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SeekingAlpha  Oct 15  Comment 
By Qaim Wynter: Interpublic Group of Companies (NYSE:IPG) is one of the "big four" advertising dgencies along with WPP (NYSE:WPP), Omnicom (NYSE:OMC), and Publicis (OTCQX:PUBGY). Their advertising work is done by McCann Worldgroup, Lowe &...
Market Intelligence Center  Sep 23  Comment 
MarketIntelligenceCenter.com's patented trade-picking algorithms have identified an attractive covered-call trade on Interpublic Group of Companies Inc. (IPG). Look at the Jan. '15 $18.00 covered call for a net debit in the $17.06 area. This...
Reuters  Sep 11  Comment 
A Dentsu Aegis executive said on Thursday that the advertising company was not interested in acquiring rival Interpublic Group of Cos, putting merger speculation to rest for the...
Market Intelligence Center  Sep 10  Comment 
After closing Tuesday at $19.26, Interpublic Group of Companies Inc. (IPG) presents an attractive opportunity to get a 5.50% return in just 129 days, which is an annualized return of 15.55% (for comparison purposes only). To enter this trade,...
Benzinga  Sep 4  Comment 
Interpublic Group (NYSE: IPG) and Placed announced today that they have entered into a strategic partnership, which includes an investment by the global marketing company in Placed. Placed is the leader in mobile attribution, measuring the...
DailyFinance  Sep 3  Comment 
Five Cities Targeted as Part of National Marketing Campaign PRINCE GEORGE, BRITISH COLUMBIA -- (Marketwired) -- 09/03/14 -- A new Initiatives Prince George (IPG) marketing campaign is being targeted at five Canadian cities in an effort to attract...
Forbes  Aug 29  Comment 
The worst performing sector as of midday Friday is the Services sector, showing a 0.1% loss. Within the sector, Wynn Resorts (NASD: WYNN) and Interpublic Group of Companies (NYSE: IPG) are two of the day's laggards, showing a loss of 2.1% and...
Cloud Computing  Aug 20  Comment 
NEW YORK, NY--(Marketwired - August 20, 2014) - BBN, the global leader of large-scale B2B digital marketing solutions, today announced the launch of its automated private marketplace exclusively populated with business decision makers. The BBN...
Market Intelligence Center  Aug 6  Comment 
After Tuesday’s trading in Interpublic Group of Companies Inc. (IPG) MarketIntelligenceCenter.com's patented algorithms uncovered a trade that offers a 5.44% return or 12.10% on an annualized basis (for comparison purposes only), while...




 

The world's third-largest marketing and advertising conglomerate by revenues, the Interpublic Group of Companies is organized as a holding company for independent advertising and communication services firms. Over half of Interpublic's revenues (58%) come from print and traditional media advertising such as television, newspapers, and magazines.[1] The remaining 42% comes from marketing services such as public relations and customer relationship management.[1] In 2007, Interpublic's largest clients included General Motors (GM), Microsoft (MSFT), JOHNSON & JOHNSON (JNJ), Unilever (UL), and Verizon Communications (VZ).[1]

Once the industry leader by revenues, Interpublic lost momentum in the 1990s as it struggled to integrate a string of over 400 acquisitions. The firm racked up $2B of debt related to the acquisitions, sold 51 of them, and even in 2008 it continues to face restructuring expenses and impairment charges.[2] As a result, the company's revenue growth has been volatile; for instance, revenues rose only 2% during the period 2004-2007 (from $6.4 to $6.6B), while net income was negative for four years until 2007. [3]

The volatility in advertising spending is another underlying cause of the erratic revenue growth. Advertising spending is closely tied to economic cycles, and in 2008 consumer confidence is at a historic low point and companies are cutting back on their marketing expenditures as a result.[4] The strong growth in digital advertising, meanwhile, creates new competitors for Interpublic - stand-alone digital advertising agencies - and has pushed the firm to respond by acquiring and entering into partnerships with such agencies.[5] Interpublic had stopped all acquisitions in 2004, but it re-opened its coffers to purchase a stake in Spongecell in 2007, which provides digital marketing tools for event-planning. IPG has also formed partnerships with agencies like Radian6, an internet brand reputation firm, and Velti, a mobile phone marketing firm.[1]


Company Overview

Interpublic Revenues and Net Income
Interpublic Revenues and Net Income[3]
2007 Revenues by Segment
2007 Revenues by Segment [1]

