Interpublic Group of Cos.: 2008 Year in Review

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(This analysis written as part of Ad Age's Agency Report 2009.)

Interpublic Group of Cos. in 2008 ranked as the world's third-largest agency company. With revenue of $6.963 billion, it ended the year $63 million ahead of French rival Publicis Groupe ($6.900 billion).

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

Interpublic 2008 worldwide revenue grew 6.2%. The New York-based company employed about 45,000 people worldwide at year-end 2008 vs. 43,000 at year-end 2007; 42,000 at year-end 2006; and 43,000 at year-end 2005.

Interpublic said it generated 54.4% of revenue from the U.S. in 2008, down from 55.7% in 2007.

Interpublic's proportion of U.S. revenue is higher than its proportion of U.S. workers. Interpublic ended 2008 and 2007 with 19,000 U.S. employees, vs. 18,000 at year-end 2006 and year-end 2005.

Frank Mergenthaler, exec VP-chief financial officer, told analysts in February 2009 that the year-on-year increase in staffing "was 100% attributable to the acquisition of MCN in the Middle East." (See discussion below regarding MCN, or Middle East Communication Networks.)

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 major agency holding company. Interpublic went public in 1971.

ORGANIZATION

Interpublic divides its holdings into two sectors:

• Integrated Agency Networks: McCann, DraftFCB, Lowe, Mediabrands (including Initiative and 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, MWW Group 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.

Interpublic in July 2008 created Mediabrands as a management entity to oversee its media agencies, notably Initiative and Universal McCann. Interpublic said in July 2008: "Our global media networks, Initiative and Universal McCann, continue to operate as independent entities, each aligned where appropriate with a full-service marketing network partner" -McCann Erickson and DraftFCB, respectively.

Magna, another part of Mediabrands, in March 2009 promoted Brian Wieser, age 34, to global director of forecasting; he joined Magna in 2003. Wieser succeeded Robert J. Coen, age 86, who retired in March 2009 as Magna's senior VP and director of forecasting but stayed on as a Magna adviser. Coen joined McCann Erickson in 1948 and was the industry's best-known tracker of ad spending.

Michael I. 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.

One of Interpublic's biggest rivals is also a shareholder: Publicis Groupe at year-end December 2008 owned 1.02% of Interpublic, according to Publicis' French regulatory filing for the year ended December 2008. That filing said: "This investment is not consolidated and the shares are classified as 'available-for-sale.'" The percentage is down from December 2007, when Publicis reported owning 1.13% of Interpublic.

In its 20-F filing with the SEC in April 2007, Publicis also classified its Interpublic shares as "available-for-sale assets." Publicis received the shares in 2001 when Interpublic bought True North Communications, in which Publicis owned a 9% stake as the result of a one-time, and long-aborted, alliance with Foote Cone & Belding (now Interpublic's DraftFCB).

2008 RESULTS

Interpublic 2008 worldwide revenue rose 6.2% to $6.96 billion. Interpublic said organic revenue grew 3.8% in 2008 as well as 3.8% in 2007. Mr. Roth in February 2008 said 2007's 3.8% organic growth was Interpublic's best since 2000.

Interpublic said in its 10-K for the year ended December 2008: "The domestic organic growth was primarily driven by expanding business with existing clients and winning new clients in the advertising, media and public relations businesses. The international organic increase occurred throughout all regions. The increase in the United Kingdom was primarily due to the completion of several projects with existing clients and net client wins in the events marketing business and winning new clients in the advertising business. The international growth was also driven by increased client spending and net client wins primarily in Brazil, China and Spain."

Interpublic, forging ahead on a turnaround, reported net income of $295.0 million, up from $167.6 million in 2007; 2007 had marked the first year since 2002 that Interpublic recorded net income rather than a net loss.

Interpublic had an operating margin of 8.5% in 2008, up from 5.3% in 2007 and 1.7% in 2006. Operating margin is operating profit divided by revenue.

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.

Read SEC's official settlement with Interpublic. (This is a PDF file.)
Interpublic disclosed its accounting problems in summer 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.

NEW BUSINESS

Interpublic in 2008 tied with Publicis Groupe as 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 J.P. Morgan analyst Alexia Quadrani.

The agency company in 2008 had a $31 million loss in net equivalent revenue from new business, Ms. Quadrani calculated.

By Ms. Quadrani's tally, Interpublic's gross billings wins exceeded its gross billings losses in 2008. But to arrive at net equivalent revenue, Ms. Quadrani weighted gains and losses based on whether the billings in question were creative or media. Based on that weighting, Interpublic showed a loss in net equivalent revenue.

