Does Interpublic's True North Deal Make Sense?

Analysts Express Reservations About $2.1 Billion Deal

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NEW YORK ( -- True North Communications finally found a buyer last week. But now that Interpublic Group of Cos. snatched up True North for $2.1 billion to eclipse WPP Group as the world's largest advertising organization, questions remain about how True North will be integrated, how the partners will deal with conflicts and how to get Wall Street to applaud the deal.

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Assuming no other bidders enter the fray before the deal closes, FCB Worldwide, True North's largest agency network, will have secured its future as a separate, stand-alone agency. FCB becomes Interpublic's third global network, joining McCann-Erickson World-Group and Lowe Group.

Analysts expressed reservations about the deal, however, noting the addition of True North makes Interpublic more wedded to U.S. revenue and traditional advertising at a time when both sectors are out of favor. Interpublic's own analysis of the deal showed that its revenue from traditional advertising and media buying would increase to 60% from 59% and North America's contribution to revenue would rise to 59% from 55%. By contrast, Omnicom Group pulls 44% of revenues from advertising and media buying, for WPP Group, the share is 47%.

"Our primary relationships still come from advertising relationships, so what looks like a negative is also a positive," said John Dooner, chairman-CEO of Interpublic. "There is plenty of room to grow in marketing services areas, and indeed we'll focus on that."

Analysts have watched Interpublic since last fall, as it steered its troubled Lowe Lintas & Partners around a restructuring plan, which put a dent on its earnings and on its stock price relative to its main competitors. For example, Omnicom, which had revenue of $6.15 billion in 2000, has a market capitalization of about $14.1 billion, while Interpublic, with $5.63 billion in revenue, has a market capitalization of $10.2 billion.

'The height of uncertainty'
"The new management at Interpublic has yet to really prove it can get its hands around its current problem before taking on the task of another agency that's in the throes of transition itself," said Lauren Rich Fine, analyst with Merrill Lynch & Co. "You now have the height of uncertainty, with turning around Lowe Lintas and integrating True North."

Credit Suisse First Boston analyst David McMurry concurs: "The net effect of the transaction is to provide a slight boost to IPG's earnings, a slight dilution to the company's long-term growth rate and another time demand on an already stretched management team."

The deal was set as an exchange of 1.14 Interpublic shares for each share of True North stock. The exchange ratio was set based on the closing prices of both stocks on March 16-the last trading day before the deal-but did not include any "collars" providing for altering the exchange ratio if stock prices fluctuate beyond a certain high or low. Based on the 52-week high and low for the stock, the stock swap for True North could have been worth as much as $2.9 billion or as little as $1.9 billion during the last year.

Publicis Chairman-CEO Maurice Levy, who controls a 9% stake in True North, claims it's the first time a company of True North's size has been sold to a competitor that can take advantage of synergies without the buyer paying a premium. He declared himself "quite unhappy with the price" and said his advisers are looking at all available options. He did say Publicis won't make a counter bid.

Publicis owns 4.67 million shares of True North stock, which at the March 16 closing price, would be worth $187 million in Interpublic stock. That holding would make Publicis the largest individual shareholder in Interpublic with 5.31 million shares, or a 1.73% stake -- just a slice more than Donny Deutsch's 1.6% stake from the November acquisition of his agency by Interpublic. Mr. Levy claims he doesn't plan to be a long-term shareholder of Interpublic and has no plans for the proceeds.

Before discussing the pact with analysts March 19, executives said they contacted several top clients, including Interpublic's Coca-Cola Co. and True North's S.C. Johnson, Nestle, Unilever Bestfoods, Quaker Oats Co. and J.P. Morgan Chase & Co.

Conflicts among clients
Regarding potential conflicts among True North and Interpublic clients, executives from both companies said marketers have become more tolerant of agency consolidation, which potentially could place their accounts under the same holding company as a competitor. Mr. Dooner asserted creating the third agency network would provide an additional firewall. However, Mr. Dooner acknowledged during a March 19 conference call Interpublic had taken some conflict-driven losses into account in the company's financial modeling.

