Time is running out for Interpublic. Nearly two years after Michael Roth was installed as the "company doctor", the marketing communications giant remains on the danger list. Speculation as to the group's future is rife, shareholders are showing signs of disquiet and observers are starting to wonder aloud whether the business can ever recover.
IPG's latest financial results reflect how far adrift it is from its major rivals, while its share price remains a shadow of its former self. Its market capitalisation was bigger than Omnicom's as recently as 2002 (it is now $4.1 billion compared with Omnicom's $15.3 billion) and if revenues continue to fall, IPG could soon slip into fourth place behind Publicis in the league of global marketing supergroups.
Onlookers are now questioning previous wisdom that the endgame has been reached in the global consolidation of the communication groups. Not long ago, all of them had largely ruled out any more mega acquisitions, preferring instead to concentrate on smaller strategic purchases that would fill a number of gaps in their offerings. IPG's ongoing ordeal suggests that the final chapter in the consolidation story remains to be written.
Opinions are divided as to how the IPG story will play out, but everybody agrees things cannot go on as they are. "It's a mess," a leading global industry chief executive declares. "The group has no targets and no strategy. Nobody can figure out what it's trying to do."
Even at the highest levels within IPG there is a belief that crunch time is approaching. Its market capitalisation is almost half what it was a year ago, and a fraction of that of WPP and Omnicom. Organic growth has stalled.
"We have to trade our way out of this," one senior IPG manager says. "But it's going to be a long haul and we need luck. Our shareholders will determine how much time we have - and there is a danger we're running out of road with them."
Onlookers believe another set of indifferent quarterly figures or annual results could make IPG an acquisition target. One shareholder says. "IPG has a chief executive, in Roth, who isn't really engaged, a management that wants to realise some share value and a number of buyers capable of swallowing IPG whole then dumping bits of it to reduce their debt."
Meanwhile, Roth is keeping his own counsel. He is reluctant to comment on speculation, claiming that it would serve only to dignify it. He claims most of it is driven by personal agendas.
"Last year we made great progress in resolving filings delays and addressing control issues. We also put IPG on a sound financial footing and brought it to the forefront in terms of disclosure and transparency," he told Campaign.
Nevertheless, the questions continue. How did IPG, a pioneer of the holding company model and one-time darling of Wall Street, find its share price plunging by 72 per cent in five years (it stands at $9.44 at the time of going to press) to a point where break-up or sale looks a real possibility?
The reasons are numerous. There was the ill-thought-through acquisition policy of the 90s (IPG was once even linked with a bid for Manchester United). "It was crazy," a former IPG senior manager recalls. "The company was buying things without knowing what purpose they would serve."
Other factors include the US economic downturn, a string of heavy account losses (General Motors and Bank of America among them) and the accounting scandal at McCann Erickson that resulted in an ongoing investigation by the Securities and Exchange Commission.
For Roth, whose background in law and accounting runs directly counter to those of his predecessors (Phil Geier, John Dooner and David Bell were all classic Madison Avenue-style admen), the honeymoon is over.
He is under pressure to deliver - and soon. "You get a year as a given and 18 months as a rule," a network head explains. "Two years without any real sign of improvement is too long." During Roth's tenure, IPG shares have declined by more than 40 per cent.
To make matters worse, the group predicts it will not be delivering 10 per cent margins until 2008 - and even that is well below the current industry norm of 14 per cent.
The tortuous progress is reflected in its second quarter figures published last month. Profits were up, but this had much to do with a lower tax provision and a reduction in the professional fees IPG has been paying to get its financial house in order.
Analysts are underwhelmed. Merrill Lynch's Lauren Rich Fine called the figures "neither exciting nor deflating" and warned that although new business was purportedly more positive "we are concerned about recent and potentially more client losses".
Shareholders have shown similar discomfort. David Katz is the chief investment officer of Matrix Asset Advisors, the New York money management firm that disposed of more than 2.7 million IPG shares four months ago. "Roth is doing a good job and will turn IPG around. But, from a shareholder perspective, it's taking longer than he calculated," he says.
Even within his own organisation, Roth provokes an ambivalent reaction. "He is a financial professional who understands corporate governance issues and, for that reason, there could be nobody better for us at this time," a highly placed IPG source says. "He has done all he can. The question is whether he is the strategic architect we need to take us forward."
"Roth needs to combine more operations," another top manager says. "There's too much infrastructure. That's not where the business is."
Some senior executives are privately critical of Roth for not getting costs out of the system fast enough and not bringing about any significant change in the group board, which has remained almost the same throughout IPG's period of decline.
"It's astonishing the board has not been refreshed and I can only assume that Roth is reluctant to do it while the SEC investigation is ongoing," a top IPG executive says. "I get no sense of urgency from the boardroom."
