The advertising holding company developed out of the need for agencies to service large clients. Under a central management, the holding company gathers independent, competitive service companies that can represent competing marketers, something a single, independent agency could not do. The concept evolved in the mid-1950s out of advertising agency McCann-Erickson and the fertile mind of its president, Marion Harper Jr., and materialized first as Interpublic Inc. in 1960 and then as the Interpublic Group of Cos. in 1964.
Forty years later, few agencies of any size remained outside the world's top 10 ad organizations?industry nomenclature for holding companies. These 10 amassed worldwide gross income of $38.2 billion on billings of $336.7 billion in 2001, or about 85% of the world's total advertising gross income of $45 billion, according to Advertising Age. Interpublic, with $6.73 billion in gross income on billings of $62.5 billion, was light years from the $55.6 million gross income on billings of $371 million that Interpublic Inc. registered at its founding in 1960.
Interpublic was still the biggest holding company by revenue in 2000. But by 2003, the universe of major holding companies had four global powers in a new world order: Omnicom Group (2003 revenue: $8.6 billion), WPP Group ($6.7 billion) Interpublic ($5.9 billion) and Publicis Groupe ($4.4 billion).
Acquisitions boosted holding company revenue. WPP bought Young & Rubicam in October 2000 and Cordiant Communications in August 2003. Interpublic bought holding company True North Communications in June 2001. The Big 3 holding companies became a game of the Big 4 after Publicis acquired Saatchi & Saatchi in September 2000 and Bcom3 Group in September 2002.
Holding companies and consumer growth
The idea of the agency holding company began at McCann-Erickson at a time when marketers were expanding product lines and increasing production to meet the needs of a growing postwar consumer market both in the U.S. and abroad. In 1954, McCann-Erickson purchased Cleveland agency Marschalk & Pratt. Rather than merging it into McCann, Harper decided to keep Marschalk, which had a largely industrial client list, as a separate agency. A year after the Marschalk purchase, McCann won Coca-Cola's Coke business. McCann saw potential profit in representing other Coca-Cola products and local and regional bottlers. Marschalk was called to pitch the local New York bottler; in 1960, Coca-Cola expanded its brands and made Marschalk a roster shop. By then, Marschalk had transformed itself into a consumer agency.
"It became clear that supervising all the aspects of the Coca-Cola account out of McCann-Erickson at the same time we were trying to foster the independence and competitiveness of Marschalk wasn't going to work," Neal Gilliatt, longtime McCann executive, told interviewer Bart Cummings in "Advertising's Benevolent Dictators." The answer to this supervisory need and the advent of Interpublic emerged virtually simultaneously. In Interpublic, the McCann hierarchy was basically collapsed, with the traditional McCann agency and Marschalk as separate units on one side of the family tree and former McCann units such as the Marplan research function (later, Allied Communications) among the nonadvertising services on the other side.
This model for corporate structure swept the agency community, and the ad industry rapidly consolidated into large holdings. The autonomous nature of the agency networks created in these holding companies eased most client concerns regarding the proprietary nature of their agency relationship. Today most of the large ad organizations have multiple food, airline and car accounts, for example, within different operating units, though it is unlikely that Interpublic, with its huge General Motors Corp. billings, would risk seeking Ford or Chrysler business. GM was Interpublic?s largest client, accounting for 8.3% or $487 million of Interpublic revenue in 2003.
By the turn of the 21st century, a new trend had developed. Multinationals were consolidating creative staff for their accounts drawn from many agencies?independents to operating units of holding companies?into these big holdings. The reasons for this change were varied; a significant factor was aggressive pitching at the holding-company level rather than the normal pattern of leaving pitching to agencies.
Both Omnicom and its BBDO Worldwide network simultaneously sought the consolidated Chrysler Group account of DaimlerChrysler, winning it in a late 2000 pitch against Chrysler?s other agency, Foote, Cone & Belding, whose executives were joined in the pitch by those from their parent, True North. Little wonder True North's top executives entered the fray. The Chrysler Group accounted for $136 million or 9% of True North's revenue.
