When does ‘big’ become ‘too big’? As IPG and Cordiant struggle to hold on to their sprawling marketing services empires, the whole agency group model is being called into question. If shareholders, banks and clients are restive, then who is benefiting from these giants’ existence? By Amanda Wilkinson
Advertising revenue, like any other economic indicator, ebbs and flows over the years, forcing agency groups to plan for bad times as well as good to keep investors happy and protect their ever-expanding empires. But cracks are beginning to appear in the foundations of some advertising giants, such as Cordiant Communications and Interpublic Group (IPG). They are having to sell off assets, leading both investors and advertisers to appraise more critically the true value of agency groups.
IPG last week announced that it was looking for buyers for its motorsports business, which owns the Brands Hatch race track. At the same time, the group posted a 78.9 per cent year-on-year fall in fourth-quarter profits and a 3.8 per cent decline in revenues, to $1.7bn (&£1.1bn), over the same period. The news sent the share price down to $7.50 (&£4.70) in pre-trading on Friday last week – the lowest level for more than ten years. Standard & Poor’s Ratings Services also lowered its assessment of the group’s credit rating to “junk” status. Newly appointed chief executive David Bell, who replaced demoted John Dooner last month, blamed higher expenses and a severe drop in profitability at McCann-Erickson WorldGroup and Octagon Motor Sports.
IPG has also put a “For Sale” sign up outside its market research business, NFO Worldwide Group. The sales of Brands Hatch and NFO have been triggered by a warning from IPG’s bankers that existing short-term bank credit facilities could be withdrawn unless either $400m (&£250m) is raised through asset sales or a new capital injection is made by May 15.
In addition to the problems caused by global economic conditions, IPG’s troubles have not been eased by the discovery of accounting discrepancies last year at McCann-Erickson Europe.
Although IPG has its difficulties, they are not in the same league as those of Cordiant – owner of the Bates Worldwide agency network, which includes Fitch, 141 and Bates Advertising. Cordiant has been a major casualty of the advertising recession and is being forced to sell off assets to partially satisfy banking debts of more than &£200m.
Among the desirable assets are thought to be German advertising network Scholz & Friends; London-based financial PR agency Financial Dynamics; Healthworld, an advertising and communications consultancy which specialises in the pharmaceutical industry; and Australian advertising agency George Patterson Bates. A sale of Cordiant’s 25 per cent stake in Zenith Optimedia is also expected, with majority-owner Publicis likely to take full control. The sell-off strategy, led by new chief executive David Hearn, will effectively strip back the company to its core Bates Worldwide business, which industry insiders say is likely to be picked up by one of the larger agency holding groups such as WPP, Publicis or Havas.
Are you being served?
The uncertainty created by these sell-offs is leading shareholders, clients and industry figures to question the value and purpose of agency groups.
Walsh Trott Chick Smith managing director Steve Cooper says: “There is the question of whether agencies are working primarily to benefit shareholders or clients. Sometimes the two objectives are not the same, and the value to clients of these groups is not always clear.”
Shareholders tend to have short-term interests and look for companies that are growing – organically or through acquisitions – and will deliver a reasonable return on investment.
The holding companies claim that, apart from imposing financial standards on agencies, they add value for shareholders by managing central procurement of services, the administration of IT systems, training and recruitment and by encouraging the cross-referral of business.
But Robert Willott, editor of Marketing Services Financial Intelligence, says: “I don’t personally have a lot of time for this idea of ‘synergy’. I don’t think an enormous amount of business is transferred around the groups.”
And an industry insider, who has worked for large agency groups as well as on the client side, says: “There is no automatic way to motivate people towards the common cause. The subsidiaries are run as separate businesses with different profit centres.”
Ironically, Bates Worldwide is now trying to address that problem, by bringing its various businesses – Fitch, 141 and Bates Advertising – together in combined offices for each market, with each office operating only one profit centre.
Despite their drawbacks, however, some agency groups have undeniably delivered value to shareholders.
Lorna Tilbian, a media analyst at Numis, says: “Omnicom, WPP and Publicis have undoubtedly created shareholder value; Cordiant and IPG, on the other hand, have destroyed it.”
Because the advertising business is cyclical, she says, the trick is to make sure that a group improves its profitability each time there is an advertising boom and keeps its debt levels low in times of recession.
Although the advertising recession kept Grey Worldwide’s revenues flat last year, and WPP’s pre-tax profits fell 19 per cent in 2002, other groups have done relatively well. Havas returned to profit in 2002, Omnicom saw profits rise and Publicis hit its financial targets, boosted by its acquisition of BCom3. There are no immediate signs of trouble for these groups, according to analysts.
The danger signs
But any agency holding company has to watch out for certain warning signs. Once the total value of their individual subsidiary companies is higher than that of the group as a whole, or debt levels have risen too far, pressure from shareholders to sell off assets or break up the group will mount.
