FCB + Draft: IPG Tries to Avoid Past Mistakes

NEW YORK To Interpublic Group observers, last week’s revelation of a possible combination between Draft and Foote Cone & Belding had a familiar arithmetic to it: The rationale behind such a move would bolster two of IPG’s key players, a strength-in-numbers, 1+1=3 move.

Presumably, the addition this time could succeed, wherein the past such merger equations have not only reduced the stature of IPG networks like Lowe, but also contributed to the diminished state of the holding company itself.

Leaks about that possible association—some say merger—of Draft and FCB last week caught IPG unprepared to announce details of how such a deal would be engineered. IPG is still grappling with finding the right model for the partnership and determining who will lead it. In January, FCB CEO Steve Blamer, 50, told IPG chief executive Michael Roth he would cede the top job to Howard Draft, 52, sources said. Draft appears to be the front-runner as CEO, but the issue still crops up in discussions as does the logistics of how a new entity would operate.

That situation brings to mind the potential political jockeying and power grabs associated with the ill-fated mergers culminating in the problematic cultures arising at other IPG shops, and some observers are already connecting those dots.

Last week, Merrill Lynch analyst Lauren Rich Fine commented on a possible FCB/Draft merger: “We do not believe this is a good idea, given the difficulties encountered in previous mergers such as Bozell and FCB as well as Lowe and Lintas.”

It’s worth noting, however, that FCB appears to be more stable than Bozell or Lowe, despite lagging behind its peers in growth. And Draft is considered a leader in its sector.

IPG argues it’s too preliminary to make any judgments, given the fact the company has yet to determine the form of a combination or whether it would even happen. Some say one scenario put forth by Blamer—still on the table—is forming a “mini holding company” along the lines of McCann Worldgroup. Under that scenario, Blamer and a Draft counterpart would both report to Howard Draft. Others say that move could just be the beginning of an eventual merger.

The mere consideration of a merger underscores a major difference between the holding company and its peers. IPG opts to solve problems at its stalled or troubled companies by rolling them up, while its rivals seek alignments to create stronger, more integrated offerings.

Sources point to that operational failure as a major contributor to the company’s current state, usually blamed on accounting issues. In 2000, for instance, IPG was the industry’s largest holding company with revenue of $6.8 billion. By comparison, Omnicom, now the largest, reported 2000 revenue of $6.1 billion, and has grown 70 percent to $10.4 billion in 2005, while IPG, now ranked No. 3, has seen its revenue fall to $6.2 billion. (To be fair, it’s not just slow growth that’s plagued IPG, but also the company’s downward restatements, due to accounting problems and a write-down in the value of units like Octagon Motorsports and Lowe.)

“Everyone’s been blinded by [IPG’s] financial issues,” says one source. “But what’s been going wrong with that company’s go-to-market strategy when one company [IPG] goes backwards in six years and the other [Omnicom] doubles? Every time IPG has companies with business problems, the solution is never to fix the companies, it’s to put them together. The last time Lowe went through a bad time, they were going to merge it with FCB. They have a history of putting broken pieces together, with not one example showing that this latest effort is going to work. In this case, they’re putting broken pieces together and betting it won’t destroy the success of Draft.”

More critically for IPG CEO Roth, will he be able to keep his promise to Wall Street that he’ll deliver peer-level growth by 2008? While struggling with its own financial issues, the holding company may now face the challenge of engineering two major transitions among key networks, simultaneously: combining the very different cultures of Draft and FCB while downsizing Lowe.

Last week Roth confirmed that a Draft/FCB association is under consideration, but said in a statement, “It is, however, too early to tell if a combination will take place or what we will decide is the appropriate model and structure to deliver the most powerful integrated offering.”

Earlier, apparently in a response to an Adweek Online report that indicated Draft was the front-runner in heading up a combined Draft/FCB entity, he wrote to staffers in an internal memo and pledged: “There will be no takeover of any of our companies by another company. Personalities and politics won’t win the day, sound business decisions will.”

Avoiding those politics may not be easy given the fact this would not be a merger of complementary entities, but rather a marriage of two units from completely different disciplines and backgrounds: IPG is teaming up one of America’s oldest traditional ad agencies, headquartered in New York, with an entrepreneurial CRM company firmly in the hands of its Chicago-based founder.

The rationale behind the coupling is that it will help Draft speed up its international expansion and improve its creative capabilities. Even within IPG, sources describe FCB’s 185 international offices as a weak global network. While Draft has done well in the U.S., the company’s growth has been slower internationally.

For FCB, the agency would gain Draft’s strong CRM capabilities, which the agency already has, in part, with interactive unit FCBi. Some sources wonder how urgent that CRM mandate is from the agency’s roster, largely composed of packaged-goods marketers.

If Howard Draft should emerge as CEO of a combined company, IPG risks distracting a successful executive by doubling his international challenges at the risk of diverting him from his healthy U.S. operations and efforts to jump-start FCB’s sluggish domestic growth. While he’s doing that, he would also be overseeing the logistics of a merger, with some observers pointing out that his strong suit has been overseeing organic growth in offices like Chicago and New York. Overseas, he’s had more mixed results with operations that have involved assimilating acquisitions. If Steve Blamer emerges at the top, he’s got to reach beyond his experience as an adman integrating below-the-line operations and avoid alienating Laurence Boschetto, Draft’s president, COO, who has been instrumental in the success of building the company’s New York office. Either way, Draft or Blamer faces considerable challenges in melding the very different cultures of the two companies.

Blamer alluded to that last week, writing to employees: “Please keep in mind that the objective here would be to strengthen the combined operations—not to have one dominate the other. And, importantly, personal agendas must be set aside if anything like this were ever to happen.”

Howard Draft, meanwhile, was writing to his troops: “We are firmly in control of our destiny, and we will always keep the best interests of our agency, our clients and our employees front and center.”

—with Kathleen Sampey and Andrew McMains