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Interpublic Group of Cos.: 2007 Year in Review

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Interpublic Group of Cos. in 2007 ranked as the world's third-largest agency company. But with revenue of $6.55 billion, it ended the year only slightly ahead of French rival Publicis Groupe ($6.38 billion).

Based on first-quarter 2008 results, Publicis ($1.59 billion in revenue) pulled ahead of Interpublic ($1.49 billion). Publicis' higher revenue figure largely reflects the weak dollar; Ad Age converted Publicis first-quarter revenue from euros based on average exchange rates.

Interpublic, the original agency holding company, ranked No. 1 as recently as 2000. It fell to second, behind Omnicom Group, in 2001, and third, behind WPP Group, in 2003.

Interpublic, pressing ahead on a turnaround, reported net income of $167.6 million in 2007. That marked the first year since 2002 that it recorded net income rather than a net loss.

Interpublic 2007 worldwide revenue grew 5.9%. The New York-based company employed about 43,000 people worldwide at year-end 2007, up 2.4% from year-end 2006 (42,000). That brought employment back to its year-end 2005 level (43,000).

Interpublic in 2007 generated 55.7% of revenue from the U.S., making it the most reliant on the U.S. market among the Big Four agency firms. (Omnicom, which generated 52.8% of revenue from the U.S., also is heavily reliant on that market.)

Interpublic's proportion of U.S. revenue is higher than its proportion of U.S. workers. Interpublic ended 2007 with 19,000 U.S. employees (44.2% of worldwide employment), up from 18,000 at year-end 2006 and year-end 2005.

Interpublic was incorporated in September 1930 as McCann-Erickson Inc., created by the merger of ad agencies started in 1902 by A.W. Erickson and in 1911 by Harrison K. McCann. The firm in January 1961 took the Interpublic name, becoming the industry's first agency holding company.

ORGANIZATION

Interpublic May 1, 2008, settled with the Securities and Exchange Commission over issues surrounding past accounting and financial reporting. This concluded a formal investigation that the SEC began in January 2003.

The SEC alleged that Interpublic flagship McCann Erickson Worldwide "fraudulently misstated its financial results" and that Interpublic "negligently failed to address the accounting problems at McCann, its largest subsidiary, resulting in material misstatements in its own financial reporting."

Interpublic and McCann agreed to settle the SEC's charges, and McCann agreed to pay a $12 million penalty. Interpublic, McCann and two former McCann employees agreed to settle the SEC's charges without admitting or denying the allegations. McCann Erickson's credo, as it happens, is "Truth Well Told," the original slogan of H.K. McCann Co.

Read SEC's official settlement with Interpublic. (a PDF file)


Interpublic disclosed its accounting problems in 2002 and has worked since then to improve internal financial controls. Interpublic in 2007 completed a plan to fix "material weaknesses" in controls. The company said in its February 2008 10-K: "Management concluded that the company's internal control over financial reporting was effective as of December 31, 2007." That brought Interpublic into compliance for reporting standards of the Sarbanes-Oxley Act for the first time since the act became law in July 2002.

Interpublic divides its holdings into two sectors:
• Integrated Agency Networks: McCann, DraftFCB, Lowe, media agencies (Initiative, Universal McCann), standalone agencies (including Campbell-Ewald, Campbell Mithun, Deutsch, Hill Holliday, Martin Agency and Mullen).
• Constituency Management Group: marketing services such as public relations (including DeVries Public Relations, GolinHarris and Weber Shandwick), event marketing ( Jack Morton Worldwide), branding (FutureBrand) and sports marketing (Octagon).

Interpublic's flagship agency, McCann Erickson, operates in more than 100 countries.

Michael Roth joined Interpublic as chairman July 13, 2004, and became chairman-CEO Jan. 19, 2005. Before becoming Interpublic chairman, he was chairman-CEO of financial-services firm MONY Group from February 1994 to June 2004; he left MONY following the sale of that company.

Interpublic in July 2007 named Jocelyn Carter-Miller to its board. Ms. Carter-Miller is president of TechEdventures, a "community empowerment firm." She earlier was CMO at Office Depot and Motorola.

One of Interpublic's biggest rivals is also a shareholder: Publicis as of April 2008 said it owned 1.13% of Interpublic. In its April 2007 20-F, Publicis classified those shares as "available-for-sale assets." Publicis received the shares in 2001 when Interpublic bought True North Communications (the then-parent of Foote Cone & Belding), in which Publicis owned a 9% stake as the result of a one-time�and long ago terminated�alliance with FCB.

