CLOSE-UP: ANALYSIS/INTERPUBLIC - Will Interpublic's financial nightmares ever end?

Sean Orr is chief financial officer at IPG. Be glad that you aren't, Bob Willott says.

It's more than three years since Sean Orr joined Interpublic as its chief financial officer, and in every financial year since then the company has suffered serious financial embarrassment. Almost $2 billion of exceptional write-offs and reorganisation costs have been incurred in the period, culminating in the latest disastrous losses at Octagon Motor Sports and the discovery of some $181 million of accounting errors in McCann's European operations.

What on earth attracted Orr to such a role? Flagellation would be fun by comparison.

When Orr joined Interpublic, aged 44, in June 1999, he thought he was joining a $5 billion company that was about to enter a new and exciting phase in its development. The group was engaged in providing professional services that he regarded as his specialisation, having started his career at KPMG and been elected a partner there in 1986. "The idea of being part of the leadership team was very appealing," he recalls.

People close to Orr say that, before accepting the Interpublic position, he talked extensively to board members and advisers about the company and its qualities. But nothing prepared him for the nightmare that was to follow.

The seeds of the financial debacle had been sown in a previous era, when Interpublic was under the direction of Phil Geier. Feeling vulnerable to competitive pressures from Omnicom, the group had embarked somewhat belatedly on a course of acquisitions that with hindsight was almost certain to end in tears.

At that time Interpublic's flagship network was McCann - highly successful and highly profitable. Alongside were the Lowe Group and the rather shaky Lintas agency. The group was predominantly engaged in traditional advertising business while Omnicom and WPP were building up a wider range of marketing services, from direct marketing to public relations and design.

Interpublic was determined to get bigger and be more broadly based. Its ambitions were fuelled by a bullish stock market, where share prices were buoyant, and the investment community was eager for rapid growth in earnings. But its relative inexperience in making acquisitions or backing new ventures was to cost the company dear.

With all the major players racing for growth by acquisition, prices were high. And although the market was not short of sellers, some of the best pickings had already been picked. So the quality of target acquisitions available did not always match their price.

The buoyant stock market also seduced Interpublic into an element of over-confidence. In many cases, it used its own highly priced shares to pay for acquisitions, making the deals seem cheaper than would prove to be the case. That over-confidence was fostered further by an accounting rule (since abolished) that allowed acquisitions to be booked at a price that was often vastly below the true value of the deal. The result? Companies bought at too high a price and without sufficient scrutiny.

The cost of sorting out some of the new and older acquisitions has proved time-consuming and expensive. True North has cost a massive $646 million to rationalise. The merging of Lowe with Ammarati Puris Lintas cost another $172 million.

And the practice of paying too much for too little extended well beyond Interpublic's comfort zone of advertising. Brands Hatch Leisure is a good example. That company is now being blamed for the surprising losses just announced at Interpublic's Octagon Motor Sports division.

Brands Hatch was a UK public company listed on the London Stock Exchange when Interpublic decided to acquire it in 1999. Profits had been in the region of a modest £3.9 million after tax. It was not a typical service business, owning swathes of property, in the books at £45 million. And it was not engaged in an area of activity within the previous experience of its buyer. The market value of Interpublic's offer was about £160 million, although it was booked at a mere fraction of that amount. The price represented a stratospheric multiple of 42 times profits - it was diversification gone mad.

By now Orr had arrived and was feeling his way into his chief financial officer role in the shadow of his predecessor, Eugene Beard, who remained on the board until the following February. Whether Orr could, or should, have been questioning the deals so soon is difficult to decide, given the buoyant climate, the growth strategy that had been initiated and the personality of Geier. At the time there was still a fashionable intention to build up discrete businesses such as Octagon and to float them off on the stock market by way of an IPO.

In a similar way, Interpublic had also enthusiastically embraced the internet and related technology sector as a development opportunity. Here, too, it paid a very heavy price. Geier oversaw investments in companies such as MarchFIRST, the Swedish consultancy Icon Medialab International, Zentropy Partners and Capita Technologies, to name a few. They have since cost some $300 million in write-offs alone.

By the time John Dooner succeeded as the chairman in January 2001, several of Geier's time bombs were about to explode, while others were still ticking away merrily. Meanwhile, the True North deal had yet to be completed.

Orr still believes this deal was worth the $1.6 billion value placed upon it, although again it would appear that only a small portion of that value has been recorded as the cost in Interpublic's books.

This extraordinary sequence of financial hiccups cannot be blamed on poor investment decisions alone, although clearly that is a major component.

It also begs the question of how well Interpublic's executive team was equipped to manage the acquisition programme, or anything else. No more starkly is that illustrated than in the latest financial shock - the discovery of $181 million of accounting errors in McCann's European operations going back over many years. This had nothing to do with acquisitions. It was simply financial incompetence.

"The situation was discovered as the result of a company-wide initiative begun some time back by Interpublic finance to improve the process of managing inter-company activity," Orr explains, adding: "New procedures have and are being put in place across all our agency systems. We are building a corporate finance staff appropriate to the size and complexity of a company such as Interpublic."

However, Interpublic is keeping tight-lipped about the details of the errors. A major component is thought to have arisen from inter-office recharges for client work. Those costs were neither recovered nor rejected - they just dangled in thin air as the network failed to reconcile the inter-office balances. Now McCann's top European management team of chief executive officer, chief operating officer and chief financial officer has been, or is being, replaced.

But none of this explains why the errors occurred, or for so long. One possible explanation is that McCann was the jewel in the Interpublic crown. It was always expected to achieve or exceed expectations, and it usually did. If those expectations became increasingly difficult to fulfil, McCann's local management may have been tempted to turn a blind eye to signs of quirky book-keeping. Meanwhile, the group management left McCann well alone, concentrating on seemingly more troublesome and urgent issues.

Maybe McCann's management was also too preoccupied with advertising and client relationships, treating day-to-day financial management as an unimportant detail to be handled in the back office by that well-known pariah - the accounts department. If such an arrogant attitude prevailed, it is unlikely to survive much longer.

"Since the matter was discovered, our auditing process - both internal and external - has been significantly broadened and intensified," Orr says.

What, if any, reassurance can be gained that there is not another disaster waiting to happen, another time bomb left behind with the compliments of Geier and Beard? It's small comfort and a rather sad epitaph to the whole affair to know that there's not a lot left to write off. "After this exercise, our balance sheet is as clean as it has ever been," Orr claims.

The nagging worry that remains is the role of Dooner in this story. Before taking over as chairman, he was the group's chief operating officer. In that capacity, he should have shared with the chief financial officer the responsibility for ensuring there were adequate operating systems and controls throughout the group. And where was Dooner before he became group chief operating officer? From 1995, he was the chairman and chief executive officer of McCann-Erickson Worldwide.

- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

KEY DATES

Jun 99: Orr joins IPG

Nov 99: IPG announces merger of Lowe with Lintas

Nov 99: IPG acquires Brands Hatch

Jan 01: Dooner becomes chairman

Jun 01: True North acquisition approved

Aug 02: First accounting anomaly in McCann Europe exposed

Oct 02: Further accounting anomaly, of $120 million, exposed

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