India Played a Massive Role in Publicis' Deal to Buy Sapient
When Publicis Groupe agreed to buy Sapient Corp. for $3.7 billion, a hefty 40% premium over its recent trading price, the French holding company provoked head-scratching throughout the industry. But Publicis isn't just acquiring an agency to bulk up in familiar services or add obvious short-term financial gains. It was placing a bet on the engine that Sapient has built in India to power a future of marketing that looks more like consulting -- and a future of consulting that looks more like marketing.
More than 65% of Sapient's employees -- about 8,500 out of almost 13,000 -- work in India, where labor is cheap but there's a wealth of technology talent.
That doesn't mean Sapient is necessarily pocketing buckets of money, because labor savings in international markets are often passed on to clients, agency executives familiar with offshore operations said. Rather, cost-competitive production of high-tech work such as system integration and web development helps it get in on projects that more often require both consulting and digital marketing prowess.
Consulting work is also an aim of more agencies as they lose share to marketers' nontraditional partners such as consultants and ad tech vendors, which are increasingly supporting marketing as part of larger technology projects.
"It's more of a way to win business as opposed to win margins," said one agency executive who wished to remain anonymous.
Sapient declined to comment for this article. The company doesn't break out revenue from its operations in India. Publicis also declined to comment.
"Sapient is a 'crown jewel,' a one of a kind company born in the technology space with strengths in marketing, communications, consulting and omni-channel commerce," Publicis Chairman-CEO Maurice Levy said as the companies announced the deal early this month. He went on to reference Sapient's consulting capabilities in numerous conversations about the deal, which, if it closes early next year as the companies expect, will transform Sapient into an umbrella organization overseeing Publicis' digital agency networks. Under the new network, called Publicis.Sapient, Publicis' existing shops will gain access to the massive offshore operation that Sapient built from the ground up beginning in 1999.
Sapient is currently divided into three groups: global services, which includes consulting and IT functions; marketing services group SapientNitro; and government services, which is largely consulting for U.S. government agencies. It began hiring in India during the earliest days of e-commerce to remain competitive with consultants on costs and to build a talent well for complicated digital projects. The region, where Sapient has grown completely through hiring as opposed to acquisition, now has thousands of company employees in concentrated talent and production hubs in Gurgaon, Noida, Bangalore and Mumbai.
"It's the only digital agency that really made a big bet on scaled technology development," said one executive familiar with the company, "and as clients are trying to work toward both business and marketing transformation, they need systems that can drive that."
Sapient's work coming out of India spans marketing platforms, multi-channel commerce projects, content management and distribution and analytics reporting, said another executive close to the agency and its operations in India.
It might handle a large retailer, for example, looking to rethink customer experience across channels, he said. That sort of project would require interface and application redesign and technology to support it. While a dedicated client team in both the U.S. and India might support content management and distribution, a separate digital production studio in India might handle less complicated technological work like microsite updates and banner-ad resizing.
Sapient's production studios in India use rotating teams that aren't necessarily dedicated to the client, as part of an offshore structure it calls "global distribution delivery."
The company is also moving more marketing capability into India, adding marketing analytics functions to the existing production studio, which produces "a lot of the things that you'll see online," such as banner ads, Sapient CEO Alan Herrick said during the company's second-quarter earnings call.
"We've got creative chops in India now to help our clients in that part of the world," he said at the time. "We're also moving more and more marketing analytics into India, again to support that whole ecosystem of the kind of marketing meets technology."
"They're building campaigns ideated by the U.S. team," said Scott Liewehr, president and principal analyst at Digital Clarity Group, of Sapient India. He added that the company supports a lot of project-based work in India and globally, compared to other digital shops that support fewer, larger and more marketing-oriented retainer accounts. So some might look at the company's acquisition as a bid by Publicis and Sapient to turn specialized projects into bigger accounts, he said.
Competing with consultancies
While cheap labor in India might have made for a smart margin play for agencies in past years, today it's more about staying cost-competitive with the consultancies that have large, homegrown offshore operations, said a number of agency executives.
