The agency kickback scandal you couldn’t make up if you tried

November 10, 2010

One staple theme yet to make its appearance in our favourite TV soap, Mad Men, is the celebrated agency kickback. No doubt it will in time.

But why wait for the soap when you can have the real thing, authentically reproduced in verbatim court transcripts?

I refer here to a protracted States-side legal case which Grey Advertising Group has just lost after attempting to suppress the evidence for a decade.

And what a very unedifying picture that evidence paints. Internal memos and personal transcripts reveal an agency whose senior executives were steeped to the gills in a conspiracy to deny major clients Procter & Gamble, Mars, British American Tobacco (BAT) and SmithKline Beecham (now GlaxoSmithKline (GSK)) about £4m that was rightfully theirs.

Before going any further, you’ll appreciate that I have to flag up a legal health warning. All these events took place a long, long time ago – up to 20 years ago in some cases. Almost all the protagonists have now quit the business. And at that time WPP, which now owns Grey, was no more than an expletive uttered by Grey supremo Ed Meyer – who then held the agency lock, stock and barrel – every time he lost an account to JWT or Ogilvy.

Also, I’d like to point out that what follows is a very much abbreviated version of a story recently broken by my fellow blogger Jim Edwards, whose detailed account can be found here.

Now back to the script. The scene is Grey’s London office, then at the top of Great Portland Street, circa 1998. New American ceo, Steve Blamer (left), has just arrived to take over from long-serving managing director Roger Edwards. An increasingly incredulous Blamer is updating himself on the agency’s financial position, with the help of chief financial officer Roy Wilson:

Blamer: P&G is that much?

Wilson: Yep.

Blamer: Jesus… I’m telling you, the reality is you as the financial officer and me as the ceo and now Roger (presumably Edwards) could be sued. I mean, we’re cheating and stealing from our clients. That is the truth.

And later…

Blamer: I believe we should return these discounts. I’m not going to, I can’t make that decision unilaterally…If those guys (senior management, in New York) say that we’re not going to do it, and we can keep the discounts… then I say, fuck it that’s crazy, send me a note, I want a ‘Get out of jail free’ card.

Of course, handing back the discounts – mostly from print contracts – would open a whole new can of worms; as Edwards was quick to explain, citing one client in particular.

Edwards: Mars is such a vitriolic client, that if they did catch you doing that they would probably punish you very severely. They would take you back years, take a brand off you or something like that.

Not surprisingly, everyone decided to stay mum. But they did change the terms of business, so that future discounts would be rebated to the client.

You might ask yourself why clients were not better informed about what was going on. After all, it was their money. The answer seems to be Three Wise Monkeys syndrome. Indeed, even those party to what was going on within the agency were baffled by clients’ seeming ignorance, or indifference.

Blamer: Have they [clients] ever discovered that in an audit?

Wilson: No.

Blamer: And why is that?

Wilson: …I mean to be honest one has to be a bit surprised that none of them have ever specifically, eyeball to eyeball… and then asked the question, since it’s a clause in every one of our contracts, but…

In view of this circle of deceit and self-deception, it might seem surprising that anything ever came to light. The weak link, indirectly, was Wilson, who rightly feared he might be made a scapegoat and had the conversations taped and transcribed as an insurance policy should he ever get fired. Which he later was.

The case of Grey is, of course, no isolated instance, merely a well documented one. Currently, there is a still-breaking media-buying scandal in China – involving broker kickbacks – which has already claimed the scalps of Vivaki Exchange’s two top China operators. Earlier this year, Aegis Media finally put the so-called Aleksander Ruzicka affair to bed, when it settled €30m on Danone in lieu of unpaid TV advertising rebates. And going back a few years, readers may remember Interpublic’s belatedly generous settlement on clients of media volume discounts, whose non-payment had come to light as a byproduct of the accounting scandal that engulfed the group at the beginning of this decade.


Interpublic’s solution to Lowe London? A Wall of money

April 19, 2010

Who will put Lowe London out of its misery? The loss of its principal accounts seems an everlasting litany. To Stella Artois, John Lewis and Nokia N-Series should also be added the Beck’s account. All that’s propping Lowe London up is international business from Unilever (barring Peperami, which went last year) and Johnson & Johnson. According to Nielsen, 2009’s already depleted billings of £91m shrank to a minuscule £53m.

