As the Interpublic Group of Companies' chairman and chief executive, Michael Roth, finally talked analysts through the company's restated results last Friday, the vultures had already begun to circle.
IPG restated $550 million for the period of 2000 to 2004, while belatedly revealing a net loss of $558.2 million for 2004. But if Roth thought this would draw a line under the company's troubles, he was mistaken. For having battled so long to mop up an accounting scandal, IPG's management team now has to deal with the possible break-up and sale of the company.
Later this month, the disgruntled IPG shareholder Charles Miller will put his "maximum value" resolution before his fellow shareholders at the company's AGM, calling for the holding company's "prompt sale".
IPG is thought to be worth around $6 billion. However, there is no obvious buyer for the entire holding company. Beyond the company's unworkable size and huge price tag, investors are also unclear as to what value IPG has bestowed upon its networks, beyond merely providing the funds for acquisition.
A far more likely scenario is that these networks will be sold off individually.
The Securities and Exchange Commission could just slap IPG on the wrist and issue it with a fine. However, it could also take a sterner view and rule that a network of senior managers had benefited personally, whether knowingly or not, from the actions of their colleagues. Clients would find this hard to stomach and potential buyers for McCann will be aware that the network could lose several big-money accounts in the wake of a negative SEC ruling.
Of course, it's also conceivable that the shareholders may choose not to sell. The markets seem to have been impressed by Roth's performance last week - by close of business last Friday, shares had risen 3.84 per cent to $11.64.
IPG's share price, which was once as high as $35, has plummeted in recent years and although the accounting scandal hasn't helped matters, this decline began before the irregularities came to light as the company battled to deal with the legacy of the former chief executive Phil Geier's 400 acquisitions in the 90s.
IPG's shareholders could decide to show faith in Roth, trusting him to fatten their assets in preparation for a more lucrative sell-off at a later date. There's no doubt Wall Street will have been reassured as to the validity of the new figures; Roth went over IPG's books with a fine-tooth comb before announcing the results last Friday. That distraction over, Roth can concentrate on organic growth.
However, with the SEC ruling around the corner, the situation at IPG could get worse. Shareholders need only look to the example of Cordiant for proof of how quickly a holding company can unravel.
- Perspective, page 21
THE RESTATED ACCOUNTS MAIN CONTRIBUTORS TO ACCOUNT RESTATEMENT Reduced by dollars m Client revenue recognised incorrectly 257 Media discounts and credits 185 Earn-outs etc, that should have been treated as remuneration 70 Pre-acquisition profits included in error 56 Internal investigations (including fraud) 35 Accounting for leases 35 Personal-service companies etc 33 671 Offset by Goodwill impairment charged in error -145 Other -12 Total reduction in results 514 Source: Marketing Services Financial Intelligence.
COMMENT - IPG restatement raises serious questions
Two questions were posed by last week's revelation that one of the biggest contributors to Interpublic's embarrassing $514 million rewrite of its accounts was the removal of a $185 million profit contribution from "media credits" to which the group was not legally entitled.
First, are such practices more widespread and likely to lead to further revelations from other media buyers?
Second, what does it say about financial management at Interpublic?
Media credits come in various forms. Some are the legitimate property of the media agency. Others are not. Volume discounts are an obvious example.
The agency may receive an annual "rebate" if it commits to, and/or subsequently delivers, a predetermined volume of media spend. That rebate may be in the form of "free" or discounted advertising spots that the agency is free to use in any manner it chooses - perhaps to attract a new client.
Whether the rebate belongs to the clients who provide the volume or to the agency will usually depend on the contractual terms. After spending millions of dollars on extra finance staff and professional fees poring through individual contracts, the company appears to have concluded that the contractual entitlement was commonly in favour of the client.
But media credits were not the sole cause of Interpublic's overstated financial results, nor was this latest disclosure of financial shortcomings the first. Other errors revealed last week included recognition of media revenues at time of billing instead of when contractually earned, incorrect accounting for acquisitions, improper accounting for leases, the use of personal-service companies and even fraud.
Before these revelations, the group had already incurred humiliating exceptional write-offs for a variety of reasons, totalling nearly $3 billion since 1999. And, in 2002, the group had admitted other accounting errors totalling $181 million - including inter-office client charges that subsequently proved irrecoverable.
Frank Mergenthaier, the latest in a string of chief financial officers who have been parachuted in to sort out the mess, blamed many of the latest problems on three areas of weakness - lack of proper integration of acquired businesses into the group, lack of competent financial management and lack of adequate procedures. This was a com-pany where results mattered, but the means of recording them didn't.
Now the chairman and chief executive, Michael Roth, is confident the company can put the past behind it. "It was essential to get this right and for it not to be repeated," he commented.
However, the losses continue and group reserves were dented by another $139 million in the first six months of 2005. Despite this, the balance sheet remains fairly strong and the management says it has no plans to divest significant assets. In reality, that decision will depend on whether the group's fortunes recover swiftly or not.
- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.
HOW INTERPUBLIC'S NETWORKS SHAPE UP
MCCANN WORLDGROUP
Estimated value: $3.5bn
Clients: Microsoft, L'Oreal, Nestle, Unilever
Wins and losses: $3.5bn US GM business lost by Universal. McCann Erickson won global Credit Suisse and Intel, but lost global Vaseline.
Lowdown: McCann is still a powerhouse, but needs to reassure key clients that its troubles are a thing of the past. Rumours are circulating that its EMEA chief, Rupert Howell, is seeking backers for an MBO, something he strenuously denies.
FOOTE CONE & BELDING
Value: $500m
Clients: SC Johnson, BDF Beiersdorf, Motorola
Wins and losses: Lost Samsung to WPP. FCBi recently landed global Motorola DM and digital account.
Lowdown: In its present state, there's no obvious buyer for FCB. Much will depend on whether its new chief executive, Steve Blamer, convinces investors he has the network moving in the right direction. A merger with Lowe could boost its value.
DRAFT WORLDWIDE
Value: $400m
Clients: GM, Nokia (pictured), Procter & Gamble, HP, Masterfoods
Wins and losses: Lost Bank of America account in the US.
Lowdown: If IPG stays together, many expect Draft Worldwide to be merged with Lowe.
INITIATIVE
Value: $300m
Clients: Unilever, Orange, GM, Johnson & Johnson
Wins and losses: Lost pan-European Unilever to MindShare last year. Won easyGroup globally.
Lowdown: With both Publicis and Havas looking to bolster their media offerings, the Initiative network would almost certainly attract buyers.
LOWE WORLDWIDE
Value: $300m
Clients: GM, Nestle, Reebok, Unilever, Tesco
Wins and losses: Lost global HSBC account to WPP. Lost pan-European Flora account to BBH and saw global Braun account consolidated into BBDO. Won global Nokia brief in February.
Lowdown: Rumours include former Lowe chief Jerry Judge teaming up with Howard Draft to lead a Lowe/Draft merger and Sir Frank Lowe again planning to back a Lowe management buyout.
DEUTSCH
Value: $150m
Clients: Johnson & Johnson (pictured), Novartis, TGI Fridays
Wins and losses: Won Babies 'R' Us; lost Monster.com, Revlon, Coors Light.
Lowdown: A string of recent losses means selling Deutsch now might undervalue the network.
THE REST ...
IPG's disparate collection of interests includes the branding network Futurebrands, the experiential marketing agency Jack Morton and the film trailer specialist Kaleidoscope. Some of these may blossom if freed from IPG's shackles, so management buyouts might be the order of the day. The largest of this number is the global PR shop Weber Shandwick. The former chief executive, Larry Weber, is rumoured to be considering buying his old company.
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