Thus began Harbour’s wheeling and dealing. He has struck 30 deals since then, the purchase of a hotel in Bali and a health club and spa among them.

“I got so excited at my ability to buy businesses without using cash I bought all sorts of things,” he said. “I describe myself as being sector agnostic. I will literally buy anything.”

Armed with such self-belief, Harbour launched The Harbour Club, an “experiential training course” which teaches entrepreneurs how to find, buy and sell companies.

The course, which included mentoring over several months and a private jet trip to San Tropez on the French Riviera, initially cost a staggering £37,500 (S$66,000) before Harbour, showing a ruthless and opportunistic business streak, hiked the price further.

“As soon as I realised people would pay, I put it up to £45,000 (S$80,000),” he told Laing in the same YouTube interview.

Harbour has since scaled it back to a “fraction of that price” with the course now limited to a weekend retreat at his plush villa in Mallorca, Spain. Flights are courtesy of budget airlines rather than fancy private jets.

Driven by his sector agnostic approach and his thirst for new opportunities, Harbour eventually turned his attention to the marketing industry and formed The Marketing Group.

All four founding companies assisted with its formation, with Reed paid $S140,000 as a non-executive advisor in 2015, Yadav $S103,000, One9Ninety boss Laurent Verrier S$119,000 and Nice & Polite CEO and founder Ross Anderson £11,196 (S$19,950).

Adopting the barely recognised term agglomeration – which effectively means a “mass or collection of things” (one online dictionary suggests it simply means a “jumbled mess”) – Harbour and his Unity colleagues drew up a lofty ambition to build an entrepreneurial version of the traditional holding group.

While benefitting from being part of a network, it would be a structure that enabled its agency subsidiaries to retain their autonomy and independent spirit rather than be controlled and suffocated by a bureaucratic head office.

In an interview with Mumbrella Asia in November, Laing, who also had little or no first-hand knowledge of the marketing sector, dismissed WPP boss Sir Martin Sorrell as merely an “accountant” who was “trying to tell entrepreneurs how to run their business”.

“To be fair, Martin Sorrell is an accountant who’s done very well with that model,” Laing said of the man and company which has a market capitalisation of more than 20bn GBP.

It was a remark met with derision is some quarters.

In the same interview, Laing said TMG, with 17 agencies at the time, was aiming for 30 by Christmas and would continue its strategy of only acquiring business which were debt free and generating profits of S$500,000. It would not be the last time TMG over promised and under delivered.

TMG’s rapid growth

Within three weeks of listing, TMG had acquired its first Australian agency, The Lead Generation Company, along with a small New Zealand-based media agency, Rainmakers. Those acquisitions alone were forecast to increase EBITDA profits by 50 per cent to €2.35m.

Next was Ulysses, a group comprising US businesses Skye Multimedia and Wilkin Marketing, NZ app and game development firm Marker Metro, and London-based performance marketing business Clickverta. This acquisition, TMG told the market, would increase group EBITDA by almost 90 per cent to €4.43m.

The deals kept flowing and expectations kept rising.

In early August TMG acquired Augustus Group and its Singapore subsidiary Imagine Group, NZ-based Marker Limited and UK operation Astute. Later the same month, Singapore agency The Brand Theatre, Australian business Channelzero and UK firms Ranieri and Slingshot Sponsorship joined TMG.

Group EDIBTA would now “break through the 11 million Euro mark”, investors were told, with each acquisition accretive that would increase profitability and shareholder value.

Another acquisition, in September, of Singapore agency Addiction Advertising and US-based TDA Group, increased EBITDA further to €12.5m before TMG announced details of its “largest deal to date” that would swell EDITDA by another €4.5m.

That acquisition heralded a major expansion into Australia with the arrival of Khemistry, Marc Edward Agency and McCorkell & Associates, along with its fifth UK business, Precision Marketing Group.

Even though the share price was declining, TMG and its aggressively acquisitive agglomeration model seemed to be going places.

But the growth failed to disguise growing unrest.

Notwithstanding the vagaries of the stock market and profit-seeking retail investors who cashed in when the share price soared, general market and investor confidence was rapidly evaporating. With no institutional investors to provide stability, it led to intensifying sell-side pressure which further drove down the share price.

