A Model For The Future Or A Doomed IPG Merger?

NEW YORK Last Thursday, just after Interpublic Group said it would merge its Draft Worldwide with sibling Foote Cone & Belding, Howard Draft threw down the gauntlet: “I’ve made money,” the CEO underscored in a conference call to senior management of the two companies. “I now want to make history.”

The financial success of Draft’s namesake over the years has helped propel the company to the top of its field, leading to this industry first as an entrepreneurial “below-the-line” shop assumes control of one of America’s oldest, and a much larger, mainstream agency.

It may well turn out to be a historic moment: Will Draft create an agency model for the future? Or stumble as yet another cautionary tale at IPG?

Marketing communications companies are grappling with clients’ challenges in a fast-changing media universe, and most agencies are keen to figure out the question: What is the best model to respond to empowered consumers and the realities of combining integration with accountability?

The merger speeds up Draft’s expansion overseas, where it has not been as successful as in the U.S. (Even within IPG, however, sources describe many of FCB’s 185 international offices as weak.) For FCB, the agency gains from Draft’s strong expertise in direct marketing and established top management team.

Other, more cynical observers view the transaction as yet another internal IPG machination to prop up the shortcomings of two networks, an after-the-fact rationalization of assets acquired during previous regimes at the holding company. (Bolstering their theory is the fact that IPG recently considered combining Draft with Lowe Worldwide.) IPG CEO Michael Roth is quick to defend his strategy. Previous IPG mergers “seemed more defensive,” he said, while “this is offensive.”

He added: “This is a sound business decision with two very strong organizations. They complement each other.” He noted that there’s a single vision and one P&L. It’s “growth orientated” and “it’s not being driven by cost reductions,” he argued.

While Draft and FCB are forging a common P&L, other companies are pursuing alternative models.

This past spring, Omnicom Group CEO John Wren talked about the need to align its non-traditional agency disciplines around its main agency brands such as BBDO, DDB, and TBWA. Organic, Rapp Collins and Agency.com will be partnered with those three networks, respectively, positioning them to become global enterprises for “increased coordination” of service, Wren said.

A successfully integrated Draft-FCB combination could offer a compelling new model in that it offers communications that are measurable, given the direct component. One executive described the combined company as “focused on changing consumer behavior, with strong metrics.”

But to get there, Draft faces some considerable challenges. Some are the expected stuff of any merger: politics and turf. Steve Blamer, his 50-year-old counterpart at FCB, is leaving as a result of the merger. (“There can’t be two CEOs in this thing,” Draft said bluntly.)

Blamer stands to pocket handsomely for his 11 months on the job: Some sources said the widely speculated amount of $7 million is “a little on the high side.” Another source commented that it might be more like $5 million, including two years base salary, bonus, restricted stock and other benefits.

More inflated estimates might reflect the amount Blamer received upfront when he joined FCB and was paid “make-good money” for what he left on the table when he left his last job at Grey.

Either way, another large executive payout can’t be sitting well with Wall Street after Roth promised to bring down severance costs at IPG.

This merger also brings unique challenges: FCB creative chief Jonathan Harries assumes the top creative job at the new entity, and some wonder how the two very different cultures and creative disciplines will meld into something new. At least initially, attracting talent may be difficult. Nonetheless, last week Howard Draft put forth this mandate: “I’ve told the creative guys: ‘Go hire the best ones. It’s a top priority.'”

On the business side, Draft and his top executive, Laurence Boschetto, president/COO of Draft Inc., face new distractions. Draft works for Verizon and Nokia while FCB has Qwest and Motorola. At risk is a potential $45 million in total global revenue fallout from conflicts at FCB alone, involving Motorola and Qwest. Motorola responded to calls, declining comment, while Nokia representative Keith Nowach said, “At this point, there are no changes or decisions. We’re still looking at things.” FCB has Kraft business. Draft has Kellogg’s and Mars.

Resolving potential conflicts is one thing, keeping clients happy in the coming months as Draft FCB navigates an unprecedented industry transformation is quite another.

“This is a big roll of the dice by IPG,” said one source. “If it doesn’t get some quick traction,” the merger may fail. Any client “who is not 100 percent happy is going to find its faith shaken,” the source added.

Like Howard Draft, Boschetto has made his mark in developing U.S. business, nearly tripling the size of the New York office since he took the top job there in 2002.

While Draft’s worldwide profit margin is nearly 15 percent, which puts it near the top of the class at IPG, FCB’s global margin is nearly half that, at 8 percent. Developing international capabilities has proved a challenge for Draft; now he is faced with revamping FCB’s sub-par overseas offices.

In the hours following the announcement, sources described the mood inside FCB as variously “exultant,” “nervous” and “enthusiastic.”

None nearly as exultant and enthusiastic as Howard Draft, who distances this merger from previous IPG efforts. “This is not like taking a sick puppy and putting it in with Draft,” he contended. “Everything will be built around taking the best of what we have and the best of what they have to build a modern solution. I really believe we are building something revolutionary here.”

—with Aaron Baar