Omnicom Group: 2007 Year in Review

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Omnicom Group, the world's largest agency company, reported record revenue, net income and earnings per share in 2007. The company in June 2007 did a two-for-one stock split, its first split in nearly 10 years. The stock in July 2007 reached a split-adjusted all-time high of $55.45. Omnicom as of early May 2008 traded below $50.

Omnicom earlier did two-for-one splits in December 1997 and December 1995.

Omnicom in 2007 generated about 43% of revenue from what it calls "traditional media advertising." The rest came from a range of marketing services. The New York-based company at year-end 2007 employed about 70,000 people, up 6.1% from a year earlier (66,000).

ORGANIZATION

Federal and state courts in 2007 and 2008 ruled in Omnicom's favor on 2002 shareholder lawsuits related to Omnicom's placement of digital agency interests into a holding called Seneca Investments. In January 2008, U.S. District Court in New York granted Omnicom's request for summary judgment, dismissing all claims and directing the court to close the case. In February 2008, plaintiffs filed a notice of intent to appeal that decision to the U.S. Court of Appeals.

In a related shareholder suit wending its way through New York state courts, the New York Supreme Court's Appellate Division in September 2007 ruled for Omnicom and dismissed shareholder claims. In January 2008, the court denied the plaintiff's efforts to appeal.

Omnicom's Omnicom Media Group--the unit that oversees media operations including OMD and PHD--in July 2007 formed Omnicom Media Group Digital to shepherd digital work. Sean Finnegan, formerly U.S. director of digital at OMD, became CEO of Omnicom Media Group Digital.

Omnicom in March 2007 opened a San Francisco ad agency, Cutwater, that absorbed a majority of clients and employees of the San Francisco office of Omnicom's TBWA/Chiat/Day. The agency was conceived by Chuck McBride, formerly exec creative director-North America of TBWA, San Francisco, as a breakaway creative shop, but it remained totally owned by Omnicom. In actuality, it gave the split-away shop the opportunity to pitch accounts that had conflicts with TBWA: Cutwater in April 2007 won Chrysler's Jeep branding assignment following a pitch among Omnicom agencies; Jeep would have been a conflict with TBWA's Nissan account. (Chrysler in recent years has been Omnicom's largest client.)

Omnicom holdings include:
• Three global advertising networks: BBDO Worldwide, DDB Worldwide Communications Group and TBWA Worldwide, each of which offers various marketing services and specialty communications.
• Local, regional and national U.S. ad agencies: includes Arnell Group; Cutwater; Element 79; Goodby, Silverstein & Partners; GSD&M's Idea City; Martin/Williams; Merkley & Partners; Roberts & Tarlow; Rodgers Townsend; Zimmerman Advertising.
• Global creative boutique: Majority stake in 180 Amsterdam/180LA.
• Media agencies, part of Omnicom Media Group: Two global networks, OMD and PHD; a smaller network, Prometheus Media Services; and media specialist agencies: Full Circle Entertainment (branded entertainment), Davinci Selectwork (communication planning), Icon International (barter), Ketchum Directory Advertising, Novus Print Media Network, Outdoor Media Group, Resolution Media (search marketing), Singer Direct (insert media buying and management).
• Customer relationship management: Promotion marketing and sales promotion (Alcone Marketing Group, TracyLocke); direct marketing ( Rapp Collins Worldwide, Targetbase); branding (Interbrand); digital (Agency.com, Organic).
• Public relations/public affairs: networks Fleishman-Hillard, Ketchum and Porter Novelli; specialty shops including Brodeur Worldwide, Clark & Weinstock, Gavin Anderson & Co. and Cone.
• Specialty communications: Healthcare agencies; recruitment agency Bernard Hodes Group; B-to-B agency Doremus.

CFO Randall Weisenburger in February 2008 said Omnicom overall has about 2,500 agencies in 120 countries.