Weakened by the loss of its biggest account, True North became vulnerable to takeover. A buyout battle ensued, and True North?s board in 2001 chose Interpublic?s offer over competing bids from Omnicom and a smaller French holding company, Havas.
In 2000, WPP Group created a worldwide coordinator for the Ford account. Ford was WPP?s largest client, accounting for $529 million or 9% of revenue in 2002, according to Advertising Age?s analysis. Ford was the No. 1 client in 2003 at WPP?s J. Walter Thompson and Y&R Advertising and a key client globally at WPP?s Ogilvy & Mather Worldwide. A few non-WPP agencies had Ford-related business. For example, Volvo was still with its agency, Havas? Euro RSCG MVBMS Partners, five years after Ford?s March 1999 acquisition of Volvo.
Since 2000, other advertisers have joined the Chrysler Group in consolidating their business at one or two agency networks, including United Airlines, the Guinness division of Diageo, Exxon Mobil, Hasbro and Kellogg Co. Clients see several benefits in doing business with holding companies, including multinational coverage, economies of scale and one-stop shopping.
As a "supermarket" of services beneath a single roof, the holding company not only accommodates an advertiser's multiple marketing needs but also can generate incremental revenue by selling additional services. Specialty services, the so-called below-the-line components of advertising and marketing, typically carry higher margins than traditional advertising. Most holding companies are seeking to derive at least 50% of their revenues from marketing services.
Agencies have benefited from the holding company structure because it gives them a means to "finance" the billings outlays of large advertisers. Holding companies have cushioned the impact of account losses and enhanced management succession plans among subsidiary agencies by broadening the ownership base with stock and other financial incentives.
Expansion needs have encouraged holding companies to become public, thereby further opening the door to capital markets. Their stock has become their chief means of making acquisitions. After Interpublic went public in 1971 it used stock to purchase Campbell-Ewald in 1972 and, in 1979, to acquire Sullivan, Stauffer, Colwell & Bayles and its 49% ownership in Lintas (it later bought all of Lintas from owner Unilever).
Interpublic stock gave agencies value, making them attractive even to nonadvertising/communications companies such as meatpacker Mickelberry Corp., which became a holding company in 1982 when it bought agencies Laurence, Charles & Free; Nadler & Larimer; and Cunningham & Walsh that year under a holding company structure.
Then-independent Young & Rubicam offered another twist to the holding company concept with its so-called "whole-egg" approach to treating the multiple marketing needs of clients. It did this by assembling agency specialties?healthcare, Hispanic, direct marketing, sales promotion, design, interactive?as satellites to work with lead agency Y&R Advertising on all aspects of a client's advertising and marketing needs. These multidisciplinary shops also maintained their own clients.
Cracks began to appear in the holding company convention early in the new century. At marketers, newly empowered "procurement" (purchasing) executives, intent on taking costs out of advertising, hammered holding companies and major agencies to do more for less. Holding companies won consolidated accounts in the 1990s, but clients over the next decade used the leverage to drive a better deal, forcing their agency "suppliers" to live on permanently reduced profit margins.
The original holding company, Interpublic, faced even bigger problems of its own creation. Interpublic's stock tumbled in 2002 after it disclosed revenue overstatements and as problems became apparent in some of its acquisitions. Interpublic?s earlier fixation on buying growth proved costly. In 2003 and 2004, it jettisoned some losing ventures (car racetracks acquired in the name of sports marketing) and raised cash to pay down debt by selling non-strategic assets (NFO WorldGroup, a market-research firm).
Interpublic in 2004 still faced one serious problem: improving the performance of its remaining core businesses, whose performance had generally lagged while management was focused on growth. Following asset sales and weak performance in its core business, Interpublic ended 2003 as the third-largest holding company, behind No. 2 WPP and deep in the shadow of the industry?s strongest performer, No. 1 Omnicom.