The recent nosedive taken by Interpublic Group’s stock has led investors to offload their shares in droves—a fire sale that raises questions about IPG’s leadership and future.
Shares of IPG reached their lowest point in a year on Monday, trading at just $7.25 per share. Investors took notice. Some 5.8 million IPG shares were traded in one day alone; in an average month, about 14 million shares of the company change hands.
This most recent financial calamity does not bode well for the future of the company, and it might spell trouble for CEO Michael Roth. He may have been the right man to lead IPG's turnaround efforts a few years ago, but Roth is now dealing with issues outside of his area of expertise, and could ultimately have to deal with investor wrath—or worse.
"If I were a gambling man, I would bet this is pretty much the end of Interpublic. It will be busted up in pieces and sold off . . . It can't recover from this," a former top executive of an IPG agency said.
The downturn began in July, when IPG reported weak second-quarter earnings but claimed the company could make up the loss in the second half of the year. The next day, however, IPG announced the loss of its agency Draftfcb's second largest account, S.C. Johnson. "Somebody on Wall Street woke up and said, 'This isn't going to go the way Michael Roth wants it to go,' and that's when the stock [dropped]," the former executive said.
The loss of S.C. Johnson, which had been a Draftfcb client for 60 years, is hardly the only problem IPG agencies have encountered as of late. McCann Erickson, part of IPG's McCann Worldgroup, which represents some 30 percent of IPG's total revenue, has won few accounts this year—it picked up catalog business from Ikea and kept its business with the U.S. Army. In early August, McCann's New York office completed a round of layoffs. "The only reason McCann and Draftfcb are on the radar is because they're in free fall," said the former executive.
"Ad sector stocks have been hit disproportionately by the recent downturn, and IPG shares remain more leveraged to market moves than those of our peers," an IPG company spokesman said in a statement provided to Adweek. "Both factors are evident in the degree to which a slight Q2 miss was followed by our recent price drop, which contrasts markedly with our significant outperformance in 2009 and 2010. What is more, despite the economic turmoil, we've been upgraded to investment grade and continue to affirm 2011 financial targets that build on the great top and bottom line progress made in recent years. Speculation about IPG on the part of ex-employees with personal agendas, who have not been part of the solution, are baseless and without merit."
The man who stands to take the fall if the ship isn't righted, and soon, is Roth, who was named chairman and CEO of IPG in 2005 after having served three years on the company's board. At that time, he had spent eight years as CEO of The MONY Group, a financial services holding company. In July 2004, MONY was acquired, its stock delisted. Six months later, Roth was chosen to take over IPG, which was experiencing a management crisis after having gone through two CEOs in four years. Thanks to extensive business experience and a law degree, Roth was able to bring a strong corporate background to IPG's turnaround, an effort which involved tackling the company's sizeable debt as well as dealing with an SEC investigation that had been launched in 2002 after McCann Erickson reported accounting imbalances, not to mention improving its lagging position behind competitors—and, of course, increasing shareholder wealth.
Wall Street responded well to Roth, a likeable New Yorker who spoke the same language as the analysts who follow IPG. He was viewed as a numbers troubleshooter and anchor for the ailing company—and some people still see him that way.
"Interpublic was an absolute wreck when Roth took over in 2005. They have further to go, but the last thing they need to do is change out the CEO. They did that numerous times before Roth, and it did not work. The company needs stability," said Craig Huber, a media analyst with Access 342.
But Roth's lack of advertising experience may be holding him, and IPG, back.
"He came six years ago to clean up the balance sheet and he was the perfect guy for the job then . . . But he's not an ad guy. He's not from our business. He's not a Wren. Wooing clients doesn't come naturally to him. Selling creative products and wooing creative people to come and change the game for the company doesn't come naturally for him. Not that he doesn't try, but the essence of [Roth] doesn't equal the essence of this business," an executive familiar with the top brass at IPG said.
Analysts collectively agree that investors are upset with IPG's recent performance and have been selling shares accordingly. But a skeptical attitude about the company isn't something new for potential IPG investors. "There is a reservoir of investors out there who have said that they’ve seen the IPG turnaround story go off the rails before. So, some people—even when things were going better and in recovery mode—are not interested in the IPG story because they've been burned before. I'm sure those people are out there saying, 'I told you so,'” said James Dix, a media analyst with Wedbush.
With investor confidence plummeting, attention may turn to the shareholders' eyes and ears: the board of directors. But the board has seen very little turnover in the years since the SEC launched the investigation. At that time, the directors were not known for making waves—and not much has changed. Though a number of board members bring marketing experience to the table (most notably recent addition Dawn Hudson, former CEO of PepsiCo who spent more than a decade in advertising and branding earlier in her career), some feel they lean heavily on Roth in their decision making.
"I would liken them to the Yahoo board of directors," said the former top executive. "They don't understand the business. They rely entirely on Michael [Roth] because they have no choice because they don't have the knowledge. Michael, in turn, relies entirely on his operators because he doesn't have the knowledge."