http://www.businessweek.com/1997/05/b351243.htm
SAATCHI: THE HOUSE THAT HUBRIS WRECKED
CONFLICTING ACCOUNTS
The Creation and Crash of the Saatchi & Saatchi Advertising
Empire
By Kevin Goldman
Simon & Schuster 384pp $26
Even by the eccentric standards of the advertising business, it's
hard to find behavior more outlandish than that of the Saatchi
brothers in the 1980s and early 1990s at their agency, Saatchi &
Saatchi. Conflicting Accounts, by former Wall Street Journal
advertising columnist Kevin Goldman, details that outrageousness.
Moreover, it is a blow-by-blow account of how brothers Charles and
Maurice built an empire to feed their egos and then deliberately
destroyed it after they were booted for irresponsible behavior.
Goldman tells a riveting story from the perspectives of its many
participants. There are problems, though: Conflicting Accounts offers
a wealth of information but doesn't organize it well. At times,
readers from outside the ad business may find themselves lost amid
the insider gossip, multitude of characters, and complex
machinations. And there's precious little insight into the
motivations of the brothers, who appear not to have cooperated with
the author.
Goldman lays the blame for the ad group's demise squarely at the
brothers' feet. Charles and Maurice are the sons of an Iraqi Jew who
emigrated to London in 1947, where he owned textile mills. Charles
went into copywriting, and younger brother Maurice sold ad space in
trade journals. In 1970, at 27 and 25, respectively, they pooled
their talents to create Saatchi & Saatchi, hiring such future
luminaries as Tim Bell, whose public-relations firm now represents
the cream of British society, and Martin Sorrell, now chairman of
rival WPP Group.
No question, the upstart agency's output was good. Its ''Labour
Isn't Working'' campaign is credited with bringing Margaret Thatcher
to power in 1979. Problem was, the brothers set their sights on
building the biggest, not necessarily the best, ad shop in the
world.
They began using the stock market to fund a huge acquisition
binge. Typically, they issued new stock to existing shareholders and
used the proceeds to buy smaller agencies. They usually paid out half
the asking price in cash and covered the rest in installments over 10
years--draining future cash flow when it would be needed the most. In
the U.S., they acquired Backer & Spielvogel, Dancer Fitzgerald,
and Ted Bates Advertising. They branched out into other areas,
snatching up management consults Hay Group, the Yankelovich
pollsters, and the Kobs & Draft direct-marketing shop.
By 1986, Saatchi & Saatchi had spent $1 billion to acquire 37
companies. It had 18,000 employees in 500 offices in 65 countries.
But as Goldman tells it, the brothers quickly ignored each new
purchase. They did nothing to manage client conflicts, and they hired
managers who knew little about advertising since those were easier to
manipulate.
Meanwhile, the duo began withdrawing from day-to-day operations.
Maurice continued to advise his favorite clients, British Airways,
Mars, and Procter & Gamble, but Charles became a total recluse.
Despite being chairman, he never once attended a board meeting.
Goldman reveals that Charles' shyness was pure shtick: He really led
an active social life and spent his time building one of the world's
largest modern art collections.
In 1987, events took an almost farcical turn. The Saatchis made a
bid for Midland Bank, then Britain's fourth-largest, with $77 billion
in assets. They failed miserably and were rightly derided by City of
London financial wizards. Simultaneously, the company started having
serious cash-flow problems, clients began jumping ship, and the
recession hit. The Saatchis never regained their footing, despite
hiring caretaker CEOs to cut costs and lay off thousands. The firm
dipped close to bankruptcy several times, and yet the brothers
continued to blow money.
At this time, bottom-feeding mutual funds, including those managed
by American David Herro, began buying up Saatchi's shares, which had
fallen from a high of $12 to $2. Herro had high hopes for a Saatchi
turnaround, but was horrified by Maurice's antics. With 12% of the
company's shares in his portfolio, Herro would ultimately lead the
charge to get rid of the brothers. Through it all, the board did
little, mostly because Maurice had packed it with yes-men, according
to Goldman.
The denouement came at a December, 1994, board meeting. The last
straw was a lucrative stock-option package that Maurice negotiated
for himself, despite years of losses. He was dumped. His brother and
three key executives left with him and precipitated an ugly war that
profited no one. The brothers formed M&C Saatchi--but although
they managed to lure away British Airways and other key clients, they
are unlikely to ever repair their image. Their old company, now
Cordiant, continues to struggle.
The Saatchi brothers were not alone in making mistakes. Herro
especially failed to note big differences in British corporate
governance, whose unwritten rules then did not condone the forced
ousting of management--particularly by Americans. Shareholders can
see what happens when they act too late and then try to adjust by
making overly aggressive demands, as Herro did. Board members, too,
should view the Saatchi drama as an example of how not to govern a
company. Others can just enjoy this incredible tale for its pure
entertainment value. It's better than fiction.
By Paula Dwyer
