Shares of Sapient Corp. (SAPE) surged 42.03% in yesterday’s trade after Publicis (PUBGY), a French advertising firm, agreed to buy it for $3.7 billion in cash.
Industry experts believe that the acquisition would strengthen Publicis’ position in digital advertising and versus rivals such as WPP Group and Interpublic Group. Also, the dynamics of the advertising industry have changed over the last couple of years with the advent of digital ads and target marketing campaigns that have encouraged technology companies like Google (GOOGL) and Facebook (FB) to make inroads. These companies offer digital ad solutions thereby generating a significant return on clients’ investments.
Sapient, on being acquired by the third largest advertising group, would gain broader access to the advertising market.
Publicis would be able to add clients and revenues in addition to the all-important digital ad solutions portfolio. Reportedly, Target, Audi, Coca-Cola and Unilever are some of Sapient’s clients.
Also, in terms of revenue growth, Sapient has shown steady progress by achieving 12.3% growth in 2013 and a CAGR of approximately 15% during 2010–2013. The company currently expects fiscal 2014 revenues to increase in the range of 11% to 15%.
Publicis could also benefit from Sapient’s significant low-cost operations in India where roughly half its workforce is located.
These factors, along with the favorable ad spending environment, make Sapient a strategic buy for Publicis.
According to eMarketer, ad revenues are expected to double in 2014, 25% of which will be driven by digital ads. These predictions bode well for both the companies.
However, a number of law firms have initiated investigations on the legitimacy of the deal. They are investigating any breach of fiduciary duty or state rules and regulations and the primary target has been the board of directors of Sapient. Thus, the current investigations may prove to be a roadblock to the successful completion of the deal.
Currently, Sapient has a Zacks Rank #4 (Sell).
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