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End of the road for AD/PR holding companies?

August 2, 2004
Jack O’Dwyer

OMC, which owns PR firms doing about $1 billion in fees (Fleishman-Hillard, Ketchum, Porter Novelli, Brodeur, etc.), is a "beleaguered stock," according to the July 26 Barron’s.

No wonder!

Practically anyone who comes into contact with OMC is either made a fool of or is had in some way or another.

Particular victims are those who purchased OMC at $107 in 2001 and are sitting with a 35-point deficit. They must be chagrined that CEO John Wren and two other insiders sold shares worth $24 million in the first half while buying none.

Why are the leaders of OMC doing this if the future is so great? Other victims are those who lent OMC $2.3 billion at no interest, hoping the stock would soar and they could convert. They are being soothed somewhat because OMC is being forced to pay 2.75% interest on the bonds.

Startling is the news that OMC, a roll-up if ever there was one (1,500+ different companies), only spent $1 million on new acquisitions in the second quarter, which Wren and CFO Randy Weisenberger said was a record low.

Analysts on a conference call July 27 were intrigued by the sudden drop-off. Is this the end of the acquisition road? asked several, in effect.

Weisenberger had ready answers (excuses?).

OMC lawyers have been busy with Sarbanes-Oxley, he said, which will cost OMC $50M this year.

That is a huge sum and the procurement officers who are making life miserable for ad agencies and PR firms these days will note that not a nickel of this will create any ads or make any marketing plans.

Also, Weisenberger said, OMC never makes an acquisition without the most thorough examination. It would rather not buy anything. Both Wren and Weisenberger predicted a pickup in acquisitions in Q3 and Q4.

SOX, by the way, was the law of the land in 2003 when OMC spent $472M on acquisitions, down from its usual rate of $800M+.

Among those shafted by OMC are all the ad agencies and PR firms it purchased that are no longer allowed to report their billings and fees. Advertising Age and AdWeek can estimate billings based on measured ad space and time but there are no such benchmarks for PR firms.

Maybe OMC’s acquisitions are down because few want to join the OMC family these days.

Almost all of the acquisitions of OMC and Interpublic are not publicly revealed. That’s how IPG was able to buy auto racing tracks without anyone knowing about it. IPG has made hundreds of unidentified acquisitions.

OMC once revealed a list of its purchases and one of them was a printing broker in Portugal. Why would any PR firm want to join the OMC family when it will be deprived of one of its main new business tools–a ranking by legitimate PR publications based on easily available proofs?

Douglas Carmichael, now the nation’s accounting "czar" (Public Company Accounting Board), told us in 2003 that the congloms were wrongly citing SOX as the reason they could not allow reporting of payroll and employee totals. Such figures are mere "compilations" and not covered by GAAP, he said.

Robert Benowitz, securities lawyer with a specialty in SOX and partner at Rick Steiner Fell & Benowitz, New York, said the bill was designed to restore "public confidence in the integrity of the financial markets" and that there is nothing in it that blocks disclosure of employee and payroll totals.

Benowitz, who was at the SEC for six years in the Division of Corporate Finance and the Division of Enforcement, said "Companies must ensure that, among other things, the released information is in compliance with their internal disclosure controls and, of course, is accurate. Companies subject to SOX should consult with their counsel on compliance with the law."

The ad industry does not pretend to tell the truth, the whole truth and nothing but the truth about products. Its job is selling and it does it well. But PR is about truth if nothing else. A PR firm that cannot describe its size to clients and prospects has raised questions about its integrity and honesty.

There are plenty of knocks about OMC and the other ad that investors talk about although we don’t often see them in newspapers.

The New York Times has yet to do an in-depth piece of OMC’s finances. It writes nearly ten times as much about the problems at IPG. The New York Times has yet to do an in-depth piece of OMC’s finances. It writes nearly ten times as much about the problems at IPG.

The $13.87 billion debt of the Big Five is a heavy burden that could get much heavier if interest rates rise. OMC owes $2.61B; IPG, $2.29B; WPP, $3.34B; Publicis, $3.97B, and Havas, $1.66B.

"Procurement officers" are depressing the entire ad/PR business by giving agencies the "third degree," pinching every penny, and demanding proof of effectiveness. New business is at lower margins.

The creatives who were sold out by the owners of their firms are especially watchful of these sums and are demanding more for themselves. OMC and the other congloms will have to pay more to keep the creatives happy lest they open their own shops.

The word the congloms fear is "independents," meaning creative shops without all that overhead. Attempts to buy up every last ad/PR firm and eliminate the entire category of independents failed. There is an economy of scale in media buying, at which the congloms excel, but not in creative.

Particularly wasteful is the $50,000 each of the top ten conglom-owned PR firms gives each year to the Council of PR Firms. CPRF abandoned its goal of ranking all PR firms and now has no visible mission. This is another power play that failed.

The economic resurgence may top out early, some forecasters say, blocking ad agency growth. The European economy, where OMC has a big chunk of its business, is slow.

OMC has a problem with its biggest PR unit, Fleishman-Hillard, which is charged with false billing by City of Los Angeles. F-H reported $345M in fees and 2,288 employees in 2001 but no one outside of OMC and F-H knows what the numbers are now. A clue might be that F-H’s PRSA members dipped 33% to from 70 to 47 from 2001 to 2004. It’s a poor clue, but the only one.

But even Wall Street is becoming disillusioned. It’s all reflected in the stock prices.

Jack O’Dwyer is editor and chief of the J.R. O’Dwyer publications. (www.odwyerpr.com)

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