Interpublic's agencies provide clients with services in advertising, direct and online marketing, public relations, market research, and event planning.[6] The firm charges clients a flat fee for each project, calculated based on hourly rates and company overhead and negotiated individually with each client. With some clients, the firm arranges to receive part of its fee as an incentive if its marketing campaigns achieve certain desired results.[7] Interpublic's revenues are seasonal, rising in the second half of the year as clients increase marketing expenditures ahead of the holidays and falling after the season ends.[8] Its top 10 customers accounted for 26% of revenues in 2007.[9]

Historically, Interpublic has grown primarily through acquisitions, purchasing 400 companies during one four-year period in the 1990s. However, the firm did not successfully integrate these new agencies into its operations, and has since spent over $2 billion dollars to deal with issues such as impairment charges,restructuring costs, and restating earnings.[2] Since 2002, the firm has worked to implement a turnaround plan, the main tenets of which include:[10]

  • Cutting the number of acquisitions (it purchased only 4 firms from 2003-2004 and none in 2005-2006).
  • Selling the least profitable of its past acquisitions (51 companies sold during 2005-2006 alone).
  • Closing the majority of the offices of Lowe Worldwide, a particularly troubled agency.
  • Cost-cutting measures, such as centralizing the financial systems used by IPG agencies, shrinking their number to 4 from 150.

Business and Financial Metrics

In 2007, Interpublic's revenues rose 5.9% to reach $6.6 billion. The majority (3.8%) was comprised of organic revenue growth, driven primarily by increased business from existing clients, and to a lesser extent by new client business in advertising and public relations. In addition to organic revenue growth, Interpublic also increased revenues through selling some of its agencies and benefited from the strength in several of the currencies in the nations where it conducts business (specifically the pound and the Euro).[11]

Net income rose dramatically in 2007 to reach positive territory for the first time in five years ($131.3 million compared to a loss of $79.3 million in 2006).[3] Salaries and administrative expenses decreased as a percentage of revenues, resulting in a significant increase in operating margins (from 1.7% in 2006 to 5.3% in 2007).[12] However the effects of Interpublic's acquisition spree continued to have a negative impact on net income as the firm gets its finances into order, spending on restructuring costs, audit fees, and the like.

IPG 2005 2006 2007
Total revenue ($mm) $6,274.3 $6,190.8 $6,554.2
International Revenue (%) 44.8% 44.6% 44.0%
Revenue from Top 10 Clients (%) 25% 25% 26%
Operating Margins (%) (1.7%) 1.7% 5.3%
[13]

Business Segments

  • Integrated Agency Networks (84% of revenues, 90% of income): IAN accounts for the majority of Interpublic's business, and includes its flagship agencies (McCann WorldGroup, DraftFCB, and Lowe), as well as media agencies and standalone agencies. The McCann group of agencies, which comprises a large portion of this segment, is Interpublic's best known brand, operating in over 100 countries.[1]
  • Constituency Management Group (16% of revenues, 10% of income): A much smaller segment accounting for only 16% of revenues in 2007, CMG is comprised of agencies that provide specialized services including 1) marketing services (i.e. public relations) 2) event marketing, 3) branding, and 4) sports marketing. The segment's brands include Weber Shandwick, MWW Group, FutureBrand, De Vries, Golin Harris, Jack Morton, and Octacon.[1]

Key Trends, Risks, and Forces

Interpublic Revenues by Georgraphy
Interpublic Revenues by Georgraphy [14]
 Ad Spending Growth Worldwide
Ad Spending Growth Worldwide[15]

Growth in Advertising Spending is Uncertain Due to the Economic Slowdown

Advertising spending, which accounts for over half of Interpublic's revenues,[16] grew less than 1% nationwide in 2007 over the previous year due to weakness in the housing market and growing fears of a recession. As the effects of the subprime crisis continue to spread, threatening to pull the economy as a whole into a recession, 2008 may again see little growth (0-1%) in advertising spending. [4] Factors that may limit ad spending include its historical volatility and correlation with general economic growth and such macroeconomic factors as oil prices and the U.S. housing market.[16] During recessionary periods, firms slash advertising budgets, which translates into lower revenues for advertising agencies. On the other hand, several high-profile events, including the Summer Olympics, the Euro 2008 Soccer Tournament, and the US presidential elections increase ad spending, and may counteract the effect of the recessionary macroeconomic environment. The most recent data available (Q1 2008) suggest that ad spending has so far remained relatively flat compared to the previous year.[17]