Agencies like Black Marketing and Creative Insurgence witnessed their paper wealth dwindle on an almost daily basis.

Singapore-based financial analyst Rahul Kewalramani told Mumbrella the agency owners had taken a gamble by accepting a share-only deal.

“As an entrepreneur you are selling your company for a paper value that you can’t realise for at least a year. Even after that you have to use an orderly market process which means you can’t sell a big chunk in one go otherwise it would hurt the share price.

“Basically you are selling a company for future value which is subject to market conditions and you are being controlled how you realise it.

“Cash in king.”

Kewalramani said the flip side is that companies using shares as currency traditionally pay over the odds.

“I would easily pay you $2 in shares verses $1 in cash. People offering shares are more generous with their valuation because that valuation is not realisable until a time in the future,” he said.

Declining market confidence

Aside from suspicions over the business model – it was suggested by observers the structure resembled a murky smoke and mirrors pyramid scheme with that would reward only those who exited first – TMG faced accusations it was miscommunicating information to the market.

The company had to issue a correction to its third quarter financial results after an initial version included figures from Astute even though the deal had not been legally completed.

“They do insist we present everything as the glass is half empty rather than the glass being half full,” Harbour said during an investor call in mid-November. At market close that day, 20% had been wiped off the share price.

In late January, Harbour was then forced to concede the acquisition of Astute and two other previously announced deals – Marc Edward Agency and McCorkell & Associates – had, in fact, fallen through.

“The decrease in share price between the time the offers were made and the time of completion materially changed the deal on offer,” a statement said.

In further developments which undermined trust and confidence, the acquisitions of Khemistry, TDA and Precision had also failed to complete, and remain in limbo.

In addition to the acquisition U-turns, doubts emerged over the financial health of the agencies within the group, despite the understanding that TMG was only buying established, debt free businesses with profits of at least S$500,000. The questions intensified given the lacklustre performance of some subsidiaries immediately post-acquisition.

Excitable EBITDA and pro-forma expectations announced to the market during its rapid acquisition phased were regarded as optimistic, while the development of a network which, collectively, could punch above its weight and pitch for global business had also failed to materialise in any meaningful way.

“Jeremy and Callum had this idea that if you work on velocity and keep pumping in agencies then down the line the network effect takes care of itself,” one TMG agency boss said. “It wasn’t particularly strategic.”

In the three months to March, EBITDA has plunged from €614,000 (S$985,000) in the fourth quarter of 2016, to just €125,000 (S$200,000) with an EBITDA margin of less than 2%.

One acquisition target approached by Harbour and Laing told Mumbrella he became increasingly uneasy about the model and of the calibre of some of the group’s agencies.

“Conceptually when they discussed it with me I thought it was an interesting idea but the more they opened their mouths the more I questioned it,” he said. “They thought they could take over the world when it came to marketing but they had never even worked in the industry.

“There were also one or two companies in there dragging down some good ones. And what happens after 12 months when the first agency owners started exiting the business? The share price would drop. It had warts all over it.”

He added: “I know some of the companies in TMG and the shares they took in lieu of cash payments are now not worth the paper they are written on. It’s a sad story.

“There was so much bullshit during that period you couldn’t jump over it. You didn’t know what to believe. If I’d have listened to Jeremy Harbour and Callum Laing I’d be sitting in the same hole as the other agency owners.”

Come March, faced with a share price dipping below €1 for the first time and a financial performance that failed to match the hype, it emerged that Harbour and the other Unity board directors had gone.

The following month, the remaining four board members also stepped down, replaced with a new executive team led by experienced marketing executive Adam Graham, who had joined the previous November.

It is understood Graham had reservations within weeks of joining about Harbour’s dual roles with his Unity Group private equity firm and that of TMG.

“It was suggested to Jeremy he should step down as chairman because there was a potential conflict of interest,” one source said. “The same people who controlled Unity were on the board of TMG and that is where the lines got blurred. To his credit, Jeremy stepped down as did the rest of the board.”

Another source with close links to the company said Harbour’s over enthusiasm was to blame rather than anything else.

