Out of Fashion

Michael Bungey saved his first agency, Michael Bungey & Partners, from bankruptcy by making it look successful, splurging on a champagne-splashed party that won over four new clients. Now, as he deals with what may be his last industry sleight of hand, the Cordiant Communications Group CEO is attempting to placate increasingly unhappy shareholders by overhauling a company already well-known for its many failed incarnations. In a cost-cutting move, CCG will unite key operating units Bates Advertising, marketing-services network 141, branding and design group Fitch and healthcare-marketing division Healthworld into a single entity. The move raised eyebrows, especially since it follows a two-year plan to unbundle resources such as PR. The initial expense of implementing the integration drew notice as well—a hefty $42 million charge will be taken in the second half of 2002 to realize $34 million in annual savings. In addition, Bungey's plan would seem to make it harder to sell the companies piecemeal, which CCG may need to do if it cannot reverse its fast-deteriorating financial fortunes. Bungey was traveling last week and did not return calls. Whether the plan works won't be the 62-year-old Bungey's headache. Under pressure all year, he has confirmed that he'll retire next March. His successor is David Hearn, who has been with CCG just five months as Bates Worldwide CEO. Hearn, who also did not return calls, can expect the same scrutiny from the institutional shareholders who pressured Bungey. Harris Associates fund manager David Herro, a longtime CCG shareholder now with a 9.27 percent stake, warned at the time of CCG's 1997 spin-off from Cordiant PLC: "Michael Bungey knows we're patient investors. But he also knows we're intolerant of incompetence." It was Herro's intolerance that triggered the ouster of Maurice Saatchi, which ultimately led to the demerger of CCG and Saatchi & Saatchi, and the dissolution of Cordiant PLC. The fate of CCG may be determined by outsiders, too. Brian Myerson and Julian Treger, who run London-based Active Value Fund, have emerged as front men for the group that pushed for Bungey's removal. They are said to be working in concert with other fund managers like Herro and money managers at U.K. funds Millgate and Morley. Last week CCG said it was notified that Active Value upped its stake to 10.13 percent, from 9.04 percent. The group is estimated to own almost 30 percent of CCG's shares in total. "While Active Value have claimed that a number of investors are acting with them, they are not," CCG spokesman Alex Sandberg of College Hill Associates responded. "Frankly, [those investors] are angry at being hijacked into an agenda they are not supportive of." Calls to those money managers were not returned. Myerson and Treger are notoriously aggressive in their efforts to enact change at laggard companies, and it's unlikely they will accept the economy as an excuse for CCG's woes. Speculation is mounting that they will push for CCG asset sales. Detractors of the Saatchi brothers may see some kind of cosmic justice in CCG's situation. The 1986 acquisition of Ted Bates was the brothers' biggest deal in the go-go '80s. While they are now estranged from CCG, it's no small irony that their one-time crown jewel of global ambition could be dismantled by shareholders. More pragmatic observers merely see CCG as a sign of the times. Which, in part, it may well be. The timing of CCG's efforts to catch up and diversify into marketing services was unfortunate, to say the least. Bungey overpaid for such acquisitions at the top of the cycle, piling on debt. When the economy hit the skids, CCG was forced to renegotiate that debt, on more expensive terms, at about the same time it was losing its largest revenue-generating clients. CCG was compelled to issue three profit warnings in four months in 2001 and cut its dividend this year. At the time of CCG's de merger from Saatchi, five years ago, Bun gey's company actually seemed the more attractive acquisition target: Unlike Saatchi, it didn't have the conflict constraints of a global marketer like Procter & Gamble (or need P&G to bless any deal). And while CCG's Bates network was sluggish in America, its Pacific basin operations were enviable, and it held a 50 percent stake in profitable Zenith Media. But it was Saatchi that was scooped up by Publicis in 2000, finding a safe haven in a marketing world unfriendly to stand-alone, medium-size independents—which is what Cordiant remains, despite years of acquisition rumors that typically involve French empire latecomers like Havas and Publicis.Since the demerger, Saatchi hasn't set the industry on fire, but it has avoided the kind of costly acquisition missteps and account losses CCG has suffered. To be fair, CCG lacked global marketers of the quality of Saatchi's P&G, Toyota and Hewlett-Packard. At the time of the demerger, CCG said only 13 percent of its revenue came from "global" assignments, which it said gave it room to grow. And CCG is still an independent-minded group of outposts, dating back to Bates' acquisition of disparate local agencies. Even the flagship U.S. office in New York has long been considered a set of fiefdoms. Two prime examples are Mark Morris, who has had a firm hold on Warner Lambert business, and Gary Steele, who had long controlled Wendy's and CVS, both of which left the agency this year. In 1999, Bungey said he planned to boost CCG's acquisitions in higher-margin, faster-growing marketing-services firms as a way to increase profit margins to 11 percent, from 10 percent. The following year, he paid $421 million for Lighthouse, which included Fitch and Financial Dynamics. That acquisition has already been written down. His advertising purchases have been disappointing as well. In 1999, he paid $100 million for 80 percent of Hyundai's Korean shop, Diamond Ad, to solidify Bates' ties with the car maker. Hyundai left Bates this year. Given those setbacks, and the debt load, it looks increasingly unlikely that CCG could be sold in its entirety in this industry climate. Its 25 percent stake in Zenith Optimedia remains its most prized asset. But insiders at Publicis, which owns the remaining 75 percent, have said that agency won't allow it to be sold, particularly since it has the option to buy the rest at a preset price after December 2003. 141, with its British American Tobacco business, is appealing, but CCG's ad holdings are less so. Scholz & Friends has had difficulty expanding beyond Germany. As a network, Bates is inconsistent: Malaysia and Hong Kong are doing well, but Scandinavia is slipping, and France and Germany are weak. And account losses have stripped George Patterson Bates of its No. 1 spot in Australia."One can't rule out the possibility of an asset strip of the business," says Simon Baker of SG Securities. "But it's taking you back to square one. ... You need these kinds of businesses to win global accounts. If Cordiant can't evolve into that organization, perhaps it should find a friendly partner to parent with." Which is probably what CCG, like Saatchi before it, would prefer. But given CCG's precipitous revenue drop—the nearly 10 percent slide in first-half 2002 didn't even reflect the loss of Bates clients Hyundai and Wendy's—the question is now one of time. Can Hearn, who has no agency experience, move quickly enough? And does he have the management team to help him hit the ground running? If Michael Bungey's experience is any indication, the answer may be no. If that's the case, the changes made so far don't go far enough. "Hearn is still an unknown quantity," said one source. "But what about the other people who have been there during the last two years while things have come to near-fatal consequences? Where's [CCG chairman] Charlie Scott been? Unless there's a greater change in management attitude, this is just like re arranging the deck chairs on the Titanic."

Brand Marketing

Out of Fashion

Noreen O'Leary

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Noreen O'Leary