Rise of Internet Advertising Creates New Competitors

Over the past few years, Internet advertising has become the fastest-growing segment of total ad spending, rising at a 20% rate in the first half of 2008.[18] As a result, Iarge holding companies like Interpublic have made mastery of this medium a priority. Small, nimble agencies focusing on digital advertising exclusively (for instance, AKQA in San Francisco and iCrossing in Scottsdale, Arizona),[19] as well as video hosting and community platform providers, have become serious competitors to these conglomerates. Revenue at such firms grew 26.8% in 2007 in the US alone.[5] Interpublic has responded to the threat from specialty firms by working to develop partnerships and joint ventures with them. For instance, the firm recently partnered with SocialVibe to focus on the marketing power of social networks by giving members incentives to participate in advertising schemes.[20] Interpublic has also worked to develop its own digital offerings, such as R/GA, a specialty digital agency that designs interactive campaigns for clients.[21]

Clients Increasingly Demand Accountability from Advertising Agencies

Traditionally, advertising agencies have been paid fees and commissions that do not depend on the success of the campaigns they create. As technology to accurately measure the impact of various marketing tools becomes available, however, some clients insist on tying agencies' fees to results.[22] This may mean counting the number of times an internet ad has been viewed or measuring the increase in sales of a certain product following an ad campaign; regardless, the shift has forced firms to rethink their business models to provide customers with the quantitative data they demand.[23] Interpublic has responded to client demands of accountability by merging two of its most prominent agencies into Draftfcb, one of the first agencies to use data-driven techniques that use quantitative analysis to measure the impact of marketing campaigns in consumer advertising. [24]

Excessive Dependence on Developed Advertising Markets Leaves Little Room for Growth

Ad spending in developed markets is growing at a much slower rate than in developing regions, remaining below 5% annually in both North America and Western Europe. By comparison, annual growth rates are higher than 10% in the Middle East and Asia and approximately 20% in Eastern Europe and America.[15] Interpublic, however, is heavily reliant on the mature and slowing markets in the US and Western Europe - in 2007, the firm received 56% of revenues from the US, 17% from Euro markets, 9% from the U.K., and only 18% from other locations. Out of the four biggest advertising firms, Interpublic is most reliant on the United States market.[1] To improve its global position, the firm has invested in developing markets such as India, where it already owns three agency networks, Russia, where it partners with the leading advertising agency in the nation, China, and Brazil.[24]

Competition

Interpublic competes with other multinational advertising conglomerates, small specialty advertising agencies, and new types of firms such as internet and database marketing and modeling firms.[25] The firm competes by focusing on recruiting talent from competitors for both creative and management positions, and developing its digital capabilities by purchasing or entering into partnerships with stand-alone digital agencies.[26] Furthermore, the firm has integrated digital capabilities into its more traditional service offerings. For instance, its public relations agencies have begun using blogs and social networking websites, while its special events agencies collect key data using online surveys.[24]

Despite signs that its turnaround strategies are bearing fruit (i.e. posting a positive net income in 2007 for the first time in five years), Interpublic remains in a weak competitive position compared to main rivals Omnicom Group (OMC) and WPP Group (WPPGY), which both overtook it in annual revenues during the past decade, as well as Publicis Groupe S.A. (PUB), whose revenues are now nearly on par with Interpublic's. The firm's percentage of international revenues is lower than those of all three peer firms, which suggests limited access to those markets that are growing most rapidly. Its operating margins, though they have improved over the past several years, remain far lower than those of competitors.


