MDC Execs: Negative Report About Us 'Filled with Inaccuracies'

Kauffman Uses Time to Answer Charges in Gotham City Report

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Scott Kauffman
Scott Kauffman

MDC Partners during its earnings call took the opportunity to address a report that came out late last week by Gotham City Research short seller Daniel Yu. The company called the claims inaccurate and preposterous, among other things.

The report -- 40 pages long and called "MDC Partners: Like Valeant Pharmaceuticals, But with Understated Debts" -- makes a variety of claims about MDC and questions its integrity. It brings up lack of innovation, an issue with senior talent retention, problems with copyright infringement and multiple financial issues. Among the charges:

  • "At least 42%-53% of reported profits are suspect"
  • "MDCA shares are worth less than $1.00 per share, implying 96%+ downside"
  • "The on-going SEC investigation will lead to new revelations of wrong-doing."

Whatever Gotham City's concerns about the investigation, MDC, which owns agencies like Anomaly, 72andSunny, CP&B and Doner, beat Wall Street's expectations for the first quarter, as revenue increased 2.3% to $309.0 million from $302.2 million during the same period in the prior year. Organic revenue increased 2.2%.

The Securities and Exchange Commission investigation in question -- into accounting practices, trading information and former CEO Miles Nadal's expenses -- led to Mr. Nadal stepping down in July of last year and agreeing to reimburse the company millions of dollars.

Scott Kauffman replaced him as chairman-CEO.

Mr. Kauffman gave detailed responses to many charges in the report.

"Let me begin by saying that we take strong issue with every single element of this report. It's filled with inaccuracies and raises issues that have long been addressed in a clear and transparent manner. Above all, it draws misleading and false conclusions, that are intentionally met to destroy shareholder value."

He went on to dismiss specific allegations in the report, including the charge that there was an exodus of talent.

Mr. Kauffman responded: "It's simply not true. The fact is that, we retained talent with a turnover rate well below the industry average. Even more revealing, we're able to retain senior talent and founders more successfully than our competitors. These are the leaders who have built businesses, who provide value over the long-term and who do so well beyond their initial transaction in our perpetual partnership model."

The report also said that "dubious related party transactions continue, despite Miles Nadal's departure, e.g. Lori Senecal's husband hired last year & compensated $1 million for 5 months' work." That particular charge refers to the hire of Bill Grogan as MDC's president of global brands. (He was previously at MDC shop KBS since 2010. The S in KBS is for Ms. Senecal's name.)

"We're proud to have exceptional talent [like] Lori Senecal and Bill Grogan in the network," said Mr. Kauffman. "The fact that they're married to one another in no way diminishes the fact that they are each highly acclaimed global executives, who have been in the network for many years."

The report also alluded to client losses like Doner's JCPenney account, which the agency lost to McGarryBowen last year. Mr. Kauffman responded: "In regards to our client retention, the speculation about losses reveals a fundamental lack of understanding of our industry. Sometimes you win, sometimes you lose, that's the business. The important thing is that we consistently win more than we lose, and that is evident in our net new business number, which we report quarterly and which is consistently positive."

The report also said that "72andSunny was recently sued twice for copyright infringement. Crispin Porter Bogusky was similarly sued several years ago before CP&B's fall from grace."

Mr Kauffman said: "The report attempts to make a link between certain copyright infringement claims and some kind of a looming trouble. Not only are these claims common in the advertising industry, but the report conveniently omits one key fact. These IP lawsuits were dismissed by the courts with prejudice. To be clear, MDC's agency was found not liable in these cases and did not pay any damages to the claimer.

David Doft, chief financial officer, addressed a number of specific financial claims as well, including one about organic growth. "Let's start with our organic revenue growth, which the reports speculate that we calculated incorrectly," he said. "The report is wrong. Organic revenue growth in any period is calculated as follows. The year-over-year change in GAAP revenue minus the impact of foreign currency minus the impact of acquisition."

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