Ground zero

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The future is not what it used to be, especially for agency companies that invested in online agencies. * Holding companies are assessing their investments in battered interactive shops. Havas Advertising is buying back fallen True North Communications is reviewing whether to keep or sell its stake in Modem Media. And Omnicom Group values its holdings in floundering, Organic and Razorfish at "basically zero." * It's close to ground zero for holding companies' stakes in these dot-bombs.

"A lot of people are being forced by the economy to rethink decisions they made six to 18 months ago about how to get into [the] space," admitted Chris Goodman, a managing director at WPP Group's Y&R Advertising.

One track to watch: Omnicom and its beaten down trio of i-shop investments,, Organic and Razorfish. The announcement last week that Michael Greenlees, president-chief executive at Omnicom's TBWA Worldwide in New York, will be taking a new leadership position at Omnicom "to advance its e-services strategy" led to speculation that Omnicom will soon restructure its i-shop holdings.

Mr. Goodman's agency, Y&R, had a foot in the online space in September 1999, when i-shop rollup Luminant Worldwide Corp. went public in an initial public offering priced at $18 per share. Y&R's then parent, Young & Rubicam, agreed to combine some interactive holdings with Luminant's in a transaction that left Young & Rubicam holding about 26% of Luminant. At the $18 IPO price, that was worth $123 million. The Luminant stake became part of WPP Group as part of its 2000 acquisition of Young & Rubicam. WPP now owns 22% of Luminant-worth $4.67 million based on its current penny stock price of 78 cents a share.


"The market has taken care of the overvaluation" of Net-related stocks, Mark Particelli, CEO of Modem Media, said in a conference call with analysts last week. Modem went public in February 1999 at a split-adjusted price of $8 a share; True North's then-51.1% stake was worth $90.4 million.

Modem, adjusted for a stock split, hit a $22.50 price its first day on the market. It's now Modem unplugged: The stock closed March 16 at $2.88. True North's current stake-44.6%, according to Securities & Exchange Commission filings-is worth only $31.9 million.

True North has talked in recent months about selling its Modem stake. Daniel Leib, VP-business planning and analysis, said True North is evaluating options for its stake in Modem Media but, in a change of position, has not decided to sell its stock in the shop.

"If you look back at what occurred in 2000, they [Modem Media] were a significant drag on our earnings" because of the acquisition of Vivid Holdings, an interactive agency. But Modem last week announced it is writing off the goodwill from that acquisition, so "on a going-forward basis, it will not be a drag on our earnings."

Modem Media is not fully integrated with True North since it does not serve many of the same clients, said Mr. Leib. But "now that it won't be a drag on our earnings," True North might not look to sell its shares in the i-shop, he said.

Mr. Particelli, hired by Modem's board in January to fix the company, told analysts last week there have been no discussions with True North about a divestiture. "We're afraid all we can tell you is what we read in the newspaper," he said. "We don't know what their intentions are other than what has been stated publicly."

Of course, True North itself is likely to be bought, meaning a new owner might have to evaluate what to do with that big stake in a slumping i-shop.

"Everyone in that sector has been adjusting to the changed business environment with the loss of a lot of the dot-com client base," said Barry Linsky, exec VP-planning and business development at Interpublic Group of Cos. The change has led marketers to shift to traditional ad agencies' interactive arms rather than free-standing online shops, he said.

Interpublic was early in the space when it invested in CKS Group, one of the pioneer online agencies, in 1995. After CKS went public in 1996, Interpublic sold shares in stages to recoup its investment in the company, until it phased out its holding shortly after CKS was acquired by USWeb in 1999.

The investment was very successful, both financially and strategically, said Mr. Linsky.

"It was a wake-up call-to not just our own but [all] traditional agencies," said Mr. Linsky. And a good one to sell early; USWeb//CKS successor March-First's stock last year crashed below a buck (see AdMarket 50, P. 48).

Interpublic later invested in Icon Medialab, a Swedish i-shop that went public in June 1998 on the Stockholm stock exchange at $13.24. Interpublic bought into Icon in April 1999, getting shares at about half the going price of $41 a share. Interpublic now owns 20% of Icon's shares-but the stock's worth just $1.30 a share.

Interpublic Chairman-CEO John Dooner said in an interview that his company is still committed to Icon, and still works with the shop, but also noted that Interpublic's stake is not significant.

