Mixed Results for Holding Companies in Q1
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Holmes Report

Mixed Results for Holding Companies in Q1

While Omnicom Group beat analyst expectations, the Interpublic Group of Companies fell slightly short of estimates, and WPP Group also turned in what one Merrill Lynch analyst described as “very disappointing” numbers.

Paul Holmes


NEW YORK and LONDON, May 5—The recession resulted in a mixed first quarter for the giant advertising agency holding companies. While Omnicom Group (parent of Fleishman-Hillard, Porter Novelli, and Ketchum) beat analyst expectations, the Interpublic Group of Companies (WeberShandwick Worldwide, Golin/Harris) fell slightly short of estimates, and WPP Group (Burson-Marsteller, Hill & Knowlton, Ogilvy Public Relations Worldwide) also turned in what one Merrill Lynch analyst described as “very disappointing” numbers.

“Revenue growth has clearly slipped,” says Abe Jones of AdMedia Partners, an investment banking and financial advisory firm focused on the advertising and PR sectors. “It’s not going to be a great year for any of the majors.

“At IPG, for example, revenues were up about 6 percent over last year in the first quarter. In recent years, the number would have been closer to 10 percent. Clearly, it’s a reflection of the pressure on advertising budgets and to a certain extent of the pressure on budgets for other marketing services. That’s been offset by some significant new business, but not enough to make up for the losses.”

Interpublic missed analysts’ first-quarter earnings expectations and issued a profit warning for the rest of the year. The company posted a first-quarter net loss of $38.4 million, or 12 cents a share, compared with first quarter 2000 net income of $42.9 million, or 14 cents a share. Excluding a $160.1 million charge resulting primarily from its investment in bankrupt Internet consultant MarchFirst, Interpublic said it would have earned $65.3 million, or 21 cents a share. 

The WPP numbers, says Jones, were more difficult to interpret because they included the newly integrated Young & Rubicam operations. But “our interpretation is that their organic revenue growth, including PR, is lower” than in previous years. Revenue growth for the first quarter—excluding currency fluctuations and acquisitions—was about six percent, down from 14 percent in the same period a year ago

The company itself admitted that the slowdown in the U.S. economy had stunted first quarter revenue growth. It also said that some of its high-growth marketing services operations, including public relations and public affairs, branding and corporate identity, and healthcare, had been affected the most by the slowdown.

But WPP also said it remains on track to achieve operating margin for 2001 of 15 percent, up from 14 percent in 2000. 

Omnicom said its first-quarter earnings were $95.3 million, or around 52 cents a share—beating analyst estimates by a penny or two. Revenues grew to $1.6 billion from $1.4 billion in the first quarter of last year, and Omnicom also reported impressive new business results, with net new business of $1.34 billion, compared to just $365 million at competitor WPP.

The company drew generally bullish comments from analysts. According to Karen Ficker of ING Barings, “In an environment when clients are jittery you typically have a flight to quality or size. Omnicom satisfies clients’ needs for size and diversity.”

“Omnicom has seen better growth,” than many of its competitors, says Jones. “It’s profits were better than the analysts’ estimates, and I think the diversification of its business has been a big factor—as well as the fact that it has been very successful on the new business front. I would say that Omnicom has been hurt the least.”

Despite the much-publicized layoffs at public relations firms, and the pessimistic comments coming out of WPP, Jones believes the PR industry can hold its own during the downturn.

“I think that when the results are sorted out at the end of the year, PR is still going to look pretty good in comparison to advertising,” says Jones. “It’s our impression that the PR sector—with the exception of those firms focused on the technology sector, or with a lot of dot-com business—will still hold up better than the advertising sector.”

He also says he has seen little softening of the mergers and acquisitions marketplace. “There’s still intense interest in specialist firms in healthcare and investor relations, and even in certain sectors of the technology business,” says Jones. “And the multinational agencies are continuing to look outside the U.S., particularly at those markets that have not been hard hit by the downturn.

“The valuations are not as high as they were,” says Jones. “And acquiring agencies are taking a lot more time over due diligence than they did in the past. We’re not going to see some the multiples that were paid last year for investor relations firm—those prices probably won’t be seen again—but for quality firms the multiples are holding up well.”






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