Elliott Management Takes Significant Stake in IPG

Hedge fund now owns 6.7 percent of common shares

Interpublic Group now has a new major shareholder in Elliott Management, which disclosed today that it had amassed nearly a 7 percent stake in the No. 4 holding company.

After months of speculation stemming from high-volume trading, Elliott revealed its 6.7 percent stake in a filing with the Securities and Exchange Commission, making it one of Interpublic's largest institutional investors. The filing indicated that Elliott and two subsidiaries, Ellliott Associates and Elliott International, now own 28.3 million shares of common stock.

The immediate impact of the new big stakeholder is negligible. But prepare for a wave of conjecture about the future of IPG. Will the company sell, merge or stand pat, and how will Elliott, a hedge fund led by Paul Singer, an activist investor, influence the direction?

In its filing, Elliott said it purchased the shares because they are "undervalued and represent an attractive investment opportunity," adding that it would "seek to engage in a constructive dialogue" with IPG's board about maximizing shareholder value. 

Interpublic and its CEO, Michael Roth, had no immediate comment. Same goes for Elliott.

Singer's move comes two months after IPG rivals Omnicom Group and Publicis Groupe scrapped plans to merge, just 10 months after unveiling what would have been the largest deal in the history of advertising. And while that merger failed to materialize, it left open the possibility of other mega-mergers.

Indeed, The New York Times is already reporting that Singer will push for IPG to sell to a rival. Why? Because Elliott sees Interpublic as underperforming on its own—both in terms of share price and operating margin—and there's still an appetite for consolidation in the sector, according to a source. In that context, Elliott fund managers want to begin a "constructive dialogue" with IPG management, the source added.

The price of any such deal, however, will be substantially higher than it would have been a few years ago, let alone in the summer of 2006, when, amid restatements related to a major accounting imbalance, IPG's stock slumped below $8 a share for the first time in 15 years.

The company's stock is now trading near its 52-week high of $20.35 a share. The stock opened today at $20.32 and closed at $20.15 in unsually high-volume trading. IPG ended 2013 with $7.12 billion in revenue and currently has a market capitization of $8.54 billion, according to Yahoo Finance.

Potential acquirers could include Dentsu and Publicis Groupe. Pivotal Research Group's Brian Wieser puts Dentsu at the top of the list, given its desire to increase share outside of its home base of Japan and its access to capital. Dentsu also has been an active buyer in recent years, acquiring mcgarrybowen in 2008 and Aegis Group in 2013. The Japanese holding company declined to comment.

Still, Wieser wouldn't rule out interest from Publicis Groupe CEO Maurice Lévy, who has made approaches in the past. The French holding company also shares major clients with its American counterpart, including General Motors and L'Oréal.

"I don't think [Lévy's] interest or appetite to get bigger has changed," said Wieser, a senior research analyst at Pivotal. "It's just a question of the math." Lévy had no comment.

And while IPG remained mum publicly, internally Roth urged his troops to remain focused on their work and not get distracted by speculation surrounding Elliott's stake.

"While some third parties may have opinions concerning the best path forward for our company, news reports that play to their agenda are not necessarily aligned with what is best for us," Roth noted, in an email to company staffers.

Regarding Elliott's desire to talk to IPG management, Roth said simply, "We meet with shareholders regularly. As such, we will be open to engaging in dialogue with Elliott Management to assess their perspectives."