"I think Omnicom is one of the first examples of investors looking into this industry," said an executive at a rival company. "I think this has opened a can of worms."
Even amid talk that the ad market is set to rebound, the whole agency sector has fallen in the undertow of Omnicom (see chart, above). A rival holding company executive noted other agencies' shares had high volume as well, indicating investors were selling off those shares.
A negative story June 12 in The Wall Street Journal regarding Omnicom's accounting for acquisitions and for its sale of Internet holdings led to a selling spiral as investors feared Omnicom's outstanding performance was an accounting mirage. Omnicom's stock fell nearly 30% in two days in unprecedented volume; it closed at $55.05 June 14, down 24% for the week and its lowest point since 1998. Omnicom President-CEO John Wren and other employees have lost hundreds of millions of dollars as a result (see P. 42).
Omnicom now is the subject of a class-action shareholder lawsuit. Such suits have become commonplace on Wall Street, particularly since the market for initial public offerings went bust in 2000, but they are another red flag for queasy investors.
Mr. Wren and Chief Financial Officer Randall Weisenburger tried to appease investors in a conference call June 12 and vowed to increase disclosure.
"Our integrity ... is paramount to what we are and what we try to do," said Mr. Wren. "We will do whatever we need going forward to rebuild whatever confidence was lost because of this article."
Robert N. Waxman, partner in Corporate Finance Advisory, a New York accounting firm specializing in finance, tax and regulatory issues, said Omnicom's vow to increase disclosure could force the entire category to be more open in what agency companies disclose to Wall Street. "I think it does raise the bar, or should raise the bar," he said.
Yet key rivals say they have no plans to follow Omnicom's move in disclosure because they already are giving investors broad disclosure of finances and accounting.
above and beyond
WPP Group already makes significant disclosures beyond generally accepted accounting principles, said Paul Richardson, chief financial officer. He explained that not only does WPP report results under stricter U.K. GAAP and stock regulations, it also adds to all its presentations several numbers not required by either U.S. or U.K. GAAP, such as average net debt levels and staff costs-to-revenue ratio.
Interpublic officials also stressed their company goes beyond the GAAP requirements, saying all the issues addressed by Omnicom regarding interactive investments and deferred payments on acquisitions are clearly spelled out in the company's annual report. In a statement, Interpublic said the company took writedowns in 2001 to put a proper value on all its acquisitions and investments and earlier this year reorganized its board, "which ensures that our shareholders benefit from independent corporate governance." In the statement, Interpublic management professed "the greatest respect for Omnicom and its achievements."
Omnicom has been Wall Street's favorite agency company, reporting year-over-year increases in earnings per share every quarter since 1994. That-until now-allowed Omnicom to trade at a premium to rivals. The stock now sells at an unusually low 16 times projected 2002 earnings.
Analysts rallied in support of Omnicom, most reaffirming their recommendations to buy the stock while it's cheap even as they cautioned it will stay cheap while the accounting issue remains front and center. Those who reduced their short-term outlook reaffirmed their belief that the company has solid earnings and management, but said pressure from investors' unease will keep the stock depressed in the short term.
Investor scrutiny is currently "extraordinary" in the wake of the scandals at Enron and Tyco International, said Lauren Rich Fine, advertising analyst at Merrill Lynch & Co. But once the furor dies down and investors look at Omnicom's fundamentals, they will see a higher price is fair, she said.
"No matter how you slice and dice revenue," she said, "they are a quality company."
Cheap stock may be a find to new investors, but lower share prices could make it prohibitive for agencies to pay for acquisitions with stock. In Omnicom's case, it won't be a big hurdle since the company has very rarely used stock to pay for acquisitions, noted Ms. Fine.
contributing: cara b. dipasquale