Digital advertising specialist S4 Capital (SFOR) has this morning announced a merger with American marketing agency Cashmere.
Despite the somewhat muted response from the market, shares trading marginally higher at 815.7p, the deal is significant in two key respects.
First the deal validates S4’s acquisition strategy that has been critical in driving growth and the recent series of earnings upgrades.
Second, the Cashmere merger reinforces another strand of S4’s development approach which is to align itself with the leviathans within the technology sector. Cashmere’s clients include Google, Amazon, Facebook, Netflix, Disney and Apple.
KEY GROWTH DRIVER
Since its inception S4 Capital has acquired twenty-five companies, and industry observers believe that future acquisitions are likely in both Asia and North America.
The success of Sorrell’s strategic approach has been reflected in the share price that has risen from a level of 164p in April 2020 to today’s level of 815.7p. This equates to a 396% increase and a corresponding market capitalization exceeding £4 billion, an impressive feat for a company that was only listed on the London Stock Exchange in October 2018.
Today’s Cashmere announcement illustrates that there is the scope for S4 to participate in more deals moving forward.
The success of S4 Capital’s acquisition strategy is in part attributable to the unique remuneration structure available to the owners of companies acquired by the group.
Rather than offering the usual earn out model (a contingent payment that the seller only receives from the buyer when specific performance targets are met), S4 Capital offers a cash and equity model, albeit with time locks.
This enables S4 Capital to immediately integrate the acquired entities. Conversely, the vendors receive a cash element upfront and in accepting equity in S4 Capital, are also able to participate in the future success of the combined entity.
TECHNOLOGY SECTOR IS CRITICAL
A desire to foster deeper relationships with Google, Facebook, Amazon, Adobe and other companies within the technology sector (that accounts for just under 50% of S4 Capital’s revenues) has been the motivating factor behind several of S4’s acquisition.
In June 2019 S4 Capital announced with the acquisition of Australian media tech firm Biz Tech which cemented S4 capital’s relationship with Adobe. More recently the merger announced in July this year of Australian Salesforce specialist Destined with S4 Capital is a further example of the group’s technology focused M&A approach. This trend continues today with S4’s merger with Cashmere.
