Accounting: Investors wary of Interpublic 'earning power'

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Much-awaited third-quarter results released last week by Interpublic Group of Cos. left many investors far from satisfied.

"In another quarter chock full of restatements, restructurings and write-offs, we find ourselves in the same frustrated position of not really knowing what [Interpublic's] real underlying earning power is," wrote Merrill Lynch analyst Lauren Rich Fine in a post-conference call comment.

The frustration comes despite Interpublic management devoting much of its time to investigating internal accounting problems. After telling investors Aug. 13 that it would restate its financial statements by $120 million due to improper accounting at European McCann-Erickson Worldwide offices, news leaked earlier this month that the number would be greater. On Nov. 13, management said the final restatement amount would be $181.3 million. The figure was confirmed last week, when the company also disclosed the Securities and Exchange Commission is conducting an informal inquiry into its restatement of results for the last five years.

Analysts noted that of the $181 million total, $101 million related to improper accounting at McCann, while $36.3 million was for other charges related mostly to estimates of insurance proceeds not yet realized; the remaining $44 million relates to other charges outside McCann.

problem solved?

Interpublic Chairman-CEO John Dooner acknowledged last week that attending to the financial problems was an issue, but stressed that the matter had been redressed. "With the restatement behind us, we can now focus all our energy where it belongs, on our clients and our people, as well as financial imperatives," he said.

Not everyone was convinced. "At this point, only time will tell whether Interpublic has the systems and controls in place to prevent further occurrences of this nature," said David Doft, advertising analyst at CIBC World Markets.

holding cos. questioned

The complexity of Interpublic's accounting, and management's recent difficulty in delivering definitive results, has led some observers to question whether the holding-company model is best for ad agencies. Jack Trout of marketing consultant Trout & Partners, said "Shouldn't they be working on their ads instead of working on their books? I think when the big agencies start to get swept up in merger mania and playing to Wall Street, [they] are getting off the point."

Rather than blame holding companies, others argue the problem is more with how they're run and who runs them.

"I not only think holding companies are viable, they're necessary," said CIBC's Mr. Doft. The holding company structures allow public companies to deal with vendors more efficiently, which in turn produces returns for investors, he said. "The problem is in managing the pieces. That's where [Interpublic] hiccuped," he said.

He noted that star investor Warren Buffett seemed to endorse the concept when he bought a stake in Omnicom Group last quarter. Mr. Buffet, known for investing in undervalued companies, did extensive due diligence on the company before GEICO, one of the holdings of Mr. Buffett's company Berkshire Hathaway, purchased a 500,000 share block.

Paul Richardson, chief financial officer of WPP Group, parent of ad networks Ogilvy & Mather and Young & Rubicam, among others, noted that there is no single holding-company model. Their success depends upon how they perform their functions, whether as a hands-on financial entity or a structure to help networks work together, he said. "If it wasn't of value, we'd break it up."

Fast Facts

3Q Net Income: $7.5 million

3Q Earnings per Share: 2 cents

3Q Revenue: $1.5 billion

Earnings Restatement: $181.3 million, covering last five years through 2Q '02

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