"They're really first rate as a company, but the whole sector has suffered," said Mr. Dooner. In that environment, Icon could partner with Interpublic's shops to contribute its technological abilities and coverage in Europe, he said.

Another flattened i-shop stock,, soon will disappear. George Gallate, global director for Havas Advertising's Euro RSCG Interaction, said Havas Advertising plans to combine with its Euro RSCG Interaction units to form one large interactive shop, still unnamed.

Euro RSCG Interactive comprises about 45 interactive shops within the Euro RSCG network, with 41 attached to a larger agency within Euro RSCG and some small stand-alone units. has revenue of around $70 million and the Euro Interaction shops have a combined revenue of around $140 million so will account for about one-third of the new division. went public in October 1999 when parent Snyder Communications gave shareholders a tracking stock worth $14 per share, leaving Snyder with a 20% stake. At the $14 share price, Snyder's stake was worth $224 million. France's Havas, which later acquired Snyder, agreed this month to buy back all the tracking stock at $1.27 per share, an 18 cents premium over its last closing price.

Omnicom is not expected to merge the independent i-shops at, Razorfish and Organic-with its agency-related shops such as Tribal DDB or @tmosphere, said a holding company insider.

Digital units at Omnicom's ad agencies-such as DDB Worldwide's Tribal DDB-do not yet have the depth, technological expertise and backend tools to replace the more specialized i-shops, added the executive.

A communication gap between Omnicom's agency units and the Omnicom-backed i-shops still exists, according to the Omnicom insider, and will not be going away soon.


Brian Stanton, director of investor relations at, declined to talk about the shop's relationship with Omnicom, saying anything of substance would be announced in a press release.

"We're always in discussions with them. ... They're engaged on a board level in the management of the company," he said. Meanwhile, an Organic spokeswoman declined to comment on that shop's plans. A Razorfish spokeswoman also declined to comment on its alternatives. "We're looking at many options, but haven't solidified anything," she said. went public in December 1999 at $26 a share, giving Omnicom and its Communicade unit a 45.5% stake worth $481.7 million at the IPO price, according to SEC documents. They now own 31%, which at Friday's closing of $1.19 a share was worth $13.24 million.

Organic went public in February 2000 at $20 per share; according to SEC filings, Omnicom owned an 18.5% stake worth $299.7 million at the time of the IPO. Omnicom's most recent filing says the company owns 17.3% of Organic, worth $10.5 million at March 16's closing price of 69 cents a share.

Razorfish went public in April 1999 at a price of $16 per share, and Omnicom owned 17.3% of the company. At the IPO price, the stake was worth $127.3 million. The stock later split 2-for-1. In its most recent filing with the SEC, Omnicom reported it now owned 12.1% of Razorfish's stock, worth $8.55 million at Friday's closing price of 72 cents a share.

Omnicom sold about one-fourth of its Razorfish stake last year, before the Net stock implosion.

Jerry Newman, chief financial officer of Communicade, said the sale of the Razorfish stock put Omnicom's i-shop investments in a break-even mode and all further stock sales will be gains.

Omnicom executives say they're not giving up on the field.

"Broadband will be here. Marketing through the Internet will be more and more important as Internet use increases," said John Tierney, CEO of Omnicom's Communicade. "All of that is going to happen.

Randall Wiesenberger, Omni-com's finance chief, last week told analysts: "While we continue to have assets on our balance sheet related to various dot-com investments including Razorfish, largely due to our sale, our net economic positions in the dot-coms that we've invested in is basically zero."

Not quite ground zero-but close. Omnicom's market capitalization is $14.7 billion., Organic and Razorfish have a combined market cap of only $174 million, with Omnicom's share just $32 million. In theory, it wouldn't take much for Omnicom to cut a check and own all three. But at the moment, Omnicom's share in the trio is just a rounding error on the agency giant's financials.

The largest holding companies made an effort to control their risk in those investments, either by taking small stakes or selling off stock, said Abe Jones, managing director of investment bank Ad Media Partners, New York.

"Whereas a lot of these companies were incubators back then, I don't think they'll be willing to do that now," he said.

Contributing: Wendy Davis, Laura Q. Hughes, Richard Linnett, Patricia Riedman

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