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IPG Hears Bear Call

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In the fall of 2003, not long after Interpublic Group brought in former chief executive David Bell to tackle the company's problems, Wall Street observer Joe Stauff was pretty much alone in recommending IPG's stock. Now, 18 months into the company's projected 24-36-month turnaround, the CRT Capital Group analyst has reversed his positive view of the stock and recommends that investors sell.

Stauff's earlier optimism was based on the potential of IPG's earning power—and an anticipated improvement in margins—amid a strengthening economy. He thinks that window of opportunity may have closed.

"We've had much slower than expected progress, which creates a relatively unattractive risk/reward for investors," Stauff said, "because the reoccurring issue of overbloated staff costs to revenue has emerged, and a larger competitive gap makes IPG more vulnerable to client churn, particularly in media buying and planning services."

Stauff said the biggest challenge confronting new IPG CEO Michael Roth is getting the holding company's headcount—which, according to Stauff, is two thirds of its overhead—more in line with its revenue.

He also voiced concern that media buying is becoming a strategic gap in the company's services, citing the loss of business from both Unilever and Nestlé. In addition, Stauff questioned whether cost savings from real estate and shared services can be made quickly enough and indeed be large enough to justify current expectations.

According to Stauff, IPG generated about $6 billion in 2004 revenue, which would be a 3.5 percent increase over 2003. Stauff, who has followed the marketing communications industry at the former Schwab Soundview and First Boston, said the widening competitive gap between IPG and its peers will continue to impede the company's turnaround efforts.

In the near term, Stauff noted that IPG shares are more vulnerable, on the downside, by as much as 10 to 15 percent without the prospects of a commensurate increase. He also said he expects a 12-month price target of $13, which is in line with current price levels, and believes the company won't be able to get its operating margins up to current target goals of 11 to 14 percent without an expanded restructuring program to correct its staffing levels.

Stauff credits Bell—who relinquished his CEO role in January— with retaining key talent and clients and stabilizing the company. But after IPG COO and CFO Chris Coughlin unexpectedly resigned in June—after just a year on the job—the dynamic in IPG's executive corridors changed.

"The company's lack of a 'good cop, bad cop' balance at the management level when Coughlin left came at a very critical stage in its turnaround, when the low-hanging fruit had been picked and more structural decisions and operating discipline needed to be made, especially given a lower margin of error due to the less than stellar recovery in place," explained Stauff.