“There were a lot of statements that inflated expectations and that is kind of breaking the cardinal rules of running a public company. You don’t make forward looking statements, you don’t throw forecasts out into the market will nilly, you don’t announce deals before they’re done.

“The first three months was a roller coaster of hype and it was only a matter of time before those chickens come home to roost. But I think it was over exuberance. They were optimistic people and maybe things escalated.”

Smoke and mirrors?

Harbour told Mumbrella it was clear the company needed a “reset” but rejected any suggestion of wrong-doing and claimed he was “millions” out of pocket.

He faced regular outspoken criticism on Twitter, with one spectacularly ill-conceived manoeurve in particular raising questions. That saw TMG deposit 3m shares with a lender in exchange for €16m, money that would provide a new cash component in acquisitions.

But according to Harbour, only €2.2m was received before investigations into the apparent short-selling of shares, heavily regulated in Sweden, discovered the lender had, allegedly, sold all 3m shares.

Asked if he had personally done financially well out of TMG, Harbour said: “I put my money where my mouth is and every word I have said I have backed with my own personal cash.

“I have lost millions, my company Unity Group has lost millions and my friends and family have lost millions so as it stands, no, we are very much financially overdrawn on the transaction.”

He claimed he and other Unity directors took no salary or expenses and even waived travel and accommodation costs at TMG’s summits in New York and Singapore.

“Not one cent,” he said. “We invested heavily and took a long term view. It’s only a year old. It’s a great business and we know the subsidiaries are good companies.

“I think anyone who sold Apple, Amazon or Netflix shares in the first year would probably look back now and regret it so I don’t think we can judge the business on its first year. I would much rather judge it on the next three, five or six years. Over that timeframe hopefully it will transpire to be a great investment for me, my friends and family and other investors who have backed us.”

Harbour, who said confidentiality agreements with TMG prevented him from discussing the past in any detail, was unable to quantify the exact extent of his losses but said there is “no single biggest investor in TMG than me”.

TMG’s top 20 shareholder register in May showed he personally held 758,605 shares, a further 897,417 through Five5five with Unity owning 901,748. But in June, while Unity’s shareholding remained unchanged, Harbour and Five5five no longer appear.

But Harbour denied he had sold shares, saying the absence was “a question for the TMG company secretary”.

TMG said it was “not appropriate” to discuss share movements “unless the shareholders are TMG insiders of which Jeremy or anyone from Unity is not”.

Harbour conceded it was “quite possible” investors had lost their trust and faith in his leadership but insisted any suggestion the structure was set up to benefit a handful of people was wide of the mark.

“When the share price was in decline people started to look at where the problems might be and human beings love to find patterns where patterns don’t exist. People started digging around share registers but by doing this you can add two and two and get six.

“But I do understand. I have lost huge amounts of money, lots of people have, and I understand the need to clutch at straws.

“The key thing to remember is that that we are governed by NASDAQ and the Financial Conduct Authority in the UK. We have to report every transaction to the FCA so all the governance is in place to protect against all that kind of stuff. There is no lack of transparency.”

He continued: “Markets are fickle. There was a lot of demand in the first three months and people played on the momentum. After that, there was more selling that buying and that ultimately impacts the share price.

“People will buy shares when it’s going up and sell when it’s going down so it becomes self-fulfilling.

“I don’t believe, and I think NASDAQ would agree with me, that the share market is manipulable when there are millions and millions worth of Euro traded every day.”

Referring to the 3m shares sold without permission, Harbour claimed legal action against the firm is on-going. He said legal advice prevented him from naming the company.

“We weren’t expecting these shares to be on the open market and clearly it wasn’t helpful when there is an additional sell side,” he said. “I’m dying to name and shame them but we have been advised we can’t publish that name until we have a prosecution against them.”

Far from neglecting the company Harbour said he, and the board, “took all the necessary action to make sure the company has the best possible chance and to protect the long term value for shareholders”.

“Clearly the share price is a reflection of performance and that has not been healthy. I recognised that it was time for a reset and that the best thing for the shareholders in the long term would be to professionalise the board. I got Adam in, Don (Elgie) came in, there is some really good marketing brains around the table.”