"The use of India to drive margin enhancement is less than what it used to be, and Sapient still struggles to compete with the BIG offshore firms like Tata, WiPro and Cognizant -- who have thousands of employees and pitch low cost and long-term contracts," another agency executive said in an email. Still, he added, "The solution continues to provide clients with scale, 24/7 support, and certain efficiencies."
Sapient's worldwide revenue per employee will be about $112,600 in 2014, according to Ad Age estimates. Publicis, by contrast, in 2013 had worldwide revenue per employee of about $153,800, according to Ad Age calculations.
However, Sapient's 10-K filing earlier this year noted that only about 15% of its 2013 operating expenses were incurred "by foreign subsidiaries whose functional currency is the Indian rupee," implying that India salaries are low for a U.S. headquartered company like Sapient. A senior software engineer at Sapient in India earns between $11,000 to $24,000 a year in salary and bonus, according to figures at PayScale.com converted to dollars by Ad Age. And an estimate from Glassdoor.com indicates that the average salary for a Senior Associate, Technology Level I at Sapient India, based on 41 salaries, is about $14,300.
Sapient can't be cost-competitive with only cheap labor, however: It also needs an intelligent operational structure.
The company has brought in "a large contingent of junior people, especially in India to train and get ready for future demand," Sapient's Mr. Herrick said during the second-quarter call. To hire ahead of revenue and still manage high "utilization," which reflects the amount of time the agency actually spends on clients, it uses an advanced forecasting system, said another person familiar with the company.
Sapient also takes advantage of the time difference between India and other regions, creating a steady, 24-hour work flow that might start with a technology update in India and end on a project lead's computer in the U.S. in the morning.
Revenue from services for the first nine months rose 13.3% to $1.05 billion compared to the same period a year ago; net income increased 7.8% to $59.2 million. Long term, Sapient is betting on rapid growth: Before its deal with Publicis was signed, the company forecast that its worldwide revenue would surge to about $3.8 billion in 2024 from $1.4 billion in 2014, according to figures that Sapient included in a regulatory filing last week.
What remains to be seen is how Publicis plans to integrate Sapient's operations when Publicis.Sapient adds an umbrella over the group's other digital agency networks, DigitasLBi and Razorfish Global.
"They're maxed," said Mr. Liewehr, the analyst, of the utilization level at Sapient. If Publicis wants its digital agencies to use Sapient's resources in India, the operation will have to expand quickly, he said. Culture clashes with the offshore model will present challenge, he said. In an earlier blog post on the acquisition, he wrote, "Sapient itself is challenged by the cultural mal-alignment between technologists and creatives; the offshore model would pose extreme culture clashes if paired with many of the ad agencies within the holding company. Overcoming these challenges would be no small feat."
Sapient's other suitors
But potential cultural clashes and a hefty price tag didn't dissuade other suitors from knocking on Sapient's door.
Despite speculation that Publicis agreed to buy Sapient partly to save face after its failed mega-merger with Omnicom Group this year, at least two other suitors showed strong interest in Sapient and, presumably, its 8,500 staffers in India. The Sapient regulatory filing last week noted: "At periodic intervals from the Fall of 2013 through early June of 2014, a representative of a private equity sponsor suggested to Mr. Herrick that the company consider a 'going private' transaction, however the board did not elect to pursue such a transaction."
The filing also noted interest from a suitor identified only as "Company A," whose CEO expressed "his interest in discussing a potential transaction" in early August 2013, after the planned Publicis-Omnicom tie-up was announced. The CEO of Company A met with Mr. Herrick in September 2013 to discuss "the potential for a business combination transaction," the filing said, and again in May 2014.
Mr. Levy, however, had held "periodic preliminary meetings" with Mr. Herrick since 2011. After the Omnicom deal fell apart, Publicis deployed Bank of America Merrill Lynch to approach Sapient about a potential deal. Publicis and Sapient held more talks through the summer and into the fall, according to the filing.
Company A continued to show interest, with its CEO contacting Mr. Herrick the morning of Thursday, Oct. 30, to set a date for their next meeting. But the CEO was too late: Sapient and Publicis were putting the finishing touches on a transaction that Sapient's board approved Nov. 1. Publicis and Sapient announced the deal Nov. 3.
Contributing: Bradley Johnson