How to attract top talent in such circumstances – the talent that will draw in vital new business? It’s a vicious circle, from which there are only two ways for a once famous agency to extract itself. Call it a day, as Lowe alma mater CDP did long after it should have. Or buy something that will enthuse new talent and new enthusiasm.

Not surprisingly, it is the latter course that Lowe Worldwide chief Michael Wall has embarked upon. Evidence of his enthusiasm and determination may be deduced from approaches to Creston plc (owner of Delaney Lund Knox Warren); Rapier; and Dye Holloway Murray. So far, it would seem, the overtures have been unrequited. But we should not underestimate the charm of a man with an open cheque book in these straitened times; nor the forcefulness of someone who has managed to persuade cash-strapped Interpublic to cough up.

Spotted in conversations at Davos: Levy and Roth

January 28, 2010

No doubt Publicis Groupe chief Maurice Levy and head of Interpublic Michael Roth were discussing snow conditions, or the iniquitous constraints about to be imposed on capital markets by the Volcker Rule. Or were they…? See below.

One thing that may have popped into the conversation is why IPG just got so close to busting its debt covenants that it felt it had to amend them on more generous terms. In plain language that means IPG probably won’t make its earnings forecast (bad news for the share price). IPG claims it’s just a “precaution”; but the trailing share price since the announcement says otherwise: analysts don’t believe the sweet talk. Good news for any predator, though…

Is Publicis preparing a bid for Interpublic?

January 22, 2010

Can it be true? I hear that Publicis Groupe is looking at an audacious all-shares takeover bid for Interpublic.

Publicis is nominally fourth in the marketing services league, behind Interpublic, when ranked by global revenues. However, the gap has been closing steadily in the last year and they are now almost neck and neck. Study their market performance and you would hardly believe both have entered the same recession. Where Publicis, judging from its share price, has outperformed, IPG has significantly underperformed. The market capitalisation of the two companies eloquently tells the story. IPG is now valued at about $3.4bn whereas Publicis is worth $8.26bn, making it nearly two and half times bigger. We might add that, over the past year, Publicis’ position has been strengthened by the dollar/euro exchange rate moving in its favour (excepting bumps in the last few of days, of course).

But why would Publicis entertain such a thing, given all the turmoil it could cause? Imagine the account conflicts: the cars, the cosmetics, healthcare and technology accounts that would have to be sorted out…

A few ideas come to mind. First, IPG is temptingly vulnerable, whoever decides to have a tilt at it; and Publicis is better equipped than most. Despite Levy’s surface optimism about recovery, he knows as well as any other group chief that significant organic growth in the near future is a will-o’-the-wisp. With shareholders to appease, and assets cheap, another round of industry consolidation begins to look attractive. Never mind whether the acquisition is really earnings positive – or dilutive. With an astutely managed ‘merger’ no one can be certain for years to come. A big acquisition buys time and the benefit of the doubt (as Kraft well knows).

Second, Publicis has some unresolved business with Dentsu, the Japanese agency group with a 15% stake in the group. It has not been a happy arrangement. I noted, for example, tension between the two partners over the Razorfish acquisition last year. Acquiring IPG might be a way of diluting Dentsu’s influence by rebalancing Publicis’ portfolio. The Dentsu deal, in any case, comes to a close in 2012: Dentsu may want its money back. Dentsu and Publicis-owned Saatchi & Saatchi share a worldwide interest in the Toyota car account. Could there be a bargain to be struck there, for example?

Lastly, never underestimate the human factor. Publicis Groupe chief Maurice Levy is nearing the end of his long and successful tenure. He may wish to bow out on a high note. And this would certainly be a ‘C’ to crack the chandelier.

According to those in the know, the detail of any such bid would be managed by Isabelle Simon, senior vice president at the French global marketing services conglomerate. More important than the title is the fact that she is charged with acquisitions policy at Publicis. Simon has had a high-flying career as lawyer and financial whizz-kid, in both the United States and Europe. Her last job was as an executive director at Goldman Sachs, where she specialised in M&A and capital market transactions. She was poached by Levy last February. The telephone-number salary attached to her suggests he wasn’t thinking of a couple of cheap infill acquisitions.

