1991-2001: Then & Now; Public lives of agencies

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Goodby, Berlin & Silverstein weathered the last recession with no major layoffs. But as the economy unraveled in this year's first quarter, the agency now known as Goodby, Silverstein & Partners made its first big cuts, firing three dozen staffers. The main reason: The San Francisco shop felt the heat to deliver the numbers for its publicly owned parent.

The Omnicom Group agency has a lot of company. Of the nation's 100 biggest agencies, 56 are owned by publicly traded holding companies. More telling, those 56 agencies accounted for a full 82% of the top 100 ad agencies' U.S. billings in 2000, according to Advertising Age research. In 1991, the last recession, publicly owned ad agencies made up just 40% of the top 100 U.S. shops and 55% of the top 100's billings, according to Ad Age calculations.

In good times, good agencies have comparatively little trouble in making the numbers. But in a tough market, even the best agencies feel the pressure to perform for parents that must deliver for Wall Street. That's translating into layoffs and cost cutting as agencies balance the needs of clients with those of public shareholders.

"There's enough terrific [talent] on the street to start some pretty good agencies," said Jeff Goodby, co-chairman of Goodby Silverstein.

Public agencies have been part of the landscape for decades. Interpublic Group of Cos., the pioneering holding company, went public in 1971. But the difference now is the mass of ad agencies-not to mention PR firms, direct marketing shops and promotion agencies-that must satisfy two constituencies.

Big and small units of public shops must perform regardless of the economy. In this down market, they increasingly are handing out pink slips and aggressively shaving expenses in a bid to keep earnings robust.

"When I owned Arnold, [if my profit fell short] I was the only one who had to worry about it," said Ed Eskandarian, former majority owner of Arnold Communications, now part of France's Havas Advertising. "But if you're public and you say you're going to make $5 million and you make $4 million, you and everyone who owns stock in your company is losing."

Mr. Eskandarian, now chairman-CEO of Havas' Arnold Worldwide Partners, noted the financial freedom a private shop can have: "I looked at that loss [of profit] as an investment. In the long run, sacrificing that million one year would pay off because I would be building the kind of agency people don't want to leave." Mr. Eskandarian's Boston agency has had no layoffs this year, though its San Francisco branch cut a dozen jobs.

During the decade-long boom-gone-bust, holding company giants subsumed hundreds of agencies and marketing services ventures. If agencies got built, they got bought. Interpublic, for example, swallowed more than 200 companies over the past three years.

The result is that in San Francisco, for example, once-independent agencies now often have the same status as other agency branch offices in town, with conflicts and other considerations subordinating them to distant owners. "They answer to a different master," with accountants in New York or London saying `you've got to cut deeper,' said Brian Hurley, principal in San Francisco independent Grant, Scott & Hurley.

The consolidation that took root in the 1980s has bloomed into a world where a handful of holding companies dominate the globe. The three biggest companies-potent ad stocks Omnicom, WPP Group and Interpublic-accounted for 40.4% of U.S. and 38.6% of worldwide gross income in 2000 for ad agencies, direct shops and promotion agencies (see related coverage, P. S-1).

"Ten years ago, there were still a lot of naysayers and people who championed independence and said they would go it alone and make it alone. You don't hear much of that today, and whatever you hear, you know no one believes. It's not a matter of if-it's a matter of when an agency becomes part of something larger," said a senior executive at a WPP shop.

The monster companies that have the industry sewn up are beholden to analysts, institutional investors and individual stock pickers. WPP, indeed, last month launched a Web site devoted to luring shareholders (www.wppinvestor.com).

In their bid to become bigger and faster and to beat the competition over the next hurdle, holding companies over the past decade largely looked to acquisitions to help them exceed the 4% to 8% annual industry growth seen in post-recession '90s. That brought everything from direct and interactive to guerrilla marketing and other non-traditional services into a fold that once relied primarily on media and creative.

"Years ago, the trend was to build internally," said Liza Buczkowski, president-CEO of E.W.B. Consultants and three-year manager of agency relationships for Coca-Cola Co. "Today, I feel it's more frenetic and panicked and `We've got to get there quickly [before the competitors]."'

The formula worked during the boom: Ad sector stock prices rose 132% over the past five years, vs. 78% for the Dow Jones U.S. Total Market Index.

