All Eyes on Interpublic's Double Trouble -- McCann and DraftFCB
Michael Roth was in the hot seat.
The Interpublic Group of Cos. Chairman-CEO was in friendly company at an investor conference last Thursday, given that Wall Street has been pleased with the holding company's ability to scrub clean its balance sheet -- a tall task, for sure.
Yet, he was being pressed on an even taller one: fixing the company's two biggest agency networks, McCann Worldgroup and DraftFCB. Together, they make up at least 45% of Interpublic's revenue, but have been plagued by the loss of key clients, an inability to land large new accounts and leadership churn.
Rumors had resurfaced over the summer about Interpublic pursuing a sale to a bigger rival, but company management and analysts both say such a move is unlikely anytime soon. Instead, Interpublic appears to be heading down a far-tougher path toward making the changes and investments necessary to turn its struggling creative agencies around. Doing so would complete its transformation from the dark period back in 2002 when its accounting problems were revealed.
Equity Research Analyst Dan Salmon asked Mr. Roth at the BMO Capital Markets Conference last week to deliver a "state of the union" on McCann and DraftFCB less than a week after The Wall Street Journal reported that Interpublic is prepping a leadership change atop both shops.
Interpublic is committed to finding "a successor for [CEO] Laurence [Boschetto] at DraftFCB and we are in the process of doing that ," Mr. Roth said. Suggesting the effort has not been fruitful thus far, he added: "Hopefully we'll be able to find someone."
On the subject of McCann, Mr. Roth addressed the matter in a more roundabout way, stopping short of acknowledging an official search to replace CEO Nick Brien, who's led the network since 2010. "Obviously McCann is a very important asset of IPG. ... We will continue to support McCann going forward and whatever is necessary for us to do that , we're going to do," he said.
In response, Mr. Salmon chuckled and said, "Fair enough." Read between the lines and it seems Mr. Brien's days are indeed numbered. The agency declined to comment on the matter.
Many insiders told Ad Age they'd be surprised if Mr. Brien wasn't gone by the start of 2013. But as the clock ticks down on his tenure at McCann, he's still got to do the job.
Despite being on rocky ground in the U.S., McCann is in an important global review for HSBC Bank and, against all odds, has just won a new assignment from AOL.
Still, McCann and DraftFCB are casting a shadow over the hard work Interpublic has put into repairing the company's financials.
Interpublic's progress was clear from the reception it got from the capital markets last week, when it raised about $800 million, which it will use to redeem more-expensive debt that it had to issue when times were tough. It's also far closer to its long-stated goal of burnishing its reputation with ratings agencies, all which downgraded Interpublic in 2002. Moody's and Fitch have upped it to investment grade, and S&P put it on positive watch this year.
Sidelined for years
Such upgrades would have been unthinkable when Mr. Roth, with his CPA background, took over as Interpublic's chief in 2005. Together with Chief Financial Officer Frank Mergenthaler, he has cleaned up the accounting systems. However, those issues had sidelined the firm from M&A activity for many years. Competitors added muscle through the upturn, growing largely via acquisitions, while Interpublic slipped in rank behind the other holding companies. In 2001, it dropped to the second-place slot after having been the largest ad-holding firm by revenue in 2000. It fell to third behind WPP in 2003. And today Interpublic stands in fourth place, behind Publicis Groupe .
The turnaround's fits and starts have been frustrating for people who supported it and invested in it. "At the holding-company level, they have support from the investors. "They're proactive in managing the balance sheet well, which is helping carry the story while the operations remain choppy," said Deutsche Bank analyst Matt Chesler.
"They need to ensure competitiveness at those two big global networks," he added, but noted that it's a multiyear process. "It's a big double-digit chunk of IPG's business that 's in need of fixing."
Why not sell?
Because the task of repairing McCann and DraftFCB seems so formidable, many observers have wondered if the company might just sell instead. When Japanese ad giant Dentsu announced its bid to acquire Aegis Group in July, it fueled rumors of industry consolidation, recalling an oft-speculated scenario wherein Paris-based Publicis Groupe purchases Interpublic.
Publicis Groupe CEO Maurice Levy last month noted that while no deal is imminent, he has looked at the company from time to time. He said on an earnings call: "IPG is a good company. It has bags full of issues as everyone [has] -- we respect them even if we are competing against them."
Of late, both Messrs. Roth and Levy have indicated a barrier to such a deal is price. Mr. Roth says nobody's made an attractive offer, and Mr. Levy called the company too expensive. So, if they could come to a mutually agreeable place, might a deal get inked?
"The only way I see them selling right now is if they thought they couldn't get McCann and DraftFCB competitive for global pitches," said Mr. Chesler. "And I don't think we're there yet. It would take more to entice management to sell."
For the moment, Mr. Roth seems intent on continuing the hugely challenging task of fixing his house rather than selling it. "We are still on a journey of getting to competitive margins," he remarked last Thursday. "The market thinks every time we sneeze, we get a cold. We have got to keep our head down and keep doing what we're doing."