2007 RESULTS

Omnicom's 2007 revenue increased 11.6% to $12.7 billion. Organic revenue, which factors out currency changes and acquisitions, rose 7.1%. Net income in 2007 increased 12.9% to $975.7 million. Diluted earnings per share jumped 18% to $2.95. Omnicom's operating margin (operating income divided by revenue) edged up to 13.1% in 2007 from 13.0% in 2006.

"Overall, in the past year, we believe that our businesses have performed well across our operating regions," the company said in its 10-K for calendar 2007. "In addition, we expect to continue to increase our investment in the Asian market, which we believe will grow rapidly in the future. We also plan to focus on businesses that will complement and enhance our existing strategic platforms and service capabilities to better serve our clients in various regions."

Omnicom said substantially all of its revenue comes from fees for services or a rate per hour, or equivalent basis.

NEW BUSINESS

Omnicom in 2007 was the No. 1 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.

Omnicom in 2007 had $175 million in net equivalent revenue from new business, just beating WPP Group ($170 million), 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.

Omnicom President-CEO John Wren in February 2008 said Omnicom had 2007 net new business of $4.6 billion, up about $400 million from 2006.

TOP CLIENTS

Mr. Wren in February 2008 said Omnicom has more than 5,000 clients.

Omnicom said its largest client was served by more than 100 of its agencies in 2007 and represented 2.8% of 2007 consolidated revenue. "No other client accounted for more than 2.4% of our consolidated 2007 revenue. Each of our top 100 clients was served, on average, by more than 40 of our agencies in 2007 and represented 46.2% of our 2007 consolidated revenue," Omnicom said in its early 2008 10-K.

Regarding 2006, Omnicom said in its early 2008 10-K: "Revenue from our single largest client represented 3.6% of our worldwide revenue in 2006 and 4.0% in 2005. No other client represented more than 2.9% in 2006 or 2005. Our ten largest and 100 largest clients represented 18.3% and 46.2% of our 2006 worldwide revenue, respectively, and 18.5% and 44.6% of our 2005 worldwide revenue, respectively."

Omnicom's largest client in 2006 was DaimlerChrysler. Omnicom shops have worked with Chrysler units since 1926, when Chrysler hired ad agency Ross Roy (now folded into BBDO). After Daimler bought Chrysler Corp. in 1998, the Chrysler Group consolidated at Omnicom in 2000. In February 2007, DaimlerChrysler said it was reviewing strategic options for Chrysler Group. DaimlerChrysler May 14, 2007, announced it was selling Chrysler Group to private-equity firm Cerberus Capital Management for $7.4 billion. The sale closed in August 2007. Cerberus received an 80.1% stake; DaimlerChrysler kept 19.9%. Chrysler now operates as Chrysler LLC. DaimlerChrysler changed its name to Daimler AG.

DISCIPLINES AND REGIONS

In 2007, Omnicom said, "traditional media advertising" represented about 43% of the total revenue and grew by 12.0% over the prior year. "Customer relationship management" represented about 37% of the total revenue and grew by 14.1%. Public relations represented about 10% of the total revenue and grew by 11.1%. "Specialty communications" represented about 10% of total revenue and grew by 2.5%.

Omnicom in February 2007 revealed a few details about the specialty communications sector: Mr. Weisenburger said healthcare accounted for "I'd guess 70%...off the cuff" of that sector's revenue. Recruitment advertising--Bernard Hodes--is "the bulk of the balance" of specialty communications, he said. Mr. Wren added that recruitment work represented about 2% of Omnicom total revenue. Recruitment is "the cyclical part of the specialty" communications sector, Mr. Wren said.

Mr. Weisenburger in July 2007 offered an alternative calculation of the size of Omnicom's healthcare practice, saying it accounts for "probably 8.5% of [specialty communications'] 10%," implying healthcare is about 85% of the specialty sector.

Omnicom in 2007 generated 52.8% of revenue from the U.S.; 32.3% from Europe (including 11% from the United Kingdom); and the rest from other regions.

