Keeping the Lights On at IPG

NEW YORK After Lowe CEO Stephen Gatfield and chairman Tony Wright finished the morning's final session at Interpublic Group's first-ever Investor Day last Monday, CEO Michael Roth told the audience the two agency execs "will be available for lunch."In the top job for just three weeks, Gatfield—perhaps feeling like raw meat being offered to the lions of Wall Street—laughed and corrected his boss by saying "at lunch."Those feelings were hardly unjustified considering their challenge that day: To reassure investors about the beleaguered Lowe's turnaround strategy, which includes downsizing the network and changing the agency's over-reliance on traditional advertising in favor of other marketing services.But therein lies a larger message for the latest group of top Interpublic Group executives who, like their recent predecessors, have blamed the company's ongoing problems on acquisitions, weak financial controls and accounting practices inherited from longtime CEO Phil Geier and his CFO partner Eugene Beard, both now retired."IPG generates a full 63 percent of revenues from traditional advertising and a modest 37 percent from marketing services activities," Citigroup's Bill Bird wrote afterward in a research note. "In a sense, IPG's turnaround requires significantly more than fixing up the IPG of the past. IPG is also in need of greater depth and breadth of marketing services capabilities and a retooling of the way it goes to market in a multichannel world."Roth, a pro at handling usually cynical analysts, used the event, drawing nearly 300 members of the financial community and another 1,500 through its Webcast, to reposition IPG to investors. The session captured Madison Avenue at its best: long on slick presentation, persuasion and product attributes, but short on actual content. One analyst grumbled later in the day that the only news was the 15-minute afternoon power failure. An IPG source responds: "What [analysts] want is more guidance and breakdown of numbers at places like [McCann] Worldgroup, but until controls are in place, we just can't do that."Nonetheless, Roth soldiered on, saying he expects IPG to achieve peer-level revenue growth and double-digit margins by 2008, even as he declined to provide guidance. It was left up to CFO Frank Mergenthaler to later lay out the challenge ahead, as he said IPG posted 0.2 percent margins in 2005, compared to the industry average of 14 percent.Roth trumpeted the company's new collaborative focus, calling March 27 "a momentous day in that it marks the first time ever that all of our companies have stood on the same stage together—both figuratively and literally—unified as a team. Our priorities are aligned and we are working cohesively to deal with changes confronting our business." Wall Street has heard such promises before from the holding company, whose stock has plummeted 72 percent in the last five years (during the tenure of three CEOs and four CFOs). An SEC investigation continues, and serious concerns remain about talent retention. Steven Barlow of Prudential Equity Group said, "Revenue growth is IPG's biggest unknown." Still, Roth's emphasis on IPG's transition to a more integrated company, and one less reliant on traditional ads, was a welcome message. According to analysts, at IPG, marketing services contributes to about 37 percent of revenues, compared to Omnicom, WPP and Havas, which are all at about 55 percent. Marketing services have been growing at a faster rate worldwide for the past several years, and analysts said IPG units like Draft, Jack Morton and R/GA appear to be the holding company's best performers. So greater collaboration among those entities and other IPG units would likely be seen as a move in the right direction. However, while the company hopes to have a 50-50 split in revenue at some future date, analysts said that's unlikely to occur within Roth's two-year turnaround timetable.Merrill Lynch's Lauren Rich Fine has been one of the more skeptical analysts following IPG. While she responded positively to the company's management on display and some recent new business wins, she continues to view the stock as a risk. "The company still has a lot of work to do, and while we are hopeful they achieve their goals, we have seen this movie before and reserve the right to be cautious in our own forecasts," said Fine.

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Keeping the Lights On at IPG

Andrew McMains

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Andrew McMains