Omnicom Responds Angrily to Journal Article
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Omnicom Responds Angrily to Journal Article

Communications holding company Omnicom was in crisis mode at the end of last week after a highly critical article in The Wall Street Journal and several bullish analyst reports sent its stock tumbling by as much as 30 percent.

Paul Holmes

NEW YORK, June 17—Communications holding company Omnicom—parent of Fleishman-Hillard, Ketchum, Porter Novelli and several smaller public relations firms—was in crisis mode at the end of last week after a highly critical article in The Wall Street Journal and several bullish analyst reports sent its stock tumbling by 30 percent.
The criticism clearly came as a surprise to Omnicom, which had been the Wall Street darling among the giant holding companies, maintaining impressive growth and profit numbers at a time when competitors such as Interpublic and WPP Group were in decline. Last year was Omnicom’s 15th consecutive year of revenue and profit growth, and over the past five years the company has grown at a compounded annual rate of better than 20 percent.
Omnicom chief executive John Wren immediately conducted a conference call in an attempt to prevent Wall Street over-reaction. “We take this very seriously,” he told analysts. “This morning was a total surprise. There is nothing I believe of news hereto anyone who follows us. The only new thing was innuendo. There is absolutely no concern about the company, its client base or its operations.”
The company stock rallied slightly in response to the call, although it still ended the day down about 25 percent.
The company’s board of directors also issued a public statement, saying: “We disagree with today’s Wall Street Journal article about the company. There is no controversy on the board. We fully support the company’s strategy, and are confident in its operating results, accounting practices and financial disclosures.”
Finally, the company moved quickly to communicate with its employees, forwarding analyst reports from UBSWarburg (“We believe the company has the best portfolio of assets in agency space… We are reiterating out buy rating. We believe the selling is overdone) and Salomon Smith Barney (“We believe the company’s response to recent allegations is credible and complete.”)
Omnicom executives said the company—long criticized for lack of communication—would be making several changes in the coming weeks to improve transparency.
The Journal story suggested that Omnicom’s growth had been fueled largely by acquisitions—73 in 2000 and 2001—and warned that acquisition earn outs created a potential liability of $250 million or more, that the company is not required to carry on its books.
According to the Journal, Omnicom has been “more aggressive” than its competitors in the way it calculates how much growth has been generated by acquisitions.
“The company makes it difficult to evaluate its growth numbers,” according to the Journal story. “As is true for most high-volume acquirers, Omnicom buys much of its growth when it absorbs other companies…. Omnicom says a little less than half of its 11.9 percent revenue growth last year was organic. But there isn’t any one official way to calculate organic growth, and Omnicom uses the term more expansively than its main rivals.”
Interpublic and WPP say they exclude the results of just-acquired companies from their organic-growth calculations until one year after acquisition. By contrast, Omnicom includes any newly generated revenue of just-acquired companies immediately, tending to pump up the organic-growth rate.
Said the Journal, “It is impossible to figure out independently how much revenue or income growth Omnicom buys because critical aspects of its deal machine are mysteries. With few exceptions, the company doesn’t report the revenue or profit of acquisitions, nor does it break down the individual prices it pays for them.”
Wren responded that Omnicom complies with all accounting industry and Securities & Exchange Commission requirements for reporting acquisitions.
An additional concern is the gap between Omnicom’s bottom line and its cash flow. While the company’s net income rose to $503 million in 2001 from $362 million in 1999, cash flow over a three-year period declined from $972 million to $775 million. “What’s more,” said the Journal, “if cash spent on acquisitions is subtracted, the company has a negative cash flow: less coming in than going out. That means it has to rely on selling stock or incurring debt to fund its operations.”
While the ad sector was booming, and Omnicom continued to make big acquisitions, there were few questions, but in the current environment—with advertising and PR revenues flat and corporate accounting practices under intense scrutiny following a series of scandals—the company is under more intense scrutiny.
A further concern involves earn outs for senior executives at acquired companies. Earn out payments are not treated as compensation, but as acquisition expenses. That means Omnicom does not have to subtract those expenses from the bottom line, which means they get less attention from investors.
Wren said Omnicom properly accounts for all earn-out deals. Other firms typically use the same approach.
Wren was also was eager to distance Omnicom from other acquisitive companies that have faced intense scrutiny since the Enron scandal. Omnicom is not a conglomerate but a highly focused communications company. “We are hardly a serial acquirer,” Wren insists. “One thing we have is great credibility on Wall Street.” The company has never taken a write-off, he says.
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