This is effectively what has happened to Cordiant, which went on a buying spree at the height of the last advertising boom, paying too much for assets and clocking up debts. The business then became hard to manage when the advertising recession kicked in.
Most industry experts, however, believe that Cordiant is a particularly bad case, and that other groups – even IPG – will not follow its sad trajectory.
But Willott warns: “IPG is weak and vulnerable. There is a risk of clients departing due to lack of confidence, whether justified or not, in the ability of the group.”
He says it is imperative that IPG’s new management stabilises the business and looks after clients.
DFGW chief executive Michael Finn believes that there is likely to be an even greater “correction” in the market, triggered by the recession. He says that some agency groups are highly geared (heavily indebted) and are placing huge pressures on their subsidiaries to deliver increased revenue in order to “maximise shareholder value”. Finn doubts that such action is to the long-term benefit of clients.
After a hectic period of consolidation, industry observers are also asking whether agency holding groups will be able to expand much further.
Willott says: “When there are no decent businesses left to acquire, growth will slow. There’s an argument that says: ‘Where next?’ for the likes of Omnicom.”
Groups can acquire other types of businesses, such as events companies, but Willott points out that this tactic failed for IPG, with the acquisition of Brands Hatch, and for Saatchi & Saatchi when it tried to buy Midland Bank.
Agency chiefs are optimistic, however. They contend that their companies will continue to grow, in the same way that multinationals such as Procter & Gamble and BP do.
Michael Baulk, European head of BBDO and group chief executive of Abbott Mead Vickers.BBDO, part of Omnicom, says: “I believe in the future growth of the branding communications market worldwide. Brands, as assets for the companies that own them, are growing in importance.”
Some observers believe that the search for shareholder value will lead to further consolidation among the major groups, leaving five large agency groups. What this will mean for smaller players, such as Havas and Grey, is debatable.
No need for networks of networks?
Agencies argue that international clients, rather than shareholders, have driven consolidation. Clients have pushed for – and in some cases funded – the development of global agency networks. The logical benefits for a multinational client are clear – one agency can handle a client’s business in all markets, delivering consistency in brand strategy and communications. But it is harder for clients to see the benefits of large agency groups, bringing together several global networks. Many would argue that these have been developed for the benefit of shareholders alone.
Thames Water worldwide director of marketing and strategy Mike Moran says: “I don’t think clients get very much from these merged companies, just a lot of disruption from time to time. These groups have not demonstrated convincingly why they exist, other than to enhance shareholder value. They say they do it to create ‘one-stop shop’ opportunities and synergies, but the rhetoric is never followed through. The one area where there is synergy and a benefit for the client is in media planning and buying.”
Jon Kinsey, a former British Gas and Camelot marketer, says: “From my perspective, there has always been only a marginal benefit in speaking to a single team rather than a number of different teams.”
Kinsey prefers to cherry-pick agencies, as he believes this leads to better creative solutions.
Agencies have used the one-stop shop argument with varying degrees of success. WPP chief executive Sir Martin Sorrell has on numerous occasions said that agency holding groups create added value for clients, using the argument to great effect in bailing out WPP after it bought Ogilvy & Mather at the top of the market in 1989, before plunging into a recession and financial crisis.
Boots’ relationship with WPP is often cited as an example of an agency group fulfilling all of a client’s needs, but some in the industry doubt its success.
Another is the deal that WPP secured with Ford last year, to be the car company’s sole source of marketing and advertising, increasing its share of Ford’s business from 80 per cent. Ford is now investigating whether chief operating officer Sir Nick Scheele infringed company purchasing policies by ordering that all the business be handed to WPP Group.
David Grint, a marketing consultant and former BBC and Coca-Cola marketer, says the challenge for holding groups in developing integrated solutions for clients is to overcome infighting and rivalries among subsidiary companies.
Creston chief executive Don Elgie says that large agency groups have failed to address this, preferring to use the purchase of new subsidiaries to “door knock” and sell services, rather than concentrating on how the acquisition may help in providing solutions for clients’ business needs.
For some clients, though, agency groups do work. International clients often require a global network, but if that network is not performing or there is a conflict, they may appreciate the option of switching to another network within the same group.
Michael Winkler, European business director for Gillette’s Braun brand, says: “For a very centralised business like Gillette, there are a lot of advantages in working with this kind of group.”
He adds that large groups can adapt easily to clients’ needs, so that client-agency relations are more efficient; they are able to recruit extra creative talent if needed; and they provide greater media buying power.
Some global companies that have traditionally used international networks are turning to local creative “hot shops” for extra input. In the UK, Coca-Cola – which is aligned with McCann-Erickson – is using Mother, while Unilever subsidiary Lever Fabergé has also turned to the agency to work on Surf, a brand aligned to Lowe.
Tilbian says that clients want the best of both worlds: “They want the ease of international networks and the creativity of boutique Soho hot shops. A lot of what they want is illogical.”
That may be the case, but if agency holding groups do not deliver what clients want, their customers will eventually go elsewhere – perhaps creating new major players in the process.