But there's not much left to buy, putting the onus on holding companies to build what they own. With the U.S. ad market early this year showing its first major decline in spending in a decade, parent companies and their agencies must deliver the numbers.

Layoffs are omnipresent inside the giants; Ad Age last week, for example, reported cuts at Interpublic's Initiative Media, WPP's MindShare and Omnicom interactive shop Tribal DDB. Cuts sometimes come quickly: Black Rocket Euro RSCG is said to have laid off this month about a dozen people, about one-third of its staff-less than two months after Havas bought the shop.

"It's the pressure they're under to perform in public markets, the pressure the boards of directors put on the CEOs," said Abe Jones, managing director with AdMedia Partners, a New York investment banking firm that specializes in mergers and acquisitions. "That pressure gets pushed to agencies and everybody else."

Public agency ownership offers advantages for agencies-and clients. Marketers are demanding global reach, clout in media buying, technological prowess and the ability to integrate advertising with other marketing services; public ownership gives agencies those resources.

Agencies insist they can still act locally even when owners are thinking globally. "We haven't changed our culture one iota," said Tim Maleeny, director of strategic development at Publicis & Hal Riney, the fabled San Francisco shop now part of France's Publicis Groupe. "We've always been able to make decisions based on what makes sense for Riney, and they've always respected that."

Agency consolidation has its critics. One issue, they argue, is just how forthright agencies can be in proffering unpleasant advice to super-clients whose defection could shave crucial cents off income statements and dollars off stock prices.

"When you're in a financial mode and have gone public, you want to protect your billings with a vengeance. The last thing you want to do is go to a client and be brutally honest because that can [affect] your billings," said Jack Trout, president at Trout & Partners, a marketing strategy firm.

Merrill Lynch analyst Lauren Rich Fine agreed that creatives working on a holding company's largest accounts can be loath to take risks.

"I could see how you could feel hindered," she said, citing Interpublic's statement to her when Coca-Cola Co. shifted Coke work in 1992 and `93 to talent agency Creative Artists Agency. "Interpublic said they couldn't try anything crazy because it was so big. They said `We couldn't do our best work,"' Ms. Fine recalled. Interpublic's stock tumbled at the beginning of 1993 as McCann-Erickson's 40-year grip loosened on the then-$600 million account.

Interpublic's chairman-CEO, John J. Dooner Jr., couldn't be reached for comment at deadline.

Interpublic over time restored relations with the world's largest soft drink marketer. Last December, Coca-Cola named the agency company its global "creative consultant." The agency stock jumped more than a buck on the news.

The executive at the WPP agency said wise parent companies don't interfere with their holdings.

"That's not what they do. [Before he became president-CEO of Omnicom] John Wren was a financial guy. John Wren has learned, through time being on the board and time around the industry and time with creatives, the value of creative as a business tool. He's smart about it, and he realizes it's not what he does best. It's just like [WPP Chief Executive] Martin Sorrell. He doesn't interfere," he said. "That's a fact."

Mr. Sorrell was traveling last week and couldn't be reached by deadline, but a WPP spokeswoman said shareholders are served when clients are served. "If you service your clients to the best possible level of capacity, with smart and innovative solutions, you satisfy your shareholders," she said.

Mr. Wren wasn't available by deadline.

Many agency executives say clients gain when shops link with a public entity, which must live in the same financial world as public clients.

But some marketers say red tape can creep in. One soft drink veteran said that while his company brass is more comfortable working with big holding companies, he prefers dealing with private midsized shops that have or can build the ability to reach a brand's key global markets.

"It is a little more efficient," he said. "I know now that I talk to [my contact]. When a holding company comes into play, you're dealing with the holding company, the agency, the staff of the agency, and it can get confusing."

Few major private shops remain. Increasingly alone are independents like Dallas' Square One. The $131 million shop offers on-the-job massages, pantries stocked with munchies and gourmet meals, equally stocked bars, yoga classes, discounted gym memberships, and money for personal enrichment activities-such as personal trainers, foreign language and photography classes, travel and even plastic surgery.

"The benefit of being private is you have no one to answer to but yourself. You call the shots," said Ernie Capobianco, a partner who said the agency has never had a layoff and only would consider selling a minority stake to finance its own acquisitions. "You have total control over your business and total control over your culture."

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