NEW YORK Investors, already on edge after Interpublic Group of Companies' disclosure of new accounting issues on March 11 as flagship client General Motors put its $3.2 billion U.S. media buying account up for grabs, were dealt another unexpected blow last week: The financial controls at the industry's third-largest holding company are in worse shape than anyone could have imagined.
Not only is IPG unable to announce a date for reporting its 2004 results, it may be delayed in releasing its first quarter numbers—and possibly even those for the second quarter. The annual meeting, typically in May, may be postponed. As IPG faces the possibility of more restatements, its shareholders are realizing they may not get a true picture of its financial operations until August.
Coming in the midst of IPG's sluggish turnaround, struggling media operations, its ongoing SEC inquiry and yet another shift in top management, some observers are even mentioning the previously unthinkable: The place that created the industry holding company concept in 1960 may now even be vulnerable to the dismantling of those parts.
"Who ever thought we'd look at (an IPG share value of) $13 nostalgically?" said one financial observer. "It's going to get to a point where the company is worth more dead than alive."
Michael Roth, through a representative, dismissed such speculation: "We have a range of outstanding assets and are increasingly serving clients across multiple marketing disciplines. We therefore continue to believe that the optimal strategy for enhancing shareholder value is to deploy our talent and resources so as to improve the operating performance of our units and, in turn, of the group as a whole."
At current trading levels, IPG has a market cap of nearly $6 billion, about the same as its revenue. (By comparison, WPP Group paid $1.7 billion for Grey Global Group, with 2004 revenue of $1.3 billion. In 2000, WPP paid $4.7 billion for Young & Rubicam, with 1999 sales of $3.4 billion). On Friday the company's stock closed at $11.76, off 1.3 percent for the week. Trading volume, at 6.8 million, was more than double the daily average.
Some top execs at IPG agencies aren't concerned about the latest bad news, saying past accounting problems don't adequately reflect the its current reality. But, some financial observers aren't so sure. In a report last week, Merrill Lynch analyst Lauren Rich Fine said that the huge GM review, coupled with the ongoing accounting problems present "concerns that more clients will lose faith and put their accounts under review."
IPG clients such as Mastercard, Coca Cola and Intel had no comment this week on the latest financial setback at the company.
With uncertainty clouding its reporting obligations, IPG moved to forestall any negative consequences. Late last week, IPG was offering bondholders, covering $2.15 billion in debt, a cash premium to change terms of the five issues. The revision allows IPG until Sept. 30, 2005, to become current in its reporting obligations, thus avoiding technical default. Bondholders get an additional bounty if IPG does not file its annual report by June 30. The company is also seeking bank waivers.
IPG's latest accounting woes—due to "material weaknesses in its internal controls," according to its statement—appear to be an overstatement of revenue related primarily to acquisitions from 1996 to 2001. The problem stems from IPG claiming full-year revenue on hundreds of agencies it purchased mid-year during that period, sources said. IPG said it had identified about $145 million in revenue and $25 million in net income that "may have been improperly recognized" in that period.
Based on past practice, IPG had been expected to post 2004 results in mid-March, though no date had been set. Now IPG concedes the delay will be until at least April and that fixing its financial controls will extend into 2006. The company said it will provide further details in an investors' conference call on April 5.
IPG is still in compliance with SEC requirements, because last week it filed a 12B25 notification that it would be late. Under a new New York stock exchange rule, IPG—after making public its delay—has nine months during which the NYSE will monitor it. After that time, if an report filing has not been made, the Big Board may delist a company's shares or give it another three-month grace period.
Former CEO Phil Geier and former CFO Gene Beard were at the top of the company during the time of the acquisitions. The estimated 300 to 400 deals in question were designed to diversify the offerings of IPG holdings such as direct shop Draft and PR firms such as Weber Shandwick, as well as to expand the global footprints of McCann WorldGroup, Ammirati Puris Lintas and Lowe.
PricewaterhouseCoopers has been IPG's independent auditor since the holding company's formation. And the accounting firm "approved every one of those acquisitions [in question] through all those years," said one source. PWC billed $27.2 million in fees for its services in 2002 and $39.3 million in 2003, according to a proxy statement IPG issued in April 2004. Those fees, which cover the cost of auditing consolidated financial statements and reviewing interim financial statements in quarterly reports, continued to climb last year—to an estimated $50 million to 60 million, according to a source. IPG declined comment.
PWC rep Steve Silber said, "We don't comment on client matters as a matter of policy."
IPG has now had four CEOs and three CFOs since 1999, leaving some to argue that accountability must be shared by others invested in corporate oversight besides those in control during 1996-2001. IPG's board, with many long-standing directors should bear some responsibility, they contend.
Michael Roth joined the board in February 2002 and was head of its audit committee from November 2002 to July 2004, when he became executive chairman. Roth, who was named IPG CEO in January, is a former CEO and CFO of MONY Group. Other IPG board members didn't return calls or could not be reached.
However, some operating heads within IPG believe Roth is the man who will succeed in cleaning up the company's financial mess. "This is the reason the board made the move so quickly from Bell to Roth," said one. "If I were in Roth's shoes, I would make damn sure you've got everything out that wasn't on your watch. It's taking extra, extra care to make sure that with this massive organization every single book that's closed is exactly perfect. Only then, can you begin to look to the future."