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Grey Advertising's past client defections are still giving the agency heartburn.

Last week, the publicly held agency posted its second consecutive weak quarter. First-quarter net income fell 98% to $107,000, down from $5.03 million for the same period in 1998. That followed a 47.5% drop in fourth-quarter net income. For full-year 1998, net income declined 15% to $25.9 million.

Grey's stock tumbled $24.25 to $302.25 after the first-quarter results were reported on May 10. The stock recovered somewhat later in the week, closing at $309 on May 13. That's still far below its 52-week high of $449. And Grey is trading at just about 20 times earnings, compared to price/earnings ratios of 35 to 40 for other, more heavily traded holding companies.

Grey blamed the dip on the loss last year of such clients as Barilla Co., Dannon Co., Kraft Foods, Lexmark International and Mitsubishi Motor Sales of America, as well as troubles with overseas markets.


Last year, the agency's gross billings rose 9% to $6.2 billion.

But the earnings outlook for 1999 seems, well, gray. In its 10K report, Grey stated: "During 1998, the principal advertising agency lost a number of pieces of business, the impact of which will be felt mostly in 1999."

Industry observers say the decline isn't a reason for investors of the thinly traded stock to worry.

Alan Gottesman, managing director, West End Communications, compared the May 10 drop to a $32 dollar stock dropping to $30 per share. "If you put it in perspective, it's really not that major," he said. "If it were a big deal, you would have seen it go down a lot more."

Others point out that since Grey is so closely held -- Chairman-CEO-President Ed Meyer holds about 70% of the voting stock -- fluctuations can seem more dramatic than they really are.

"There's only a million shares outstanding. This is a very thinly traded stock," said Donald Yacktman, president of Yacktman Asset Management, who has followed and invested in Grey. "You can't judge it from quarter to quarter. It's not that type of company."


Grey has been fighting hard to rebound from its losses.

"We've been lukewarm lately and that affects your numbers," said Exec VP-Worldwide Financial Services Steven G. Felsher. But, he added, "We're continuing our policy of investing in our future."

Mr. Felsher said Grey is investing in such areas as media and interactive technologies. And these arenas have done well by the agency so far.

While Grey has struggled recently in the traditional areas, it has posted profits in its media buying, direct marketing, interactive, healthcare and public relations units. Its MediaCom unit gained more than $350 million in new business last year; while Grey Healthcare Group, Grey Direct, Grey Interactive and PR shop GCI/APCO all posted income growth of at least 28% in 1998.


"We lost some clients last year and we're actively seeking to replace them. This year we're off to a good start in terms of new business," Mr. Felsher said.

So far in 1999, long-standing clients Hasbro, Procter & Gamble Co. and Seagram all gave Grey a combined $152 million in additional business.

However, the naysayers still persist. Much of that criticism is directed at the 72-year-old Mr. Meyer.

Although he's often cited for his intelligence, critics say he has too much power, and wields it broadly. Opponents also charge that Mr. Meyer doesn't hire or nurture enough young talent.

"What they don't have is diverse people that have contacts outside the mainstream," said one former Grey executive. The agency "continues to be led by men who are out of touch with today."


Executives close to the agency also say morale has been down due to layoffs and the fear of more. Those executives estimated more than 100 staffers had been let go in 1998.

Mr. Felsher said, "There's been no mass layoffs."

In fact, an agency spokesman said U.S. employee count is up in 1998 and '99 by 209 people, "with some retooling for account shifts."

"I believe we have a proper balance of stability, while at the same time bringing in young blood," Mr. Felsher said.

Lawrence J. Goldstein, general partner of investment fund Santa Monica Partners, blames Mr. Meyer for the agency's stock woes. However, Mr. Goldstein still feels the stock is worth three times its price, if only one of several factors would occur: Mr. Meyer leaves the company, if Grey announces a stock split and lists on the New York Stock Exchange (it currently is traded on Nasdaq) or if Mr. Meyer sells the agency.

Those inside the agency say none of those elements seem feasible now.

Mr. Meyer, who couldn't be reached for comment, staunchly defended his agency's independence in an Advertising Age interview last month (AA, April 5).


Mr. Goldstein pointed to one ace in the hole for himself. Currently, Mr. Meyer controls the majority of the voting rights through untraded class B stock that allows 10 votes per share, as opposed to one vote per share. That multiple vote allowance ends April 30, 2006. At that time, Mr. Meyers' class B shares would convert to common stock, and dilute his control of the agency.

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