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Deutsch now part of Interpublic empire

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After he gave a well-received speech at an American Association of Advertising Agencies management meeting in 1999, Donny Deutsch was approached by Phil Geier. As the Deutsch chairman recalls it, Interpublic's boss said, with characteristic bluntness, "You're a lot smarter than I thought you were."

The two had dinner that night at an Amelia Island, Fla., restaurant, along with Mr. Geier's wife, Faith, who hoped to play matchmaker for the then-unattached Mr. Deutsch. Instead, a courtship of a different kind blossomed, eventually resulting in Mr. Deutsch's decision to sell his once fiercely independent agency.

After months of on-and-off discussions with Mr. Geier and Interpublic President John Dooner, Mr. Deutsch signed off last week on a deal that places Deutsch in Interpublic's vast empire.

The agreement calls for Deutsch to operate as a stand-alone agency, with Mr. Deutsch, 43, remaining at the helm. Financial terms were not disclosed, but industry watchers estimate Interpublic will pay $200 million to $250 million in stock for Deutsch, which has a client roster that includes Domino's Pizza, Mitsubishi Motors of America and Snapple.

Executives close to the deal said it includes a significant upfront stock transfer and built-in incentives over the next five years, with the ultimate price contingent on how well both Interpublic's stock and Deutsch itself performs. Since Interpublic is publicly traded, the holding company will be required to disclose more detailed financial information in the next few months.

Deutsch, which currently claims billings of $1.5 billion, had 1999 revenues of $133 million, according to Advertising Age data. Mr. Deutsch owns 87% of the agency; there are 10 other equity holders at the shop. Mr. Deutsch will report to Interpublic, but he will not sit on the board.

Mr. Deutsch said he believes the most significant change for his agency is that it will be able to use Interpublic's global platform and integrated-marketing resources to better serve clients.

"Obviously, I knew we needed to grow," Mr. Deutsch said in an interview in his office last week just after he unveiled the deal to staffers. "I did a lot of homework and a lot of soul-searching," he added, noting that he had spoken to a number of advisers, including his 71-year-old father David, who founded the agency 31 years ago. "It started out as a very personal decision, turned into a left-brain decision, and that made it a no-brainer," said Mr. Deutsch.

Mr. Deutsch has spent the last few years speaking openly of his desire for geographic growth. The agency has floated the possibility of opening offices in other locations, including Florida and London, but has had difficulty getting its plans off the ground. Domestically, the Los Angeles office has thrived since opening in 1995, but the Boston and Chicago offices are still fledgling operations.

While Mr. Deutsch has his sights set on global expansion, Interpublic's Mr. Geier seems to hold a more modest vision. Interpublic will provide resources to assist Deutsch's international growth, but Mr. Geier views Deutsch as more on par with his smaller agency brands than its Lowe Worldwide and McCann-Erickson WorldGroup global networks. Mr. Geier repeatedly likened Deutsch to Hill Holliday and the Martin Agency, two of Interpublic's midsized domestic shops. "We actually have five or six agencies. This is not a matter of us acquiring a third large one," Mr. Geier said.

Analysts also place Deutsch below global network status. According to a report by Morgan Stanley Dean Witter analyst Michael J. Russell Jr.: "[Deutsch] is not big enough to act as a third network on its own. Long-term this presages more complementary acquisitions or folding Deutsch into one of the other networks. We believe that the former is most likely."

Alexia S. Quadrani, an analyst with Bear, Stearns & Co., concurs. "While it is important to recognize that Deutsch is a strong brand, we do not believe it is large enough to constitute a third agency network for Interpublic," she said in her report. "The company is more comparable to Campbell-Ewald, a regional Interpublic agency with estimated $200 million in 2000 revenues, than Interpublic's two main networks, McCann-Erickson Worldwide and Lowe Lintas, which will likely generate revenues of $2 billion and $1 billion, respectively, in 2000."

Some speculation holds that Interpublic wanted Deutsch, which enjoys a high-profile industry image, for the prestige value. One former Deutsch executive likened the move to Interpublic taking a "trophy wife." For his part, Mr. Dooner praised Mr. Deutsch for having grown the agency to its present status. "Getting [Deutsch] at that quality level is a gem for anyone," he said.

Deutsch's growth spurt in the late 1990s-coupled with its creative strength-earned it Advertising Age's 1999 Agency of the Year honor. Since then, not all has been rosy for Deutsch. Most recently, the Swedish furniture retailer Ikea, for which Deutsch created often critically acclaimed work, blindsided the agency by putting its $40 million account into review. Deutsch is not participating.

Although some Deutsch clients compete against marketers at other Interpublic agencies, Mr. Deutsch and Interpublic executives maintain there won't be any conflicts because Deutsch will remain autonomous. Deutsch's largest client is Mitsubishi Motor Sales of America while Interpublic's agencies handle billions of dollars globally for competing carmaker General Motors Corp. Spokespeople from Mitsubishi, (DaimlerChrysler holds a controlling interest in its parent company, Mitsubishi Motors Corp., Tokyo,) and GM both said they do not believe there will be a conflict because Deutsch will have safeguards in place to protect client confidentiality.

Snapple, another high-profile creative account at Deutsch, just shifted owners itself. Mr. Deutsch expects his agency to retain the beverage account, even as it shifts to its new owner Cadbury Schweppes. However, Interpublic does handle Snapple competitor Coca-Cola Co. A Snapple spokesman and Mr. Deutsch both said they did not consider the brands a conflict. A Coca-Cola spokesman did not return a telephone call seeking comment.

Interpublic may even gain more than first thought from its deal. On Dec. 1, Tommy Hilfiger consolidated its clothing account with Deutsch, awarding the agency an additional $30 million in billings. Deutsch won some $50 million in Hilfiger business in 1999, including men's and women's sportswear. The new assignment includes kid's, jeans, home, golf and footwear.

In addition to Mr. Deutsch, other agency partners are expected to stay with the agency after the deal closes. The partners are: Kathy Delaney, 36; Val DiFebo, 38; Peter Drakoulias, 40; Cheryl Greene, 56; and Linda Sawyer, 39. The remaining Deutsch minority stakeholders are five executives from the Los Angeles and Boston offices.

Contributing: Hillary Chura and Jean Halliday