Principal risks and uncertainties

Counterparty relationships /

Counterparty risk remains a significant focus of attention for many organisations, including our own. We have maintained our efforts to identify and monitor material counterparty risk in relation to our clients, affiliates, banks, media owners and other suppliers.

These risks include the loss of income from clients in financial distress and potential media buying liabilities arising in markets where we act as principal. We have also continued to face the risk of credit insurers withdrawing previously available cover and the continued viability risk of our domestic and overseas banking partners.

It is our policy to undertake credit enquiries on new clients and for written contracts to be in place before starting any significant work. To minimise the impact of the overall risk of default, our strategies can include requesting pre-payment, imposing credit limits and taking out credit insurance, broadening cover in markets where it remains available. We have also closely monitored our exposure to relationships with our banking partners, ensuring that deposits held with any one banking group do not exceed £30.0m.

Liquidity and working capital /

Our funding arrangements and cash management have continued to be a priority for us during the year, and will remain so going forward, to enable the Group to meet its liabilities. Our media buying activities, in particular, require robust cash management processes. To help manage our cash, we receive daily cash reporting from our operations. Our larger businesses take part in cash pooling arrangements with our relationship banks, with which we also have our debt facilities. Business units deposit surplus funds with Group Treasury to assist with managing interest payments and liquidity.

During 2010 we focused on improving the cash reporting from our business units to ensure that executive management has accurate and timely information to actively monitor liquidity and covenant headroom. We actively manage our headroom to accommodate both general and specific contingencies. Management reporting, liquidity and covenant monitoring will continue to be a key focus going forward.

In 2010, our principal borrowing arrangement, a 5 year revolving credit facility of £450.0m with a syndicate of banks was extended until 2015. We have an active programme of regular communication with our relationship banks and bondholders, who are long-standing and supportive, and continue to have a good understanding of our business performance and prospects. We were successful during the year in launching a convertible bond, due in April 2015, to raise £190.6m, thereby further improving our financial position.

Client relationships /

We have worked with a number of our larger clients over a number of years, some in excess of 20 years, and have built up a strong sense of partnership. We have a broad portfolio of some of the world’s most prestigious multinational and national clients across 80 countries worldwide. No single client exceeds 3% of revenues. Although the winning and retaining of clients is at the core of our business, we are conscious that in the uncertain economic climate endured in recent years, there is a risk that our clients’ investment in advertising and research will decrease, causing an impact on our revenues.

While our diversified range of services helps to mitigate this risk, we also make sure that we have dedicated client relationship teams in place. In 2010, we continued to integrate our digital and traditional services in certain markets and in global client services, to give clients one point of contact to deliver to all their needs across our entire range of communications services. Through our Power Brand strategy, we also increased the opportunity across our client base to provide multiple services to clients, as and where appropriate. In addition, we increased our activity, both organically and through acquisition, in faster-growing regions and focused on more resilient fee-based revenues.

As part of its global structure, Synovate has a Global Client Relationships team in place that enables us to form stronger ties with existing clients and develop successful new relationships with key global clients. Synovate also has a Local Business Development structure in place to provide strategic support for developing relationships with local clients as well as with key regional and global clients. It also closely manages client relationships and has developed an in-house tool to enable the global sharing of client work and client preferences.

Acquisitions and successful integration /

As well as client service, new products and services are a key driver of our business performance. We accomplish this in part by investing in strong talent and by acquiring carefully selected businesses that will broaden our offerings and capabilities and enable us to stay ahead of the competition and retain clients.

Acquisitions and joint ventures remain a key feature of Aegis’ long term strategy. There is a risk that our investment in an acquisition is based on incorrect assumptions and does not have the long term future on which we based our investment case, resulting in overpayment. There is also a risk that our integration plans for them are not successful.

All of our acquisitions require approval by our internal acquisitions committee as well as independent due diligence. We measure the price paid by reference to an internal hurdle rate of return which exceeds our internal cost of capital. Acquisition sponsors from within our existing businesses are assigned to each new acquisition and robust post-integration monitoring plans are put in place for all acquisitions.

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