Cordiant’s Plan to Dissolve Itself Raises More Questions Than Answers

By Michael McCarthy and Hank Kim

NEW YORK–The Cordiant ‘demerger’ road show began in earnest last week. In New York, chief executive Bob Seelert conducted interviews with analysts and the press to convince them the planned breakup of the holding company would ‘energize the operators in the networks and unlock the considerable potential residing in our businesses.

‘We concluded that the holding company mode wasn’t the right kind of structure for us,’ said Seelert, who is hoping shareholders will approve the demerger plan in October and that shares in the Bates and Saatchi & Saatchi groups can be issued in December. Senior managers at Saatchi & Saatchi Advertising and Bates Worldwide echoed that sentiment.

‘With the Cordiant limitations removed, it will empower us and allow us to grow our businesses faster,’ said Bates chief executive Michael Bungey. Bungey will head up a new entity called the Bates group, which includes the Bates agency network, the Rowland Group and other units such as the National Research Group. Cordiant claims the Bates group has annual revenues of about $600 million.

The Saatchi & Saatchi group, which will include Saatchi & Saatchi Advertising Worldwide, Cliff Freeman and Partners and Siegel & Gale and has annual estimated revenues of $576 million, will report to Seelert.

The announcement of the breakup, which had been considered for some time (Adweek, Feb. 17), came the same week Interpublic and Omnicom once again posted robust quarterly earnings. Given Cordiant’s struggle to successfully perform as a holding company, several analysts and other agency executives questioned whether the demerger would in fact lead to two smaller, healthier agency groups.

‘Will this increase shareholder value? Who knows,’ said Dean Witter analyst Jim Dougherty. ‘The only way it will is if Bates and Saatchi are able to run themselves better than the holding company. That’s not guaranteed.’ He and other analysts added that the demerger will make both Bates and Saatchi more vulnerable to takeover attempts. ‘Bates and Saatchi & Saatchi themselves are more digestible deals,’ said Dougherty.

‘This basically put the entire company up for sale,’ said one rival agency executive of the demerger plan.

Much of the demerger’s success rides on the theory that Bates was hamstrung in its new business efforts because of the strict conflict policy enforced by Procter & Gamble, a major Saatchi client. ‘With one fell swoop we have put all that aside,’ said Seelert. ‘Everybody’s on their own patch. Their destiny is in their own hands. They don’t have any encumbrances and can compete for whatever business they want. It’s just hugely motivating.’

By Cordiant’s own admission, however, the demerger proposal exposes Bates to only about 10 percent of the worldwide ad spending it was blocked from due to the P&G conflict. With little success in recent years in winning new accounts from the other 90 percent of global clients, Bates is seen as the most likely unit to be acquired by a holding company trying to fill out its geographic and client roster.

The list of potential suitors is a long one, including IPG, Omnicom, True North and WPP Group. Meanwhile, industry sources speculate a legion of P&G agencies, including New York’s Grey Advertising and The MacManus Group and Leo Burnett in Chicago, will be interested in Saatchi. Japan’s Dentsu has also been mentioned as a suitor, with Toyota, Saatchi’s largest client, as the main attraction.

Ed Wax, who will report to Seelert as chairman and chief executive of Saatchi & Saatchi Advertising Worldwide, insists it is not likely that his group will be acquired. ‘We didn’t do this to put ourselves in a position to be bought,” he said.

If Saatchi and Bates remain independent, however, each will have to take on extra staffing costs to make up for the disappearance of Cordiant. Most of the Cordiant staff, and their salaries, will be divided between the two new groups as they set up their management infrastructures. Seelert estimates saving about

$1.5 million by the dissolution of Cordiant. Cordiant chairman Charles Scott is proposed as a nonexecutive chairman for both companies.

Meanwhile, questions loom over Zenith Media Worldwide, which under the plan will be jointly owned by Saatchi and Bates. Zenith chairman John Perriss said that the new arrangement will enable Zenith to operate with a ‘fully independent status’ that can service its own clients as well as those of the parent firms. Observers said, however, that Zenith could be in store for more conflicts given its proposed ownership.

Given Zenith’s anemic performance in North America, observers feel that post-demerger, the company may seek to partner with another buying service. To assure short-term stability, Saatchi, Bates and Zenith are working out a three-year contract that asks the parent agencies to assign their media business to Zenith, clients willing.

However, observers point out that the proposed status for Zenith will not assuage Bates’ inability to put its North American clients into Zenith. For example, Bates recently pulled an estimated $100 million in national buying for Wendy’s from Zenith.

The breakup of the group quickly follows Cordiant’s announcement of its first shareholder dividend in seven years. ‘They finally had a decent financial report and figured it was time,’ Dougherty said.

–with Cristina Merrill

Copyright ASM Communications, Inc. (1997) ALL RIGHTS RESERVED