2007 RESULTS

Interpublic 2007 worldwide revenue rose 5.9% to $6.55 billion. Interpublic said organic revenue increase was 3.8%, "primarily due to higher revenue from existing clients." Mr. Roth in February 2008 said the 3.8% organic growth was Interpublic's best since 2000.

Operating margin was 5.3% in 2007, vs. 1.7% in 2006.

"The change in revenues was negatively affected by net divestitures of non-strategic businesses, primarily at DraftFCB and Lowe, and a sports marketing business at the Constituency Management Group," Interpublic said in its February 2008 10-K. "This was partially offset by businesses acquired during 2007, primarily in the U.S. and India," a country in which Interpublic bought full ownership of two affiliates. "Net divestitures negatively affected revenue, due to the sale of non-strategic businesses in 2007 and 2006, primarily at DraftFCB and Lowe, partially offset by businesses acquired, primarily at Lowe."

The 10-K report said: "The organic revenue growth was primarily driven by domestic markets through expanding business with existing clients, winning new clients in advertising and public relations and completing several projects within the events marketing business."

Specifically, the 10-K said: "The domestic organic increase was a result of higher revenue from existing clients and net client wins, primarily at McCann and Hill Holliday. Partially offsetting this domestic organic increase was decreased revenue from existing clients at Lowe and net client losses at DraftFCB."

The 10-K continued: "The international organic revenue increase was primarily driven by increases in spending by existing clients in the Asia-Pacific region, partially offset by net client losses in Continental Europe, primarily in France at the Integrated Agency Network."

Specifically, the report said: "The international organic increase was due to increases in client spending at McCann in the U.K. and Asia-Pacific, partially offset by net client losses at DraftFCB and Lowe across most international regions."

In its February 2007 10-K, Interpublic stated: "Our strategy is focused on improving organic revenue growth and our operating income, and we are working to achieve a level of organic revenue growth comparable to industry peers and double-digit operating margins by 2008."

In November 2007, Interpublic reduced its margin target, saying it expected to post operating margins of 8.5% to 9% in 2008. In April 2008, Mr. Roth said: "We continue to be on track to achieve our 8.5 to 9% target."

NEW BUSINESS

Interpublic in 2007 was the No. 4 holding company in new business as measured by net equivalent revenue (anticipated annualized revenue from new business), according to the tally of Bear, Stearns & Co. analyst Alexia Quadrani.

Interpublic in 2007 had $115 million in net equivalent revenue from new business, Ms. Quadrani reported. Ms. Quadrani's tally adjusts billings of creative wins and media wins to arrive at an estimated net equivalent revenue associated with that business.

Bear Stearns aggregates account shifts reported in media, but it doesn't claim its new-business tally is all-inclusive, particularly in marketing services and outside the U.S. and U.K.

TOP CLIENTS

Interpublic said its top ten clients based on revenue accounted for about 26% of worldwide revenue in 2007 and 2006. Based on 2007 revenue, Interpublic's largest clients were General Motors Corp., Microsoft Corp., Johnson & Johnson, Unilever and Verizon.

Microsoft in 2007 moved up to No. 2 position in client revenue, behind General Motors.

Based on 2006 revenue, Interpublic's largest clients, ranked in order of size, were General Motors, Johnson & Johnson, Microsoft Corp., Unilever and Verizon.

For the first time in decades, Interpublic's February 2007 10-K annual report didn't disclose the revenue contribution of its largest client. An Interpublic spokesman in 2007 said the company would "reassess" reporting that data in future years. The company chose not to report the figure in its February 2008 10-K.

DISCIPLINES AND REGIONS

Percentage of revenue by region in 2007: U.S. (55.7%); Europe excluding the U.K. (16.5%); U.K. (9.0%); Asia-Pacific (8.9%); Latin America (4.8%); other regions (5.1%). "Other" includes Canada, Africa and the Mideast.

Interpublic said 58% of 2007 worldwide revenue came from advertising and media; 42% came from marketing services.

Interpublic generated 84% of 2007 worldwide revenue from its Integrated Agency Networks sector. The Constituency Management Group sector accounted for 16% of revenue.

ACQUISITIONS AND DIVESTITURES

After staying on the sidelines for a few years while working on its turnaround, Interpublic in 2007 got back into the acquisitions game in a limited way. It bought eight ventures in 2007, making its first acquisitions since 2004.