U.S. revenue grew 8.2% in 2007, vs. 2006 growth of 7.8%. On a constant-currency basis (excluding changes in exchange rates), non-U.S. revenue increased 7.2% in 2007, vs. 2006 growth of 7.9%.

ACQUISITIONS

Omnicom said it completed 13 acquisitions in 2007 for $160 million. It also made additional investments of $59 million in companies in which it already had an ownership interest. Finally, it paid $159 million in earn-outs on earlier acquisitions. Total amount paid: $378 million.

Omnicom made 16 acquisitions in 2006 and made additional investments in some companies where it had an ownership stake. Amount paid in 2006: $152.8 million. Omnicom also paid $158.6 million in earn-outs for deals done in earlier years. So in total, Omnicom in 2006 paid $311.4 million in cash, stock and assumption of liabilities.

CHINA AND INDIA DEALS

Mr. Wren told Ad Age in January 2007 that the company planned to build up operations in China and India in 2007, "the only two markets we don't have leadership parity with the best of my competitors."

Omnicom in September 2007 bought a majority stake in Consultech, a healthcare consulting and marketing company founded in 1995 and based in Beijing; it's now part of Omnicom's Diversified Agency Services sector.

Omnicom in January 2008 said BBDO Worldwide took "a significant minority stake" in Shunya Communications Group, an integrated communications company in China.

OTHER DEALS

Omnicom's first-quarter 2007 acquisitions:
• Doom & Dickson, an ad agency in Amsterdam; now part of the TBWA Worldwide network.
• Karakter, a London-based branding consultancy; it's been renamed Siegel & Gale Ltd., making it part of Siegel & Gale.
• Mango Mobile (www.MangoMobile.com), a mobile-marketing company based in Plano, Texas; now part of Omnicom's Radiate Group network.
• Red Urban, an Amsterdam digital shop. Omnicom then combined that agency with other holdings, including Dallas-based Tribal DDB spinout and conflict shop Virion, to form Red Urban's global network.

Second-quarter 2007 acquisitions:
• Expert Communications, a San Francisco direct-response agency; now part of Omnicom's Star Marketing Group.
• ASA Events, a youth lifestyle marketing and entertainment company in Culver City, Calif.; now part of Omnicom's Radiate Group network.

Third-quarter 2007 acquisitions:
• Sil Ad, a 16-year-old ad agency in Kuala Lumpar, Malaysia; now part of the TBWA Worldwide network.
• Pointer Group, a promotion agency in Helsinki, Finland; now part of the TBWA Worldwide network.
• RTS Rieger Team, a business-to-business ad and integrated-marketing agency in Germany; now part of the TBWA Worldwide network.
• Signature Graphics, a producer of customized vehicle graphic wraps and large-format branding materials and services; based in Porter, Ind.; now part of the Diversified Agency Services sector.

Fourth-quarter 2007 acquisitions:
• Brandcom, an ad agency in Dubai, United Arab Emirates; now part of the DDB Worldwide network.
• WatersWidgren, a Stockholm, Sweden, ad agency; it merged with TBWA/Sweden to form WatersWidgren/TBWA, part of the TBWA Worldwide network.

First-quarter 2008 acquisitions:
• A Vista Events, an event designer and producer in Beltsville, Md.; now part of the Radiate Group network.
• Direct shop Kern Organization, which was to remain an independent brand operating under Rapp Collins. Kern, based in Woodland Hills, Calif., specialized in customer acquisition and B-to-B lead generation. Acquired in February 2008.
• Majority stake in Shift, a digital consultancy in New Zealand. Shift specializes in web site development. It was to work with TBWA, Tequila and Agency.com Worldwide, expanding the TBWA Worldwide network's digital offering. Stake acquired in February 2008.
• Lew'Lara, an ad agency in Brazil; rebranded as Lew'Lara/TBWA, making it flagship agency in Brazil for TBWA Worldwide.

Omnicom in October 2007 made an investment in Millions of Us, an agency that builds destinations in virtual realms such as Second Life.
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