The Dooner party

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Interpublic group of cos. shocked the advertising community and investors with its 5,700 layoffs, $500 million restructuring charge and $110 million second-quarter net loss, but Wall Street isn't writing off the company or freshman Chairman-CEO John J. Dooner Jr.

Dragged down by the tech and advertising recessions, the world's largest ad agency holding company is making what appears to be the biggest full-year agency layoffs in history. Some analysts expect Interpublic to post a net loss this year when restructuring charges and write-downs are factored in.

"Clearly the advertising economy is in its worst period since the early '90s," said Abe Jones, managing director at AdMedia Partners, an investment bank. "A number of people were added to agency staff to handle the rush of new business in 1999 and 2000, and many of those are now being laid off due to the downturn."

Interpublic last week revealed it cut 2,200 staffers in the first half and announced 3,500 more firings. Together, that's 10% of the global staff-in a way, not a surprising percentage, given that local offices of many ad agencies have cut staffs by around 10% this year in response to the ad-market decline.

Most of Interpublic's new firings already have been made: 3,200 took place this month. It's unclear how the cuts break down in U.S vs. international offices. Most remaining cuts are expected to come from the newly merged public relations units of WeberShandwick and BSMG and international operations.

U.S. ad agencies employed 4,900 fewer people in May than in January, according to the U.S. Bureau of Labor Statistics.

Mr. Dooner, a former top executive at Interpublic's McCann-Erickson WorldGroup and then president of Interpublic, on Jan. 1 succeeded Philip Geier as chairman-CEO.

"The magnitude [of the cuts and write-offs] does seem large, but these are new guys coming in trying to rebuild the business and integrate acquisitions. It's early," said Alexia Quadrani, analyst for Bear, Stearns & Co. "You don't know how much he inherited and how much is a result of the confluence of circumstances."

Rival Omnicom Group reported strong profit growth even as Interpublic struggles (see TurnSignals, left). "While the ad market is tough, Interpublic's performance also stems from company-specific issues and missteps," wrote Deutsche Banc Alex. Brown analyst Vivian Kuan, in a market report.

Of its $500 million restructuring charges, Interpublic attributed $375 million to cost-cutting efforts and $125 million to restructuring into four major units after buying True North. The efforts include closing or merging 75 offices globally.

Interpublic has only recognized $52.8 million of the 2001 charges on its income statement-meaning it still has $450 million of charges to write off in future quarters. Interpublic also foresees write-downs in goodwill beyond the $221 million second-quarter write-down it took for goodwill and asset impairment. Given these charges and write-downs, some analysts say Interpublic likely will report a net loss this year.

Analysts, though, tend to look at (and Interpublic prefers) another view of net income-one that doesn't factor in restructuring and charges. On that score, analysts expect Interpublic to be profitable this year.


Mr. Dooner placed much of the blame on the economy. "Six months ago I took charge, and I don't think anyone would have expected the negative economy to happen, so when you have an economic environment that is negative, the issues you may have had going into it seem to show themselves a little more than normal," he said in an interview. "I don't look back and say what was wrong, what was right."

Mr. Dooner was quick to put the numbers in perspective.

"You must have your costs in line with revenue stream," he said. "We believe this puts Interpublic in a better situation for when the economy improves, but right now we're just like any other company or any business affected by the economy."

Interpublic revealed its misfortune after the market closed July 26 (, July 26). Investors pushed shares down to a three-year low in heavy trading July 27 before the stock recovered a bit to close at $27.05, off 3.74%.

The world's largest ad agency holding company posted a second-quarter net loss of $110.2 million, reflecting restructuring and write-downs, vs. net income of $166.4 million a year earlier. Interpublic lost 30 cents a share in the recent quarter, compared with diluted earnings per share of 45 cents a year ago. Revenue fell 4.3% to $1.74 billion; U.S. revenue dropped 7.3%. Results for both years include the June acquisition of True North Communications; last year's results were restated.

Despite weak second-quarter revenue, Interpublic told analysts it expects second-half revenue to be "flat"-good news in a bad year. But Mr. Dooner conceded that could change. "Right now our plans are more optimistic than flat but you have to be more conservative going forward because the visibility going forward isn't great," he said.

Last week's announced 2001 restructuring charge was far higher than what Interpublic forecast during the second quarter. Yet analysts are forgiving. "It sounded to me that they've done a lot of work in financial controls, but it's a very challenging environment, and they're not quite there in completing changes to financial controls so you can't expect perfect accuracy in their projections," said Ms. Quadrani.

Now that Interpublic has posted six consecutive quarters of one-time charges, it might seem the company is addicted to them. But analysts see the charges as a long-term positive.

"It's certainly not good news, but it paves the way for earnings performance and right-sizes the organization for a new level of revenue," said Lauren Rich Fine, analyst with Merrill Lynch. It also puts the company at risk.

"When you lose an account, it's easy to cut costs related to the account, but when clients are just not spending at their normal levels it's harder to reduce cost levels and spending to service the account so the risk is you disrupt service and hurt the relationship," she said.

Interpublic said it has finished planned job paring in its three units that do traditional advertising. The remaining cuts will come in its marketing-services operation and international, according to an executive with knowledge of the process. Mergers between McCann-Erickson and Lintas Worldwide & Partners units in Russia, France and Spain are expected to include major staff cuts. In addition, most of the 75 office reductions involve combining multiple office locations into one or two, and some offices will close entirely, according to one executive, who characterized the move as a "real estate consolidation."

Contributing: Cara Beardi, Normandy Madden, Ali Qassim, Sergey Rybak and Laurel Wentz

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