The Seneca Trail

It's strange to think that two companies which look to total just $125 million in revenue this year have caused so much angst for Omnicom Group—which, in the second quarter alone, reported $1.9 billion in revenue. But that's the case with Agency.com and Organic, the erstwhile interactive hot shops that form the cornerstone of Seneca Investments LLC.A joint venture between Omnicom and Pegasus Partners II, a private equity investment firm, Seneca was constructed by Omnicom CFO Randy Weisenburger in March 2001. It was 11 months after the dot-com bubble burst and the beginning of a cataclysmic interactive-shop shakeout. Omnicom's rationale for creating Seneca was simple: Seneca would buy Omnicom's stakes in its Internet holdings, take the companies private and find a way for the holding company to salvage some of its once high-flying e-investments. Omnicom, in return, would receive preferred stock in the venture, relinquish any say in how it was run and erase any prospective losses from its books.But in the current corporate climate, deals that once looked great are now being questioned. Special-purpose entities like Seneca, designed to keep debt off Omnicom's books, have gained notoriety through the likes of Enron, believed to have abused the practice.In early 2001, almost every major independent shop had only a tenuous grasp on survival; Agency.com and Organic, despite their relatively long histories, were faring little better. Agency.com's revenue fell by 27 percent between the fourth quarter of 2000 and the first quarter of 2001, and Organic's revenue declined by 42 percent in the same period. In the past 18 months, such names as MarchFirst, WPP Group-backed shop Luminant, iXL and Scient have all disappeared. By the end of last year, Agency.com and Organic were looking at revenue declines in excess of 50 percent. Making matters worse, both companies were hemorrhaging cash, having used their IPO money to fund real-estate leases, technology upgrades and other boom-time expenses. What did Omnicom stand to lose if the two companies went under? Millions, on paper anyway. In early 2000, Omnicom sold most of its stock in Razorfish, another interactive shop, for a pretax gain of $110 million. But the holding company retained its position in Agency.com and Organic as their share prices dipped into the single digits and below. If Organic had managed to hover around its February 2000 offering price of $20 per share, Omnicom's 17.3 percent stake would have been worth more than $300 million; its 49.9 percent stake in Agency.com, which opened at $26 per share, would have been valued at much more. Omnicom, as a major investor in both companies, no doubt felt that protecting what was left of its investments was far preferable to the likelihood that both companies would vanish entirely. Though no one would expect Seneca, or any other company, to return Organic and Agency.com to their former luster, Seneca provided not only an expertise in fixing troubled companies, but also a financial setting in which the i-shops could be fixed without the prying eyes of the public markets.There's nothing to suggest there was anything legally problematic about the manner in which Omnicom and Greenwich, Conn.-based Pegasus went about forming Seneca, even if it took some deft maneuvering. KPMG's examination of the Seneca books—and its ruling that Omnicom need not make any accounting changes to the way it handled the transaction—underscores that point. In fact, for all the major parties concerned—Omnicom, Organic and Agency.com—the deal looks better today than it did when Seneca was first created.In an analyst call last week, Weisenburger said Omnicom is still interested in buying both agencies. "Negotiations have been on hold while we've been doing other things," he said. "But it's something we still think will be a good fit."

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The Seneca Trail

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