Why It’ll Be Tough For IPG To Make Good On Promise

Interpublic Group CEO Michael Roth still vows to achieve peer-level growth and double-digit margins by the end of 2008. And while last week’s report on 2006 results showed signs of progress—including marginally positive organic growth—several industry analysts remain unconvinced that the No. 3 holding company will meet its aggressive goals.

At the end of 2006, IPG’s operating margin stood at -1.7 percent, compared to 13 percent at Omnicom Group, 14.5 percent at WPP Group and 16.3 percent at Publicis Groupe. At this stage of IPG’s turnaround, following already deep cost-cutting, it’s going to be difficult to achieve an 11 point margin gain.

“We view the target of double-digit operating margin by 2008 as more of a stretch . . . as significant reductions to salary expenses, which have been challenging to achieve so far, would likely be required,” wrote William Blair & Co.’s Troy Mastin, in a report issued on Friday.

Even if IPG continues to slash costs, such as those related to professional fees and severance, it will still be hard-pressed to reach its double-digit margin goal, wrote Merrill Lynch analyst Lauren Rich Fine in a report titled, “Still Skeptical; Maintain Sell.”

Based on a projected $260 million reduction in severance and professional fees between 2005 and 2008, “We are still only able to reach 7.3 percent margins, well below IPG’s 10 percent target,” Fine wrote. “We cannot assume much in the way of head-count reductions as new business is growing and we presume [that IPG] will have to find a way to pay its people. We have reduced office and general costs, so we are unsure where else to cut,” Fine added. “We think the goal is dependent on revenue growth, which is hard to project with any confidence given the relative lack of momentum.”

Indeed, IPG significantly trails its peers when it comes to organic revenue growth. While Omnicom, WPP and Publicis reported organic growth in the 5-8 percent range last year, IPG mustered just a 1 percent gain. That’s a significant swing from the -3 percent organic revenue loss IPG had at the end of 2005. Still, what’s the likelihood that the $6.19 billion company can continue to climb at that rate in less than two years?

For perspective, consider that in 2001, IPG reported $6.59 billion in revenue. The same year, Omnicom reported $6.88 billion in revenue. Since then, Omnicom has grown its revenue by 66% to $11.4 billion, while IPG’s revenue has declined 4 percent, in large part due to a series of restatements related to accounting and financial control problems. What’s more, last year’s total represented a 1 percent decline from 2005.

Still, Roth maintained Friday that IPG was “on track” to achieve its ’08 targets. “In order to do so, we must not only aggressively manage staff costs and keep showing progress against office and general expenses, we must also continue to grow. We made significant progress in a number of areas last year and will look to build on this momentum in 2007.”