The Numbers Tell the Story

So much for getting his sea legs. In his first full week as IPG’s new CEO, David Bell faces the task of delivering to investors some of the holding company’s worst financial results ever.

Insiders say IPG, which releases 2002 fourth-quarter and full-year financial results midweek, was hit harder than expected by the dismal performance at McCann-Erickson and losses in the motor-sports division Octagon. IPG is expected to report a loss for the year. Losses in Octagon alone—previously estimated at $58.4 million through the first three quarters of 2002—could be as much as $250 million, said sources.

Sources said McCann’s abysmal shortfall was the straw that broke the camel’s back for CEO Jim Heekin, who was ousted last week. Two executives said IPG was frustrated that Heekin was not forthcoming about the worsening financial news at McCann. One source said the extent of the bad news at the end of the year came as a huge surprise to IPG.

At the end of last week, IPG’s auditors, PricewaterhouseCoopers, still had not signed off on the company’s books. Sources said after news about its management changes leaked out last week, the holding company moved up its earnings release date by a week. Because of that, some unresolved issues remain between the auditor and IPG. A PwC spokesman said the company does not comment on its clients.

After the past year, worse-than-expected results would not shock many observers. “From a revenue perspective, I don’t know what would have changed materially at IPG,” said Lauren Rich Fine, a financial analyst at Merrill Lynch. “Anything different in below-the-line revenue wouldn’t surprise me, because I haven’t understood those numbers all year. I don’t know what’s recurring, what’s one-time, what’s going on.”

The board, led by presiding director Frank Borelli, chose Bell because he has an understanding of IPG’s operating companies as well as credibility on Wall Street from his days as CEO of True North. His selection for the top job is drawing mixed response from some executives running IPG operating units. And with new management and mounting losses at IPG, many observers believe the viability and stability of the holding company are far from a given.

In fact, the scenarios were being bandied about last week included the possibility of some agency entrepreneurs becoming interested in buying their agencies back.

Outside investors have also been watching the developments. Among them is Dan Snyder, owner of the Washington Redskins, who sold Snyder Communications to Havas for more than $2.3 billion in 2000, and Ted Forstmann, a partner at private equity investors Forstmann Little & Co. (The two looked at Young & Rubicam in the 1990s.) Hellman & Friedman, the private equity firm that made a $224 million investment in Y&R and a $100 million infusion in Digitas, has looked at IPG as well. Sources said other venture capital firms looking at IPG have approached former IPG CEO Phil Geier. Dentsu is also said to still be interested, although most observers do not think an acquisition by the Japanese company is a likely scenario.

While it is not the style of investors like Hellman & Friedman to break up companies and sell them piecemeal, other outsiders looking at IPG’s current trading levels, relative to its assets, might not be so benign. “Everyone’s taking a wait-and-see attitude,” said a top exec at one IPG unit. “But if things don’t improve, or God forbid get worse, the whole thing could turn upside down and fall apart.”

Officially, NFO is the only IPG asset on the block. But even after IPG sells NFO and raises capital, liquidity issues will remain a major challenge for Bell. “[These management changes] may pacify investors in the short term, but IPG still has significant challenges ahead,” cautions David Doft, executive director of equity research at CIBC.