Buying ads in the age of Google

Martin Sorrell’s new venture seems a better bet on future of marketing than his old one

The largest ad company is moving in the same direction as one of the smallest. It says much about the way Google has disrupted Madison Avenue that the smaller of the two may be in a stronger position.

WPP—the embattled giant of the ad industry with $70 billion (U.S.) of billings last year— unveiled a new strategy this week. New Chief Executive Mark Read wants to offer advertisers a more integrated service by bringing agencies together, while pivoting toward growth areas such as apps and e-commerce. WPP has already merged old-school agencies Young & Rubicam and J. Walter Thompson with digitally savvy VML and Wunderman.

Mr. Read’s predecessor Martin Sorrell is taking a similar strategic path at his new venture, S4 Capital—only with a blank sheet of paper.

When Mr. Sorrell quit WPP in April amid allegations of misusing company cash—and without a noncompete clause—he set up S4 with the ambition of creating a “new era” ad company. It announced its second major deal last week with a $150 million “merger” with MightyHive, a San Francisco agency founded in 2012 by digital-ad veterans from Google and Yahoo.

The merger structure, with MightyHive’s founders taking half the sale value in S4 stock and seats on its board, is important. Mr. Sorrell is determined to avoid the fiefdoms associated with traditional holding companies. Instead he wants MightyHive and S4’s previous $350 million “merger” target, MediaMonks, to work together, with MediaMonks creating ads that MightyHive can feed onto the vast platforms of Google and Facebook.

Both WPP and S4 want a creative yet technology-driven, integrated ad offer. But the smaller company could find it easier to deliver this Holy Grail of modern marketing.

Small companies are easier to manage and adapt. S4 is only involved in the growing field of digital ads, with no legacy assets in declining media such as print. While Mr. Read shifts resources from one part of WPP’s empire to another, Mr. Sorrell can focus on growth alone.

Moreover, scale isn’t the force it used to be. Mr. Sorrell relentlessly bought agencies at WPP because scale in ad buying got him better deals with TV networks. But in the digital world framed by Google, ads are increasingly bought in real time using auction processes that don’t reward bulk buying.

After huge falls, WPP’s stock is cheap, and a 7% dividend yield and slow-burn recovery may generate decent returns. S4 is hard to value before the yearend accounts come out, but Mr. Sorrell didn’t pay crazy sums for MediaMonks or MightyHive: A total outlay of $500 million amounts to roughly 15 times the targets’ expected earnings before interest, taxes, depreciation and amortization this year.

For those that don’t mind dabbling in small companies, S4 could prove the smarter bet on the future of advertising.