Above all, concern remains over whether Roth's heart is really in the job. One former top manager of an IPG agency network contrasts the IPG boss' approach with those of his counterparts - Maurice Levy (Publicis Groupe), Sir Martin Sorrell (WPP) and John Wren (Omnicom). "Those guys aren't necessarily ad people, but they've spent most of their working lives in the industry and are passionate about it," he says. "Roth is really only going through the motions."
One rival holding company chief suggests Roth's problem is not that he is getting too little advice, but too much. "He's surrounded by advisers and has spent a fortune on consultancy services," he argues.
Roth's conundrum is that he faces a number of possible scenarios, most of them beyond his control - certainly while IPG's share price languishes around the $9 mark.
Taking IPG private has been mooted as his best option. "The share price is a big problem for him," one insider points out. "Going private would provide Roth with cover while he sells or reorganises before taking the group back to market."
But few expect Roth to sell large chunks of the business. "There may be the odd sale, but no more than that," an associate says. "The problem is that the operations most attractive to buyers are the IPG revenue drivers."
Indeed, it would be hard to find a taker for the enfeebled Lowe network while the newly merged Draft/FCB remains a predominately North American business. Moreover, there seems little relish among IPG's US domestic agencies, which include Deutsch and Hill Holliday, to buy back their independence. Many of the founders who sold to IPG for top dollar have left the stage. Also, as one IPG agency chief says: "Staying in IPG allows you to spread your overheads."
A successful disposal programme would, however, allow IPG to regroup around McCann WorldGroup, which is described as "hermetically sealed and virtually self-sufficient".
Not that a private equity-backed management buyout by McCann, now once again commanded by John Dooner after his less-than-happy stint running IPG, can be ruled out.
"Dooner is a savvy animal who believes he got burned at IPG by being held responsible for problems that pre-dated him," a senior adman who knows him says. "He feels no allegiance to the group. His people, who have kept their distance and their profile, are fed up operating with a ball and chain tied around both ankles."
There are a few crumbs of comfort for Roth. One is that the SEC probe is not expected to inflict huge damage. IPG sources believe the group has been caught in the Enron backlash and the commission will conclude that individuals did not act corruptly but on the basis of imperfect information.
Another is that nobody believes the loss of a big client would prove terminal. "We're not like Cordiant (whose share price took a fatal dive when it was fired by Diageo)," an IPG senior executive points out. "Our client base is nowhere near as concentrated as WPP's."
But if IPG does get put into play, who will go for it? The lack of investment opportunities in the US has left private equity firms with money burning holes in their pockets and two of them, Hellman & Friedman and Kohlberg Kravis Roberts, are thought to be on alert.
But some IPG sources think a venture capitalist bid unlikely. "This wouldn't be a highly leveraged deal from their point of view and it would be difficult for them to get a significant return on investment," one says. Other observers are not so sure. "IPG is big enough to be divided into some attractive packages for selling off," one says.
If private equity companies rule themselves out (along with Omnicom, which has never gone in for mega takeovers), some intriguing possibilities open up. Egos and national pride look likely to play as big a part in determining IPG's fate as pragmatism.
WPP's Sorrell could join the chase although he still has plenty to do getting Grey and Young & Rubicam into shape, and a bid could bring him up against US competition rules. Some believe that if he decides to play, it might only be to drive up IPG's price.
Which points to a possible contest - or even a collaboration - between the two French heavyweights, Publicis Groupe and Havas. The addition of IPG would make Publicis the world's largest marketing communications group, whereas an IPG takeover would propel Havas into third place.
"Never underestimate the French desire to have an international champion," a senior manager with experience of both IPG and Publicis agencies says. "I don't think the rivalries between Levy and Vincent Bollore (the Havas chairman) are as great as what unites them."
Both deny having had any conversations about IPG. Bollore insists his priority is to address Havas' weakness in media planning and buying and to win boardroom representation at Aegis, in which he has a 29 per cent stake.
"If IPG came up for sale then we would, of course, be interested because we have to become stronger and more efficient," he says. "But our goal at the moment is to improve our relationship with Aegis. We've had no time to study an acquisition of this size."
Levy must weigh up whether going for McCann makes sense when he already has an efficient global ad delivery system in the Publicis network. He is said to be more interested in IPG's digital offerings, although there is little chance of them being sold separately. "Levy is a cavalier conservative, if there is such a thing," an associate says. "He has a good record of buying operations like Bcom3 and Saatchi & Saatchi and making them work. If he competes against Sorrell, he'll want to go three-nil up. He won't want Sorrell pulling the score back to two-one."
Roth, meanwhile, has his own priorities. "This year we have begun to make headway on strategic operating initiatives, notably the new Lowe and Draft/FCB," he says. "We have begun to see growth in underlying business during the first half of 2006. Turnarounds are never easy, but ours remains on track to meet the 2008 goals outlined in March."
For now, he must rally his troops. But as one commentator asks: "Just how many times can you encourage people to get you out of a mess?"
The clock is ticking. "Given more time, we can control our destiny," one of Roth's senior managers observes. "But time may not be on our side."