The Story Behind the Lowe/Deutsch Merger

Combined U.S. Operation Faces Cost-Cutting, Possible Culture Clash

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NEW YORK (AdAge.com) -- Interpublic Group last week said it planned to combine two U.S. ad-agency brands, Deutsch and Lowe. Only, rather than call it a merger, Interpublic is soft-pedaling it as "an alignment." And rather than admit that the long-mulled move was driven by an economic downturn that's pounded Interpublic and every business this side of Goldman Sachs, it's pitching the unit as "an innovative new model" with complementary offerings and cultures.

Linda Sawyer, CEO of Deutsch
Linda Sawyer, CEO of Deutsch
These PR gymnastics are just the beginning of the fancy footwork required to prevent the merger from the fate of past Interpublic-agency mash-ups, like the ones that put Lowe in desperate straits for the better part of this decade and made it so ripe for another merger. The PR approach, in part driven by an awareness of that history, tried to omit some straightforward realities.

First off, though all of the executives balk at the suggestion, there is sure to be cost-cutting, both through layoffs and through a real-estate consolidation that will likely see existing Lowe, New York, staffers, who just a few months ago were upgraded from midtown Manhattan to swank Tribeca digs, again move, this time to Deutsch's Chelsea offices. Just how many make the move remains to be seen.

Interpublic did not respond to requests for comment.

According to one person close to the matter, Lowe in New York has 150 people and Deutsch about 250, and cuts of about 10% -- some 40 people -- are expected in the coming days, mostly for non-client-facing roles. A spokeswoman said the matter of redundancies is under review.

"What Deutsch and Lowe called an alignment was more of a restructuring," said John Prunier, partner at M&A consultancy Petsky Prunier. He noted such moves are taking place across the ad-agency landscape, though mostly behind the scenes, not involving the dissolution of a brand as in this case.

Delicate pairing
Second, while Interpublic Chairman-CEO Michael Roth has taken the public position that the merged companies will be harmonious when it comes to culture and approach, it's a hard line to swallow. Lowe, founded in London and now operating in about 30 markets from Madrid to Mumbai, prides itself on a creative heritage. Deutsch, on the other hand, is a New York shop through and through, even if its center of gravity is now split with a Los Angeles offering that's had some success in recent years in drawing high-profile accounts. To say that the Lowe and Deutsch mesh is a tough sell when you consider there's been friction between Deutsch's own New York and L.A. offices.

Culturally, "they have to be careful," said one industry consultant who asked not to be named. "There's been so much bad luck for [Lowe] because they've been through mergers that are right financially but not culturally. Deutsch is aggressive stylistically, so they'll have to work hard to make sure that the people who are a part of the new organization get the right Kool-Aid from Linda Sawyer."

Ms. Sawyer, CEO of Deutsch since 2005, was put in charge of overseeing the merged entity -- which does everything just short of scrubbing the Lowe name from the New York office, officially redubbed Deutsch Inc., a Lowe & Partners Co.

Ms. Sawyer reports to Mr. Roth. So does Tony Wright, the Lowe Worldwide chairman. So does Michael Wall, the Lowe Worldwide CEO. If you're counting, that's three direct reports from one agency (and that doesn't consider the strong direct relationship Deutsch L.A. Co-CEOs Eric Hirshberg and Mike Sheldon are said to have with Mr. Roth). There lies a potential organizational nightmare that could make global cohesion tough.

Outside the U.S., the Lowe brand remains intact, and it'll be interesting to see how Deutsch can use the international footprint to grow with multinational clients like Novartis, Kodak and Johnson & Johnson -- a common client with Lowe. The new offering gives Interpublic the heft of a fuller international network alternative to McCann Erickson or DraftFCB. And Interpublic, whose shares were depressed before the recession thanks to years of big client losses and accounting screw-ups, needs it. The holding company last quarter reported a 70% drop in profit to $21 million.

Success stories
Agency mergers are tough to pull off. There have been many failures but also some successes. Interpublic has one of the latter in its 2006 combination of Draft and Foote Cone & Belding, which made sound strategic sense and was a reasonable reaction to changes in the marketing world that were ailing FCB. Though it had naysayers, DraftFCB grew revenues 5% last year to $510 million, and has weathered the economic storm better than many of its competitors.

Lowe, too, has been ailing as J.P. Morgan analyst Alexia Quadrani stated last week in a research note: "Lowe has been merged, reshaped and realigned unsuccessfully too many times this past decade, and we believe that moving its assets into a stronger brand may hopefully be the best solution for IPG."

The matter of the agency brand aside, the move is likely to boost morale -- something that's been lacking at Lowe after attempts to revive it time and again -- for staffers who survive. Many Deutsch employees already appear excited about potential for work projects abroad. It's also sure to help Interpublic with cost efficiencies -- one estimate said savings could be as much as $8 million. And, let's face it, sticking a fork in the Lowe brand in the U.S. is a good thing. Several attempts to shock it back to life after that period of merger-mania-driven client losses failed, though the most recent go at it, led by Mark Wnek, at least helped reacquaint the agency with the idea of a new- business win.

Val DiFebo, CEO of combined Deutsch/Lowe operations
Val DiFebo, CEO of combined Deutsch/Lowe operations
But Mr. Wnek, a British import, was basically pushed out in the merger. He was not invited to join the new Deutsch and, while Mr. Wright last week told news outlets the company was searching for a global role for Mr. Wnek, people familiar with the situation he'll stay on for a few months at most to help through a transitional period.

One of the most surprising elements of the move was the downplayed appointment of ex-Deutsch creative director Greg DiNoto as partner-chief creative officer for the new Deutsch New York. Mr. DiNoto will close up his own shop in New York, which handled brands like Bloomberg and Graco. Weirdly, he announced on his website Thursday, the same day the Deutsch/Lowe deal was made public, that his agency was appointed to handle advertising and branding duties for investment management firm Rockefeller & Co. And even weirder, Donny Deutsch in a New York magazine profile that ran after Mr. DiNoto's departure, said, "Greg probably couldn't work at Deutsch today."

The leadership team was rounded out by Val DiFebo, previously president of Deutsch, New York, now CEO of the combined New York operations; and Lowe New York President Sal Taibi, who becomes partner-general manager of the new Deutsch New York. On the West Coast, Messrs. Hirshberg and Sheldon emerged with new titles as well, going from co-presidents to co-CEOs of that office. Mr. Deutsch, now known best as a TV personality but who helped orchestrate this merger, will remain chairman.

Last week's merger leaves at least one marketer in the lurch, Lowe client Matrixx Initiatives, the maker of cold remedy Zicam, which gave its $30 million account to Lowe earlier this year. Now there's a conflict with J&J that, according to a New York Times report, Interpublic trying to sidestep by shifting the account to another of its agencies. The client, however, isn't sold. "We're still working on the details of what this decision will mean and how it will impact our business," said Tim Connors, VP-marketing at Matrixx. "We'd like to be supportive, but we'll ultimately make a decision that's best for our business."

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Laurel Wentz contributed to this report.

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