He also dismissed suggestions that some acquisitions were poor performing agencies, claiming audited accounts proved their profitability.

Asked for his rationale for the venture, Harbour said: “We are in the business of trying to address inequality through the democratisation of wealth. Agglomeration creates value for SMEs and creates meritocratic reward to hard working entrepreneurs.

“Anything new and disruptive will be criticised but over the long term I think it will answer all critics. So we will keep working tirelessly towards our goals.”

Mumbrella contacted many agencies acquired by TMG but they declined to publicly discuss events.

Reed, who last year robustly defended TMG against detractors and several times repeated the question “what’s the downside?”, also declined to comment, saying he was unauthorised to do so.

One, however, described Harbour and Laing as “inspiring” but said confidence in their leadership ebbed away as the share price tanked, acquisitions collapsed and financial targets were missed.

“There does appear to be some grey areas but I don’t believe their intention was to get a bunch of companies together and make a quick dollar. They invested in the company as well,” he said. “I think they were also naïve. When it emerged about the lender dumping 3m shares on the market they were given a dressing down by shareholders at a board meeting in New York.

“It was a shit deal based on a handshake and trust and it turned the tide from ‘fuck, look at this go’ to ‘shit, we’re now in defence mode’.”

He admitted that some agencies had probably been blinded by the charisma and vision of Harbour without examining the finer details, while Unity Group rushed into deals without sufficient due diligence.

“But it did feel entrepreneurial and exciting to be part of something different, and we thought it was a good deal.

“I’d be a liar if I don’t look at the share price and think ‘well, that’s annoying’. So it’s clearly a long term investment and what Adam, Glen and the rest of the new board have bought to the table is a proper network. Previously it was a financial vehicle.”

Another member of TMG added: “It was a case of risk verses reward and we had some strong legal advice that suggested it was a sound idea. I don’t think Jeremy or anyone else was trying to pull the wool over anyone’s eyes.

“I think they were guilty of over exuberance rather that doing anything with  malicious intent.”

Financial analysts said the company, while clearly overvalued when the share price climbed rapidly, is now undervalued, with a share price somewhere between €1 and €2 a fairer reflection of its worth.

A new dawn

Graham, the former boss of Omnicom’s Weapon7 and an ex-chief executive of the British Interactive Media Association, had joined TMG in late 2016 as CEO as Harbour scrambled to restore confidence.

Graham has since drafted in former Havas Media and Possible chief financial officer Mike McElhatton as CFO, the respected founder of insight and communications group Creston, Don Elgie, as executive chairman and Australia-based marketing executive Glen Fraser as non-executive director.

In an interview with Mumbrella, Graham distanced himself from the previous regime and revealed the company, while retaining its entrepreneurial focus, was operating in a more “traditional fashion”.

The term agglomeration is no longer used, he said, while acquisition targets will be subject to far greater due diligence. Deals will also involve an approximate 75% cash component, with the remainder in shares.

He added that the board’s industry skill set will unlock synergies and collaborative benefits.

“We are very keen to create a line in the sand between the past and future,” Graham said. “But what I would say is that none of the guys from Unity are from the marketing industry so in terms of the strategic fit of the agencies, I think that has benefitted from people like myself, Don and Glen. We are working through how we can create synergies and how we can create a competitive dynamic within the group.”

Pressed on the past, Graham conceded that “expectations had been mismanaged”.

“It’s very important when running a public company to under promise and over deliver and I think my predecessors got very excited. They are very ambitious and optimistic people and they haven’t run a public company before. As such perhaps expectations were not managed as best they could.

“There had been a lot of hype around the launch in the first few months and piece by piece those threads of narrative started to fray.

“You should not announce a deal until it is absolutely complete. That was the beginning of confidence beginning to wane in the group.”

In the Q1 financial results, Graham reported that a “strong core” of agencies delivered €563,000 EBITDA, but that a “small number” had held back the rest of the group resulting in a dismal return of only €125,000.

Since then, on June 29, the share price plunged to its lowest ever price, €0.37, before rallying in July to close at €0.72 yesterday, giving TMG a market cap of €23m (S$37m).

Graham said “decisive action” is being taken on the weaker agencies – Marker Metro has already been folded into Marker Studio – with further changes set to be announced at TMG’s second quarter results on August 15.