Publicis and Dentsu cut up nasty over Razorfish acquisition

July 29, 2009

RazorfishWord reaches me that Razorfish, the digital interactive-cum-media placement agency being disposed of by Microsoft, is causing controversy as the bidding enters the second and final round.

Microsoft originally bought Razorfish as part of its $6bn acquisition of aQuantive in 2007, but clearly feels an agency of this size conflicts too much with its ad sales operation. The idea is to offload it, via Morgan Stanley, onto one of the big agency groups for well over $400m, plus  a commercial deal involving Microsoft proprietary advertising technology and a commitment to buy ad space across Microsoft web properties such as Bing. Conditional selling, you might say.

Interpublic and Omnicom have fallen by the wayside, which leaves WPP, Publicis Groupe and Dentsu in contention.

Publicis emerged as an early favourite, despite the fact that its platform technology (via Double Click) is more closely aligned to Google than Microsoft’s Atlas. So it was somewhat miffed to discover that its ally Dentsu – which holds a strategic stake in Publicis – has comprehensively outbid it.

But the $700m rumoured to be on the table may not be the knockout bid it appears. The trouble is Dentsu doesn’t have the US presence to do an appealing commercial deal. Which is where, in other circumstances, its ally might have come in…

Experts think that $700m is over the top in current market conditions, a symptom of Dentsu’s desperation to catch up. Maybe Microsoft should take the money and forget the side-deal. But then again, that side-deal has become more important now Microsoft is acquiring Yahoo!’s search business.

No quarter for ad giants

July 29, 2009

GM bankruptAnother day, another dollar less. Quarterly results from the big agency groups paint a revealing picture of financial pain, and nowhere more poignantly than in the case of the stricken automobile sector.

Publicis Groupe recently disclosed that its exposure to bankrupt General Motors was ‘only’ $12.8m (about £8m) rather than the £78m (£47m) originally projected. That did little to soften the blow when the half-way figures came out a few days later: net income (pre-tax profit) down 13%, and nasty deterioration in organic growth in the last quarter. The only bright spot was a 6% increase in digital revenues over the six months. That, and the assurance of group chief executive Maurice Levy that things can only get better – from September onwards. Tell that to the 1,800 people (4% of the group) he has had to ‘let go’ this year.

Still, Publicis did a lot better than Interpublic Group, home of Lowe and McCann Erickson (one of whose biggest clients is GM). IPG has actually managed to achieve a loss of $53m (£32m) over the six months. So the reduction of its latest quarterly net income by 76% must be accounted something of a triumph by comparison with first quarter performance. Quite a lot of its losses are attributable to the severance costs of the 4,100 people it has made redundant – 9% of its workforce.

Omnicom (BBDO, TBWA, DDB etc), too, posted pretty dismal figures, slightly more encouraging than IPG’s but not, on most criteria, as buoyant as Publicis’. It is laying off 3,500 of its staff, nearly 5%. Profits for the last quarter were 24% down, about the same as the previous quarter. Which was probably pretty good really, considering Omnicom’s $58m exposure to bankrupt Chrysler. On this subject, however, chairman and ceo John Wren was understandably vague – despite analysts’ obvious interest in the subject. It was the second biggest search term employed in Omnicom’s earnings call. There are, as I have pointed out before, some unresolved mysteries about Chrysler and Omnicom.

As for WPP, we will not be seeing its half-year results until the end of August. Things are not looking too clever, though. True, WPP is the odd one out so far as the car industry is concerned. Not only has Ford not made its way to the bankruptcy court, it has even managed a small operating profit this quarter. So no write-downs; but that’s slim cause for comfort, as ad spend is likely to be depressed for some time to come. Redundancies give us a fuller picture. In a trading statement released early in June, WPP admitted to making 4,300 employees redundant – about 4% – since the beginning of the calendar year. The final figure is expected to be about 7,200.

Both Publicis’ Levy and Omnicom’s Wren seem to be spinning the idea that we are at, or near, the nadir. Don’t believe everything you hear, though. Next  quarter’s earnings may look better than they really are simply because the dive they took in Q3 last year will flatter the percentage increase. That, at least, is the view of WPP ceo Sir Martin Sorrell.

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