Omnicom: Maneuvers or Genuine Growth?

Omnicom Group’s continuing revenue growth in the first quarter of 2003 must irk WPP Group boss Sir Martin Sorrell. While revenue was up 12 percent at Omnicom, at WPP it was down by 3.9 percent. Admittedly, WPP suffered more than Omnicom from currency movements—on a constant currency basis, WPP’s revenue was up 1.4 percent—but currency movements are a real part of commercial life and cannot be ignored. They hit shareholders’ earnings in the same way as any other component of the income statement.

Nevertheless, a comparison of the reported results of Omnicom and WPP for last year raises some questions about the extent to which Omnicom’s reported profits have been boosted by financial maneuvers as much as by down-to-earth performance.

Take a look at the impact of interest charges. WPP had net debt of $1.4 billion at Dec. 31, compared to Omnicom’s debt of more than $2.1 billion. But WPP suffered an interest cost of about $130 million, whereas at Omnicom it was $30 million—equivalent to 1.5 percent of the average of its borrowings at quarter ends throughout the year. That’s a cheap cost of money, and doubtless Omnicom would expect—and obtain—great credit for the way it structures its borrowing arrangements.

Much of Omnicom’s debt is in zero-coupon notes. But you get nothing for nothing, and sooner or later there must be a price to pay. For example, Omnicom’s note holders had to be offered a financial inducement not to redeem them prematurely in February, after the bad publicity of last year. That cost will hit net income over the year ahead. Even so, the complex structure of the notes still means that short-term earnings per share will benefit at the expense of future earnings per share.

Another difference between Omnicom’s results for 2002 and those of WPP and other competitors will be found in the way Omnicom deals with acquisitions. Under the accounting rules introduced last year, any part of acquisition costs that is attributable to goodwill (the amount by which the cost of the acquisition exceeds the fair value of tangible assets acquired) can be left in the balance sheet as an asset indefinitely unless, and to the extent that, the management believes the carrying value in the balance sheet has been permanently impaired.

Companies like WPP, Interpublic Group, Publicis Groupe and Havas all reduced the carrying value of goodwill in 2002. WPP alone charged approximately $267 million against net income for impairment and amortization of goodwill previously carried at $7.4 billion. But Omnicom shows no such concerns about the $4.8 billion of goodwill it carries. Is that the result of perfect acquisition judgment, or does it simply reflect the fact that many of its bigger acquisitions took place some time ago and have already been written down under previous rules? Are its competitors being unduly hard on themselves?

Omnicom was the best marketing-services company performer in 2002, whereas WPP has been regularly talking down market expectations ahead of relatively dull results. (Keep in mind significant benefits might have been expected for WPP from the Young & Rubicam and Tempus Group acquisitions in recent years.) But performance is not the whole story. At the net income level, Omnicom’s results seem to have enjoyed an extra boost from its financial-management and presentation skills.