Perhaps the most apparent potential conflict for Interpublic is Coca-Cola, with which it signed a global alliance in December. Soft-drink and food brands belonging to rival PepsiCo currently are handled by True North's FCB. Interpublic's McCann and its Amster Yard unit, both New York, are at work on a Coke branding campaign, while Lowe Lintas & Partners, New York, is the agency of record for Sprite.

A top Coca-Cola executive confirmed the company is waiting to see how the Interpublic-True North arrangement will shake out, noting this would be the first time Coca-Cola and Pepsi-Cola would be part of the same holding company family. "I'm sure the people at Pepsi would have the same issues," he said.

A former Coca-Cola executive said he doubted Coca-Cola would have a problem with Cadbury Schweppes' Dr Pepper/Seven Up flavor brands, now at FCB, Chicago. A spokeswoman for Dr Pepper/Seven Up said the situation was "status quo."

Rivals RCA and Samsung
On the consumer-electronics front, Interpublic's Lowe handles more than $60 million in advertising for Thomson Multimedia's RCA and ProScan brands. True North's FCB, New York, handles the $150 million global account of rival Samsung Electronics.

Tom Wardrop, VP-advertising for Thomson Multimedia, client of Lowe, expressed concern. "Our desire, obviously, is to keep a proprietary relationship with our agency," Mr. Wardrop said, adding that he was "dismayed in the fact that I'm not a fan of the mega-agency." Mr. Wardrop expects to have an ongoing dialogue with agency executives, but said he will give them time to figure out the organizational structure of the networks.

There doesn't appear to be a conflict in cars: True North's Temerlin McClain, Dallas, has Subaru of America, 20%-owned by General Motors Corp., a key Interpublic client.

How the other True North units will fare has sparked active debate, but the top executives were mum on any changes. To help iron out those details, the deal includes a transition team led by True North CEO David Bell.

Mr. Bell said the transition team wasn't prepared to elaborate on the integration, but executives with knowledge of the deal point to past moves both holding companies have made. Interpublic "has a history of consolidating, and they're not shy about it," noted one West Coast executive.

Indeed, prior to the True North acquisition, Interpublic recently merged agencies under its own umbrella. In the past year, Interpublic folded Lowe Group's Winston-Salem, N.C.-based Long Haymes Carr into Mullen, which has offices in Wenham, Mass., and Detroit, Mich; aligned public relations agencies Weber Public Relations Worldwide and Shandwick International to form Weber Shandwick Worldwide; and merged San Francisco-based Goldberg Moser O'Neill into Hill, Holliday, Connors, Cos-mopulos, which has offices in Boston and New York. Before that, Interpublic wound up with a culture clash when it forced together Lowe and Ammariti Puris Lintas.

This tack also may be applied to the True North agencies.

Some agencies will fold
"What you'll see is that some [agencies] will fold in under FCB," said a True North executive. "FCB will look like McCann but that won't take care of all the pieces."

Conversely, an agency executive on the True North side optimistically suggested Interpublic also had a track record of keeping its acquired agencies independent, as it did with Campbell Mithun and Austin Kelley Advertising.

"There are a lot of clients in and around the Bozell Group, Temerlin and other smaller agencies that don't want to be part of a big agency," said another True North executive.

The Interpublic/True North merger gives the holding company a number of agency brands with a considerable and overlapping presence, particularly on the West Coast. That's a situation one executive said is ripe for consolidation, which could trigger another round of layoffs in the already hard-hit region.

Consolidation will certainly be one way Interpublic can achieve the 25% cost savings it projected as part of the deal. Already, speculation swirled that eliminating jobs from the True North headquarters in Chicago would likely be the first of cuts after the midsummer closing.

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Advertising Age staffers Cara Beardi, Mercedes M. Cardona, Hillary Chura, Alice Z. Cuneo, Tobi Elkin, Jean Halliday and Laurel Wentz contributed to this report.

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