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September 20, 2005
Shareholder Proposal To Break Up IPG Goes Forward
The Securities and Exchange Commission denied Interpublic Group of Cos.’ request to squash a shareholder proposal for the sale of the company, an action that could certainly lead to a shareholder referendum this fall on whether to put Interpublic on the block.
Interpublic, the parent company of McCann-Erickson, FCB, Lowe, Deutsch and others last July asked the SEC to support the company’s desire to keep a proposal by activist shareholder Charles Miller off the proxy for its 2005 annual meeting. IPG doesn't want restless shareholders who have seen the value of their holdings plummet in the last five years get to vote on Mr. Miller’s “Maximum Value Resolution,” a non-binding proposal urging IPG's board to try and sell the company to the highest bidder.
IPG is the target of an ongoing SEC inquiry stemming from the company's finding of accounting irregularities in 2002. Interpublic said last week that its own investigation had discovered employee missconduct including falsifying records, misappropriating assets and “inappropriate customer charges and dealing with vendors.” The company cited law breaking by empoloyees," and says it's mostly concentrated overseas. IPG already restated earnings from 1995 to 1999 and said last week it will restate earnnigs from 2000-2004
The stock closed Monday at $11.05, down 22 cents and off 68% from its 2002 high point.
IPG is suffering from the strategy and management philosophy of former IPG chairman Phil Geier who ran the company in the 1990s and stepped down at the end of 2000. He was succeeded by McCann-Erickson chief John Dooner who ran the company quite unsuccessfully for two years before being returned to run McCann. Dooner was a board member during Geier's term.
Geier and his chief financial officer Eugene Beard had a mystique within IPG and in the ad business during the 1990s. I had the perspective of not only being a reporter and editor at Adweek in those years, but an IPG employee for three years at Lowe & Partners.
Geier's decisions were almost never challenged internally, even around the water-cooler. But he was terribly indulgent, especially of Frank Lowe who was allowed to shop for agencies around the world like a trust fund doyenne at Bergdorf's. The height of Mr. Lowe's indulgences came when he pursued a purchase of his favorite soccer team, Manchester United, with shareholder money. When he lost out, he, all juiced up to buy a sports property, spent for Formula One race tracks in Great Britain plus hideously expensive convenants that put IPG on the hook for hundreds of millions in losses. [I won't even go into the hideously expensive and wasteful spending racked up by Lowe on the agency's New York headquarters office on Bryant Park that housed the agency for barely five years. Let's just say that the idiots who installed video monitors in the floor at Lowe's request, amidst the Isreali limestone and Italian marble tiles, neglected to vent the monitors properly so they kept burning out bfore finally being turned off for good. And then there was the conference table that cost over $1,000 to take apart every time we wanted to use the room for a function. Then, there was the time he hired Paul McCartney's concert producer to stage a new-business presentation for Burger King. Lowe lost and the winning agency put on a low-key, all-business presentation across the street at The New York Public Library.]
But while Geier allowed his operating heads of agencies to bulk up on redundant full-service creative agencies around the world, the company's investments in media buying and planning resources were insufficient. And IPG is paying for that now as it loses business to the better resourced Publicis, Omnicom and WPP. It's trying to rebuild its media offerings, but at a time of profound weakness. It's a tough nut when there is a sell recommendation on the stock and the agencies continue to lose big business.
It isn't difficult to figure out how this happened. Think about it. Guy like Frank Lowe go around rolling up ad agencies in Spain and eastern Europe and the Dar East and Middle East. These agencies were privately held by the individuals who just got rich off an IPG payday. God knows what accounting standards they were following before the deal. Now, they are reporting into some structure that they just married. All they know, for the most part, is that they have a number to hit. So they hit...anyway they can. Some of these transactions, I am told, are loopy, with little accountability as to whether the money is real. Worse, for IPG, according to Merrill Lynch analyst Lauren Rich Fine in an interview I conducted with her, IPG was pooling earnings in the Geier/Beard era. In other words, the company took combined results from these acquired companies over multiple quarters and stated them in one quarter after the IPG takeover. Then, sometimes, they would restate them. It was a mess.
If IPG were broken up, it's doubtful that any agency holding company would buy it all. Instead, it would go piecemeal. Campbell-Ewald to Publicis; Deutsch to Omnicom, etc. And some shops, I suspect, will just seek to buy themselves back, and then pursue sales later.
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