IPG hits bottom, looks up

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Half-a-billion-dollars lighter in the wallet and with a host of agency issues, Interpublic still looks better off than it has at any time in the last six months.

Last Friday, following a six-month investigation of its books, Interpublic dropped more than $500 million worth of earnings, which hardly sounds like a good news story for any company. Yet with the highly antici- pated restatement out of the way, Interpublic Group of Cos. can at least return to its turnaround plan and to making good on a promise that its accounting problems are a thing of the past.

The revised turnaround plan will be revealed at a meeting for investors and analysts early next year. "The turnaround targets set two years ago are no longer germane," said Chairman-CEO Michael Roth during a conference call with analysts. "We plan on delivering the strategic plan and financial targets in early 2006." Mr. Roth said he wants to see organic revenue growth increase to 4%-5% and profit margins grow to the lower double-digit range enjoyed by Interpublic's competitors.

DEJA VU

Interpublic also shed some light on more recent financial performance. In filings, it said net losses for the first half of this year narrowed to $139 million from $182 million during the same period in 2004. Revenue grew 1.5% to $2.95 billion. In 2004, revenue grew by 3.7% to $6.4 billion, while net losses widened to $558 million from $539 million in 2003. Those filings had been delayed because of the bookkeeping investigation.

In the best-case scenario, the airing out of the financial dirty laundry puts Mr. Roth and company in a deja vu situation, left to tend to longstanding and well-established problems at a few agencies, namely its second-largest ad-agency network, Lowe Worldwide, and at its media buying and planning possessions, which have lost ground and business to competitors in the U.S. Interpublic's leadership will also be allowed to focus on recovering from a string of client losses that occurred while the company was examining its books. Those include Bank of America's $600 million integrated account and home improvement-retailer Lowe's $315 million ad and media business.

Following the filings, Merrill Lynch maintained its sell rating. Moody's and Standard & Poor's both cut Interpublic's debt rating. After Interpublic's disclosures, S&P cut its long-term credit rating a notch to B+, sending it deeper into junk-bond status with the possibility of a further downgrade. "We remain concerned about Interpublic's ability to retain existing clients and generate new accounts," S&P said.

Interpublic offered only a few more specifics about the malfeasance it identified two weeks ago. About $56 million in reduction of earnings came as a result of an anti-fraud investigation. "Instances in which the company believes there was malfeasance do not involve current senior-level employees at any of our operating units or within the corporate group," the filings said. "These cases took place primarily outside of the United States. Seven instances of employee misconduct account for approximately 80% of the adjustment in this category."

Just under half of the amount of retained earnings that were reduced was attributed to problems with revenue recognition "as the company's review of more than 20,000 contracts found that some had been inconsistently followed, while others were unclear or did not exist." About $184 million had to do with vendor discounts, primarily in international markets, in which the company gets discounts for bulk media buys. Adjustments for earn-outs made up about $70 million, while incorrect recognition of expenses and revenue for acquired business cost it $30 million in revenue.

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