Interpublic said 2007's most significant acquisitions were an ad agency in Latin America; Reprise Media, a U.S.-based search-marketing agency; remaining interests in two ad agencies in India in which Interpublic previously held 49% and 51% stakes; a professional healthcare services business in the U.K.; and a branded entertainment business in the U.S.

The company paid $140.4 million in cash for its 2007 acquisitions. All 2007 acquisitions are included in the Integrated Agency Networks sector.

Among its deals:
• Interpublic in April 2007 bought Reprise Media, its first deal since 2004.
• Interpublic in July 2007 did two deals in India. It raised its stake in Lowe Worldwide's India operation, Lintas India Private Ltd., to 100% from 49%. Lowe planned to set up a production studio in India, letting Lowe clients take advantage of the India unit's lower costs and expertise in mobile marketing.
• In the second India deal, Interpublic bought the remaining 49% stake in FCB Ulka, which had been a joint venture between FCB and Ulka Advertising. That gave Interpublic 100% ownership of FCB Ulka, which adopted the new name DraftFCB Ulka. The shop was to serve as DraftFCB's hub for Asia-Pacific and Africa.
• Interpublic in October 2007 bought Translation Consultation & Brand Imaging, a branded-entertainment agency run by Steve Stoute, for a price estimated at less than $15 million.
• Mr. Stoute and Shawn "Jay-Z" Carter in February 2008 launched Translation Advertising, a New York multicultural ad agency, in partnership with Interpublic. Translation Advertising was 51% owned by Messrs. Stoute and Carter and 44% by Interpublic; the remaining 5% was to be determined as of April 2008. Translation Consulting continued as a brand-planning and strategic consultancy run by Mr. Stoute; Translation Advertising is a separate entity.

Interpublic, working to simplify its structure after an overload of deals in the '90s and early this decade, did not complete any acquisitions in 2005 and 2006.

Interpublic completed two acquisitions in 2004, two in '03 and nine in '02.

The company disposed of 51 businesses in 2005 and 2006, primarily outside the U.S.

Interpublic in April 2007 sold the U.S. arm of Marketing Drive Worldwide to KB Holdings (also known as RiverNorth Group), a Chicago-based promo agencies group, for an undisclosed amount. Marketing Drive had been aligned with FCB, which Interpublic acquired in 2001.

The sale of Marketing Drive came after Interpublic in 2006 merged FCB with marketing-services shop Draft to form DraftFCB. DraftFCB kept Marketing Drive's non-U.S. business and Marketing Drive's San Francisco shop, which became a new office of DraftFCB's Rivet.

KB bought Marketing Drive's offices in Bentonville, Ark.; Boston; Chicago; Minneapolis; and Norwalk, Conn. Marketing Drive U.S. operations had estimated '06 revenue of $58.9 million, just under 1% of Interpublic '06 worldwide revenue.

In January 2007, Interpublic jettisoned OneSeven, home of the so-called Saatchi 17, which, composed of that number of staffers serving the General Mills account at Saatchi & Saatchi, had left Saatchi in February 2005 with hopes that the client would shift its business. General Mills did not follow the group to the breakaway shop.

In January 2007, Interpublic and agency veteran Frank Lowe ended a year-long battle, withdrawing their claims against each other. Mr. Lowe, who founded and sold ad agency Lowe to Interpublic, came out of retirement in December 2005 to start a new London shop. The new shop, Red Brick Road, opened in March 2006 with the $80 million account of retailer Tesco, poached from Lowe's London office.

Interpublic in February 2007 formed a partnership with Spongecell, which offers web services and tools that allow marketers and web sites to manage events, track audiences, optimize attendance and manage on-going customer relationships. The deal gave Interpublic a preferred equity stake in Spongecell.

Interpublic's Emerging Media Lab in April 2007 entered a year-long strategic relationship with Joost, an internet TV venture.

Interpublic in July 2007 formed Ansible, a mobile marketing agency, in a joint venture with Velti, a London-based mobile technology provider. Ansible became a New York-based stand-alone unit intended to team up with agencies throughout the holding company as part of Interpublic's Futures Marketing Group.

Interpublic in October 2007 struck a strategic partnership with (but no investment in) BzzAgent, a word-of-mouth marketing venture. Interpublic agencies are working with BzzAgent to develop word-of-mouth campaigns for agency clients.

Interpublic in November 2007 formed a partnership with Radian6, an internet brand reputation firm, allowing Interpublic agencies to use Radian6's service to keep track of online "conversations" to measure buzz across social media.
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