“We are making good progress with the underperforming agencies and we’ll have that finished by the Q2 results,” he said. “But the point is, I am not afraid to take action against underperforming agencies.”

Future acquisitions will involve a “better level of scrutiny so we are not buying agencies which turn in a poor performance immediately after they have been acquired”.

“We will also be looking to acquire bigger agencies which have a lower risk profile and which contribute more profits to the group and are a complimentary fit,” he said.

Asked if TMG had made some poor acquisitions in the first three months, Graham said: “You’re saying that. I couldn’t possibly comment.”

Despite the negative sentiment that has swirled around the group, Graham insisted he was confident of restoring trust and confidence among investors, existing subsidiaries and potential acquisition targets.

Progress has already been made, he explained. A drive to attract institutional investors who tend to bring stability to a stock – something Unity failed to achieve – is also underway.

“Understandably investors are nervous, they lost trust in the previous chapter, but from all the conversations I have had they back myself, Don and the new board 100%. They trust us to turn this round, but they are waiting for results.”

He added that potential acquisition targets who were “scared off by the previous incarnation” are back at the table “because they understand the past is the past and because they buy into the new management team and the new model”.

The eastern seaboard of Australia is a focus for growth, he said.

What hasn’t changed is that agencies will operate with far greater freedom than they would within traditional holding groups, Graham said.

Having worked for WPP and Omnicom, he told Mumbrella he understands the benefits and frustrations of working for large corporations.

“There are some tried and tested things that work in the large holding groups so you don’t need to reinvent the wheel. But there is absolutely an opportunity for a new breed of network which does not have centralised control and which isn’t hierarchical and bureaucratic.

“One of the things that is tremendously frustrating when you are running a network agency, even if you are doing well there could be a network hire freeze or you need to get approval from New York to give someone a pay rise.

“All of those things slow you down. It’s demotivating if you are micromanaged by someone with a spread sheet.

“What you find is where there are bureaucrats in the system, all they can do is say no. That is their power. It means you can’t respond to clients as you might like and the team gets frustrated.

“With TMG we want to move away from that and give autonomy to the entrepreneurs and empower them to make decisions. As long as you are hitting your numbers I am not going to concern myself with your pay rises and hires.”

Graham said TMG offers an alternative to selling to one of the big holding groups. That, he observed, “often doesn’t end happily”.

“The classic sell is to one of the big six, where you get an earn out and lose control of your business. Through that process often, very often, everything that was good about the agency slowly get eroded, it gets homogenised.

“Often they take the name down from above the door, move you to a central building. The culture of your business is dramatically changed, the talent starts to walk and the clients start to walk.

“A lot of agency owners don’t want to do that because they love what they do, they love their agencies and have put years of work into it.”

Part of his role will also involve “fostering collaboration, partnerships and synergies” among its portfolio of agencies with the aim of using the collective muscle and PLC balance sheet to pitch for larger accounts.

“I have had a number of conversations with global brands about big chunky accounts. Obviously in order to entice those global brands we need to have a coherent network with a credible offering that can service those accounts.”

Despite Graham’s upbeat outlook, he recognised that agency owners have been battered by the share price collapse.

But he claimed the “calculated risk” they took by joining the group would reap rewards over time. Furthermore, he said TMG has never positioned itself as an exit strategy for agency owners but the opportunity to grow a network and attract larger clients with fellow entrepreneurs.

“If you wanted to sell shares today every single person would be under water in terms of the value they would get verses the strike price they came in at,” he said.

“But I am very confident we have fixed everything and the Q2 results will be the launch pad for the new chapter.

“If you take a longer view over the next three years, if you back the management team and the new board and if you back the quality agencies we have across the group, I think it is extremely likely that longer term value will be returned.

“My ambition is absolutely to challenge the big six marketing groups in the fullness of time. But it’s a five year journey.”

In the frequently asked question section on its website, one of the questions wonders how many companies TMG is looking to acquire.

Showing the bravado of the previous management, the answer states: “The market leader has 2,600 subsidiaries so that might be a nice number”.

For the time being, attention will be firmly focused on the Q2 results later this month.