Company IPG Omnicom WPP Group Publicis
Total revenue ($mm) $6,554.2 $12,694.0 $12,383.2 $6,384.0
International Revenue (%) 44.0% 68.2% 63.4% 58.0%
Revenue from Top 10 Clients (%) 26.0% 18.3% 22.0% 35.0%
Operating Margins (%) 5.3% 13.1% 15.0% 16.7%
[27]

Market Share

Market Share of Major Advertising Firms, 2007
Market Share of Major Advertising Firms, 2007 [28]

Over 1000 advertising agencies of various sizes and specialties exist in the United States alone. However, the market is dominated by the "Big Four," the four largest advertising conglomerates, which accounted for over half of the $31.1 billion total US advertising revenues in 2007.[29]

  • Omnicom Group (OMC): The largest advertising company in the world, Omnicom distinguishes itself from competitors by focusing on developing markets and nontraditional advertising methods. Omnicom's revenues have grown at a steady 11.8% annually over the past five years, ahead of most competitors. Omnicom's organic growth rate, 7.1% in 2007, is the highest in the industry. [30]
  • WPP Group (WPPGY): Following its 2005 acquisition of US rival Grey Group, for which it competed with private equity firms as well as competitor Havas (see below), London-based WPP group has become the second largest advertising conglomerate in the world, earning $11,574 in 2007. The firm is attempting to boost its nontraditional advertising offerings and take the #1 spot in the industry with a steady stream of acquisitions, including online game creator WildTangent and interactive marketing agency Blast Radius. While these may boost the firm's competitive position, they also increase its integration risk - WPP spent much of the first half of 2006 integrating Grey Group's businesses into its own. WPP recently signed a $4.5 billion deal to provide Dell (DELL) with advertising for the next three years.[31]
  • Publicis Groupe S.A. (PUB): Like its French rival Havas, Publicis has been struggling to keep up with Omnicom, IPG, and WPP Group. The company has focused on making strategic acquisitions to diversify both its service offerings and geographic reach. The former category includes French healthcare communications specialist BOZ Group and US-based digital marketing firm Digitas. The latter includes several Asian purchases such as events management group Emotion and the 30 Chinese offices of promotional marketing firm Yong Yang. The firm's revenues have been volatile over the past few years, growing 18% in 2006, but falling 7% the previous year.[32]
  • Havas Advertising: Havas is organized into three divisions and provides a variety of traditional advertising and other specialized marketing services. The company distinguishes itself from competitors with a more nimble, integrated organizational structure. [33] However, the French conglomerate has fallen behind the top three advertising firms in the past few years. For instance, revenues fell a total of 33% from 2001 to 2005. [34]





References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Interpublic Group of Cos.: 2007 Year in Review
  2. 2.0 2.1 The Shock Waves Rocking Interpublic, Business Week
  3. 3.0 3.1 3.2 Interpublic 2007 10-K Section 6 - Selected Financial Data p. 15
  4. 4.0 4.1 Joshua Chaffin. "US advertising faces 'another poor year'." Financial Times (FT.Com) December 4, 2007.
  5. 5.0 5.1 Revenue Grows 8.6%, Propelled by Digital
  6. IPG Corporate Website Company Profile
  7. Interpublic 2007 10-K Section 1 - Business p. 6-7
  8. Interpublic 2007 10-K Section 7 - MD&A p. 16
  9. Interpublic 2007 10-K Section 1 - Business p. 7
  10. Interpublic Vows Change at Wall St. Show and Tell
  11. Interpublic 2007 10-K Section 7 - MD&A p. 22
  12. Interpublic 2007 10-K Section 7 - MD&A p. 23-24
  13. Data from 2005, 2006, and 2007 10-Ks
  14. Interpublic 2007 10-K Item 1 Business, p. 6
  15. 15.0 15.1 Cheery Outlook for World Ad Spending
  16. 16.0 16.1 Interpublic 2007 10-K Item 1 Business, p. 9
  17. U.S. Advertising Spending Is Flat In First Quarter 2008, Nielsen Reports
  18. Gap Widens in Online Advertising
  19. Top 50 Digital Agencies - AdAge
  20. Interpublic Unveils New Lab Initiative, Backs Platform That Links Brands With Social Networks
  21. Interpublic 2007 10-K Item 1 Business, p. 4
  22. Accountability in Advertising
  23. Reinventing agency jobs
  24. 24.0 24.1 24.2 Interpublic 2007 10-K Item 1 Business, p. 5
  25. Interpublic 2007 10-K Section 1 - Business p.8
  26. Interpublic 2007 10-K Section 7 - MD&A p. 16
  27. Data from Ad Age Market Research
  28. Ad Age's 64th annual agency report
  29. Agency Family Trees 2008
  30. Omnicom Wikinvest Article
  31. WPP Group Hoovers Profile
  32. Publicis Hoovers Profile
  33. Havas Hoovers' Profile
  34. Havas 2006 Annual Report Item 1 Business p. 2
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