J.P. Morgan aggregates account shifts noted in press reports, but it doesn't claim its new-business tally to be all-inclusive, particularly in marketing services and outside the U.S. and U.K.

TOP CLIENTS

Interpublic said its 10 largest clients based on revenue accounted for about 26% of revenue in 2008, 2007 and 2006. Interpublic's largest accounts in 2008 were (in alphabetical order): General Motors Corp., Johnson & Johnson, Microsoft Corp., Unilever and Verizon. The U.S. government ranked as Interpublic's sixth-largest client in 2008.

The company said its top 100 clients accounted for about 55% of worldwide revenue in 2008.

Interpublic in 2008 generated about 5%, or about $348 million, of revenue from General Motors. GM is the largest client at Interpublic, whose assignments include Chevrolet, OnStar, corporate ads and two brands (Saturn and Saab) whose fate was up in the air in spring 2009.

GM's share of Interpublic revenue has fallen from 6% in 2007; 8% in 2005 (when it lost GM media buying to Publicis); and 15% in 1979.

GM at year-end 2008 represented 4%, or about $194 million, of Interpublic accounts receivable and expenditures billable to clients (work in progress not yet billed), according to Interpublic's 10-K filing. Michael Roth, Interpublic's CEO, told analysts that Interpublic's exposure to GM, receivables plus work in progress, stood at roughly $150 million at the end of February 2009; Ad Age believes the figure held stable at $150 million at the end of March 2009.

Mr. Roth affirmed Interpublic's relationship with GM in an April 2009 statement to Ad Age: "GM is vital to the U.S. economy and an important IPG client. We remain committed to our partnership and are working closely to support them as they navigate through these challenging times." The ad firm's GM ties date back nearly a century; Interpublic's Campbell-Ewald did its first project in 1916 for Chevrolet, a client it still handles.

Based on 2007 revenue, Interpublic's largest clients were (in order of revenue): GM, Microsoft, Johnson & Johnson, Unilever and Verizon. Microsoft in 2007 moved up to No. 2 position in client revenue, behind GM.

DISCIPLINES AND REGIONS

Interpublic said 58% of 2008 worldwide revenue and 2007 worldwide revenue came from advertising and media; 42% came from marketing services.

Interpublic generated about 84% of 2007 worldwide revenue and 2008 worldwide revenue from its Integrated Agency Networks sector. The Constituency Management Group sector accounted for about 16% of revenue in each of those years.

Interpublic's percentage of revenue by region in 2008: U.S. (54.4%); Europe (25.3%); Asia Pacific (9.4%); Latin America (5.1%); other regions (5.8%). "Other" includes Canada, Africa and the Mideast.

ACQUISITIONS

After staying on the sidelines for a few years while working on its turnaround, Interpublic in 2007 and 2008 got back into the acquisitions game in a limited way.

During 2008, Interpublic completed 10 acquisitions, of which the most significant were:

• Middle East Communication Networks: Interpublic in July 2008 increased its stake in Middle East Communication Networks (MCN) to 51% from 19.9%, allowing Interpublic to consolidate MCN on Interpublic's financial statements. MCN is a Dubai-based network of agencies across 14 countries. It had about 1,800 employees at the time of that deal. MCN's flagship agency, Fortune Promoseven, is part of Interpublic's McCann Worldgroup network.

• Endeavor Marketing: Interpublic in 2008 increased its stake in Endeavor Marketing to 100% from 40%. Interpublic in January 2005 bought its initial 40% stake. Endeavor Marketing is a consultancy involved in entertainment marketing, event marketing and sports marketing.

• Huge: Interpublic in July 2008 bought a 51% stake in Huge, a digital agency founded in 1999 and based in Brooklyn, N.Y. Four partners at Huge owned the rest.

• A digital advertising and communications agency in the United Kingdom.

• A marketing services agency in France.

Steve Stoute and Shawn "Jay-Z" Carter in February 2008 launched Translation Advertising, a New York multicultural ad agency 44% owned by Interpublic.

Translation Advertising is a separate entity from Translation Consulting, a brand-planning and strategic consultancy run by Mr. Stoute. Interpublic owns 60% of Translation Consulting, the result of Interpublic's October 2007 investment in that venture.

Mr. Mergenthaler, the CFO, said in a February 2009 conference call with analysts: "The most significant acquisitions in '08 were the Middle East Communications Network, the premier marketing services group in the Middle East-North Africa region, where we moved from a minority to a majority position; and our majority interest in Huge."

Interpublic bought eight ventures in 2007, making its first acquisitions since 2004. The company paid $140.4 million in cash for its 2007 acquisitions.

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 2003 and nine in 2002.

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